The Weekend Read: Sept 18

Chris Khan (R3), Roman Dahl (Nordea), David Rutter (R3) at our recent European Members' Conference

Chris Khan (R3), Roman Dahl (Nordea), David Rutter (R3) at our recent European Members’ Conference

R3 Recap

I just got back from a very full and rewarding week in our London office, highlighted by our third Members’ Conference on Tuesday. Many thanks to all the participants, as we had 44 institutions represented, including talks by 11 different members and topped off by two live demos. Perhaps most impressive was the energy carried over from the Monday night cocktails all the way thru to the end of Tuesday’s session…

One of the day’s presenters and R3 colleague Ian Grigg filed this short post on Corda and our introductory white paper. The post reviews two big considerations/requirements that drove the Corda design work: privacy (you need it!) and consensus:

The reason for [proof-of-work] was that we cannot trust the sybil element of an open access system – necessary to ensure the fabled censorship resistance. But in the institutional market, they know how to trust each other. They’ve been doing that for 100s of years. Literally – with letters of credit, trade finance, introductions, short term loans and interconnects, relationships.

[SNIP] Without proof of work, and without the public blockchain, we are really talking about a completely different animal to Bitcoin. And that’s what Corda is – a redesign from the base requirements of the institutions.

A good companion read is the recent public disclosure of the GS patent filing for FX on a blockchain, as the main themes are extremely consistent w Corda’s core requirement set:

Essentially, Goldman wants to merge the benefits of blockchain technology—speed and efficiency—with other technologies that offer privacy, security, and compliance with regulatory guidelines. For example, Goldman’s version of the blockchain would allow for private transactions only visible on a need-to-know basis; permit regulators to access the database; and adhere to anti-money laundering regulation and Know Your Customer laws, which require that banks confirm the identity of their customers.

Tim Grant makes mental note to pack shorts next time

Tim Grant makes mental note to pack shorts next time

And a sartorial shout out to our Stafford Lowe for keeping it real Bermuda style (and boos to the staff photographer for not capturing the full glory of the Bermuda shorts!) in this feature on Bermuda Reinsurers + blockchains.

Banks Bruised and Battered

McKinsey released a report on the state of banking and, well, it aint pretty:

Firing people won’t be enough to save the world’s biggest banks from technological and regulatory changes that have reshaped the industry — whole businesses must go, according to McKinsey & Co. Almost every bank will have to quash aspirations to be all things to all customers so that they can eliminate fixed costs, the consulting company said Wednesday in a report titled “Time for Tough Choices and Bold Actions.” Only three to five global full-service banks will survive, McKinsey said.

Meanwhile, the FT stood for (F)in(T)ech this week as there was a barrage of articles, but effectively helped the FT cover all bases by both deflating and inflating the fintech bubble: Cyber attacks raise questions about blockchain security and Banks find blockchain hard to put into practice and UK regulators are the most fintech friendly and Fintech start-ups put banks under pressure.

RegTech (cont.)

The Bank of England released their Consultation Paper on a potential new RTGS. This includes mention of Central Bank Digital Currency (CBDC) on page 18 and distributed ledgers on page 42. Lazy pull quotes below!

The Bank does not propose to extend direct participation in the new RTGS service to non-financial corporates or households in the United Kingdom. This is for two reasons: (a) Such a change in access would raise fundamental questions about the nature of banking, the shape of the financial system and the role of the central bank that need to be researched over a longer timeframe. (b) Attempting to accommodate a dramatic extension of access would create very material technological and security challenges for RTGS that would have significant implications for the cost and timeframe for renewing the system and would fundamentally alter the resilience and operational availability requirements of the service.

[SNIP] The research conducted so far in the Bank and elsewhere shows that asset transfer and gross settlement can successfully operate on a distributed ledger, and demonstrates many of the features of network resilience in a small-scale application. In its current state, however, this work has also highlighted that the technology is not sufficiently mature to provide the exceptionally high levels of robustness required for RTGS settlement. Further work is required to address privacy and system scalability in particular, and these and other topics suggested by this initial work will drive the Bank’s future research programme on this technology.

A bit of cold water, but one that is balanced by continued research and engagement in the space. Speaking of engagement, Hong Kong joins the party of fintech accelerators supported and hosted by government authorities, much like the FCA in England and MAS in Singapore. And ISO has approved the proposal by Standards Australia to lead an international tech committee “to build a uniform approach to the technology.”


Congrats to our friends at Ripple for closing their latest round of funding and for the expansion of their partner financial institutions:

“Our mission is to make cross-border payments truly efficient for banks and their customers, and in doing so, lay the foundation for an Internet of Value where the world moves money as easily as information,” said Ripple CEO & co-founder Chris Larsen, “We’re thrilled to have these world-class investors joining forces with us to help make this vision a reality.”

And ICYMI, Hyperledger’s Executive Director Brian Behlendorf published an introduction to the new vision of the Hyperledger Project as An “Umbrella” for Open Source Blockchain & Smart Contract Technologies:

Perhaps most importantly, we can directly address what many have observed as a major challenge with the existing open source blockchain efforts – tremendous levels of tribalism amongst developers. While invigorating, it can also make sharing code between efforts, or talking about common challenges and how to meet them, notoriously difficult. This is true even when the payoff would be less duplicated code and more eyes looking for security holes and other issues.  Multiply that rivalry with the effects of holding fungible currency whose value can be tied directly to the software in question, or open source project brands tightly associated with commercial brands in which developers own equity, and incompatible copyright license paradigms, and working together can be nearly impossible.

At Hyperledger we believe we can provide an answer to this.  Let’s bring these different implementation efforts within the same “home”, with a consistent approach to intellectual property, community collaboration standards, overall branding (“Hyperledger ____”) and an encouragement to either work together or usefully differentiate.  If we do this, it will remove barriers to collaboration, encourage developers to find opportunities to work on common code, and address the potential for confusion and wasted duplication of efforts without requiring a top-down single architecture or personality to dominate.

The Weekend Read: Sep 20

1. R3 Announcement

It has been a busy week for us at R3. Our announcement in the FT sparked quite a bit of coverage (click here for a selection of articles). We look forward to making more announcements in the coming weeks.

2. Blockchain for Business

IBM hit the news this week with a WSJ article extrapolated from this blog post by Arvind Krishna, SVP and Director, IBM Research:

We believe that for blockchain to fulfill its full potential, it must based on open technology standards to assure the compatibility and interoperability of systems. Furthermore, the various blockchain versions should be built using open source software rather than proprietary software, which could be used to suppress competition. Only with openness will blockchain be widely adopted and will innovation flourish.

Jamie Dimon was specifically asked about “block chain money transfer” at a conference this week (overview here). Dimon reiterated his lack of optimism on Bitcoin itself while making some encouraging comments about blockchain tech (quote edited for clarity, please see full transcript here):

I still believe [Bitcoin] will not be a currency because government’s control currencies and they are not going to like it…but the block chain, which is a technology behind the encryption and the certification…might very well be very useful in a cheap way if you can go see we own something…it takes 21 days on average…to transfer a loan…So if you go to DTCC, they already keep all the data. They transfer all these things, the question is can you use these things to do it more efficiently. And if it is more efficient we should do it. And I don’t know yet and it’s got to be secure.

3. Bitcoin as Commodity (says CFTC)

The CFTC finally gave a clear opinion on Bitcoin, deeming it a commodity (I agree), which not coincidentally puts it directly under the purview of the CFTC. It will be interesting to see if other regulatory bodies such as the SEC start to stake out jurisdictional territory in response.

4. Fintech Conference Season

Fire up the name tags and cocktail banter…conference season is well under way. NYC played host to Finovate (rundown here), while London hosted Fintech Week. Our own Richard Brown took part in a spirited panel entitled Blockchain for Enterprise (video here, but beware the sound mix) along with Jon Matonis and Dr. Lee Braine (IB CTO Office from R3 partner bank Barclays).

5. Odds ‘n Ends

I admit, I cannot help myself when presented with Tech Bubble click bait. In that spirit, here are two stories I have enjoyed recently. First, Bubble-Grim-Reaper Bill Gurley calls out a few Unicorns as potential Undercorns during a Techcrunch chat:

“It’s like the old adage, [when you’re] handing out dollars for 85 cents, you can go [infinitely],” he said. “Chosen unicorns are being given hundreds of millions of dollars, but you have to ask how much margin is there. The unit economics [with Instacart] would be very difficult, I’d think.”

Couple this with the recent Vanity Fair article by Nick Bilton:

Now countless people from all over want this to be a bubble and they want it to burst. There are the taxi drivers who have lost their jobs to Uber; hotel owners who have seen their rooms sit vacant as people sleep in Airbnbs; newspapers that are at the mercy of Facebook’s algorithms; booksellers and retailers who have been in an unrelenting war with Amazon; the elderly, who can’t keep up; the music industry; television producers; and, perhaps most of all, San Franciscans, who would rejoice in the streets if their rents fell from totally insane to merely overpriced, or if they could get into a decent restaurant on a Monday night. The bloggers who cover the technology industry would write a thousand jubilant think pieces saying “I told you so” to the venture capitalists who sneer and scoff when anyone comes close to mentioning the word “bubble.” As one prominent tech reporter told me, “Frankly, wiping that smug look off Marc Andreessen’s face—I can’t wait for that.”

Finally, this fascinating (long) Bloomberg piece on Tom Hayes, one of the chief conspirators (or fall guy, depending on your perspective) in the LIBOR manipulation case is worth a read:

The investigations into Libor kick-started by McGonagle and his colleagues at the CFTC have resulted in close to a dozen firms being fined a combined $10 billion. More than 100 traders and brokers have been dismissed or have left the industry. For those who remain in banking, the trading floor in the post-Hayes era looks like a very different, more chastened place. Emboldened by their success on Libor, regulators have successfully settled manipulation probes in foreign exchange, precious metals, and derivatives markets. Banks have built up their compliance staffs. Gone are the firm-funded trips to Val d’Isère and the $1,000 meals at Le Gavroche. Traders today describe living in a state of paranoia that their past conversations will be raked over and used against them. The draining of excess from banking in recent years is commonly attributed to the financial crisis. But as the public well knows, nobody who ranked on Wall Street went to jail over subprime mortgages. With Hayes behind bars, and others set to follow him to the dock, Libor and the related collusion cases have an equal if not greater claim to the new, subdued reality.

The Weekend Read: July 17

1. Blockchain Explainer (for financial markets) by the FT
Philip Stafford does an excellent job, both in print and video, in explaining why banks have “a keen interest in applying the blockchain…to financial markets.”

He goes on to note:

As with any new technology, experimentation abounds. The term “blockchain” is becoming difficult to define. For instance there is a growing debate about whether a blockchain even needs a digital token like bitcoin. Some start-ups are turning to “permissioned” distributed ledgers, where permission is granted to approved actors to access the network, and quickly record trades and discover asset ownership.

This echoes the debate that Tim Swanson has written about extensively. PaymentSource does a nice overview in their article A Very Public Conflict Over Private Blockchains. I recently ran across a nice chart by Jack Gavigan that attempts to further define the ‘taxonomy’ of distributed ledgers:

jack gavigan blockchain taxonomy

2. More Blockchain Love

SCB’s Group Chief Innovation Officer, Anju Patwardhan, lays out a great argument for how blockchain approaches can be integrated into the financial system, across both banks and regulators, in her post Blockchain – a disruptive force for good?

For banks, the blockchain has the potential to become a technology model for a low-cost and transparent transaction infrastructure. While Bitcoin is unlikely to dislodge paper money, its greatest legacy would be the benefits of the underlying blockchain technology to the security of banks and the integrity of the financial system – which remain closely intertwined.

If this takes off, prices for trading, money transfers, remittances, credit cards and other products could potentially be undercut drastically to the benefit of consumers. This infrastructure could be adopted to make financial transactions more secure and traceable for customers, banks and regulators.

Accenture joins the consultancy deluge into all things blockchain-thought-leader-y with a very well written report entitled Blockchain in the Investment Bank:


3. FinTech Odds ‘n Ends

American Banker highlights how banks have started to warm to opening up internal systems to outsiders via APIs:

“It’s like breaking a few windows to let free air and light in,” said Andres Wolberg-Stok, global head of emerging platforms and services at Citi. “It ends up benefiting fintech as a space.” The new openness is unprecedented, unless you look at other industries. “Google makes their Maps API available. PayPal makes their payment API available. FedEx makes their location and tracking APIs available,” pointed out Eric Connors, senior vice president of products at Yodlee, a company that provides account aggregation and API integration services to banks. For those well-known brands, the motive is to move more transactions or users through their systems.

For banks, the main driver is innovation. By sharing APIs, in some cases through hackathons in which outside developers are given software tools for a prescribed amount of time with which to build new apps, new ideas can be generated and tested.

McKinsey goes for the headlines by arguing that the oft-hyped Internet-of-Things opportunity is, in fact, underhyped. And boy, do they hype it:



Yet it is interesting to note that McKinsey cuts their hyperbolic forecast by 2/3rds noting “If machines can’t talk to each other, says McKinsey, the Internet of Things might only be a $3.9 trillion opportunity.” Offering another potential pot of gold for those exploring machine-to-machine distributed networks…

The Weekend Read: July 10

Screen Shot 2015-07-11 at 8.35.40 AM
 1. Blockchain on Wall Street (cont.)

BNP’s Quintessence magazine has a very nice overview of the potential for blockchains. I was nodding my head vigorously at the passage below, as internally at R3 we have discussed at length the possibility of the bank custody model adapting to custody of a customer’s private keys:

The first scenario creates a total disruption. In its purest form, a distributed blockchain system allows all market participants direct access to the DSD (Decentralised Securities Depositary), to the exchange and to the post trade infrastructure (clearing & settlement). If this setup develops then existing industry players might be redundant. However, given the challenge of keeping the private key of the account safe, it is possible that investors will entrust an authority to safe keep the private keys. It is also possible that custodians will be responsible for the application layer over the blockchain or that they will launch their own network.

The second scenario is an integration within the post trade ecosystem. The distributed ledger might only be the next generation of IT infrastructure. In this scenario custodians or settlement infrastructures might use the blockchain to record the ownership and trades between themselves; however end investors will still need to use a custodian to have access to the market. The ledger will only be accessible to authorised market participants. Existing actors will remain in charge in this scenario however their level of service could change and they may deploy new services that they could not in the past because the investments required were a huge barrier to entry.

Philippe Denis, the chief digital officer of BNP Paribas Securities Services, gives more context to their thinking in this article (pdf version): How BNP Paribas Securities Services stays ahead of the game – The Banker

2. Bitcoin Fork?

While BTC price had another good week (whether due to the Greek crisis (see below) or a Chinese Litecoin pump ‘n dump can be debated), the protocol had a fairly rough time. As the picture above shows, an incomplete roll out of a Bitcoin Core update has led to miners confirming incorrect blocks, a/k/a it has experienced a fork, once again calling into question the idea that fully decentralized governance can work (or if it really even exists and instead has an implicit governance already. See: block size debate)

3. Bitcoiners on Greece (cont.)

4. Fintech Reports


5. R3 Advisor Corner

Finally, a review of the in-depth posts released this week from R3 advisors Richard Brown and Tim Swanson:

-Richard Brown: A SIMPLE EXPLANATION OF BALANCE SHEETS (DON’T RUN AWAY… IT’S INTERESTING, REALLY!) [ed. note: I did run away the first time, but glad to have returned to finish the article…]

“[A]s I’ve written repeatedly, we could be witnessing the emergence of shared ledger systems in finance – blockchains, if you prefer. And they will be used to record obligations of – and agreements between – firms and people of all sorts.”

-Tim Swanson #1: A blockchain with emphasis on the “a”, where he takes on Chris Dixon and Fred Wilson (aim a bit higher next time Tim)

-Tim Swanson #2: he drops the mic with a speech in front of bankers, VCs and Bitcoiners with Learning from the past to build an improved future of fintech:

If we were to create a valuation model for the bitcoin network (not the price of bitcoins themselves), the network would be priced extremely rich due to the wealth transfer that occurs every 10 minutes in the form of asset creation. The network in this case are miners, the block makers, who are first awarded these bearer instruments.

How can financial institutions remove the duplicative cost centers of this technology, remove this $300 million mining cost, integrate permissioned distributed ledgers into their enterprise, reduce back office costs and better serve their customers?

That is a question that several hundred business-oriented innovators and financial professionals are trying to answer and we will likely know in less time it took Bitcoin to get this far.

The July 4th Weekend Read

As us Seppos get ready for America’s birthday, the bitcoin crowd continues its Grexit ambulance chasing

1. Blockchain on Wall St

FT article: Banks and exchanges turn to blockchain (with the oddly salacious subtitle ‘Wall St lured by efficiency promise of the technology behind bitcoin’):

For now many start-ups accept they cannot go around the system. “It’s very important to work with existing market participants,” says Adam Ludwin, chief executive of Chain. “The mantra of Silicon Valley is: ‘Move fast, break things’. That mantra doesn’t apply in financial services.”

Head of Citi Innovations Ken Moore also highlights his group’s internal experimentation with blockchains:

Citi has been exploring payments in a cross border capacity, as well as the regulatory environments across various jurisdictions, with a view to how transactions that have taken days can be done in seconds in a very transparent way. “Because we are a global network, a global bank, we can look for opportunities to use this technology to move money from country to country – country A to country B, across our network.”

Finally, here is a very interesting run thru RBS’s plans for technology transformation, which includes some mention of their experimentation with Ripple. Some figures popped out at me that highlight just how complex these bank infrastructures can be (‘Further rationalisation (50%) of Top 500 applications’ and ‘rationalising the number of payments systems and gateways (80 to 10)’ and ‘Over 500 Nostros removed from UK & EMEA network’…which implies there are quite a few still in place!)

2. Blockchain and Regulators

MAS Managing Director Ravi Menon name drops blockchain a few times in a recent keynote (thanks to Anju Patwardhan for the head’s up). He does such a good job of giving an overview that I have quoted him liberally below:

Whether digital currencies will take off in a big way remains to be seen. But it is a phenomenon that many central banks are watching closely, including MAS. And if they do take off, one cannot rule out central banks themselves issuing digital currencies some day!

But the bigger impact on financial services, and the broader economy, is likely to come from the technology behind Bitcoins – namely the block-chain or, more generally, the distributed ledger system.

The potential benefits of such a distributed ledger system include:

  • faster and more efficient processing;
  • lower cost of operation; and
  • greater resilience against system failure.

There are many potential applications of distributed ledger systems in the financial sector [and] could potentially allow regulators to plug into the network to conduct surveillance of risks and to track transactions to detect money laundering or terrorist financing. In fact – and this would be of interest to the lawyers gathered here – distributed ledger systems could potentially be applied in any area which involves contracts or transactions that currently rely on trusted third parties for verification.

Some examples of FSTI-supported institution-level projects that are ongoing include:

  • a decentralised record-keeping system based on block chain technology to prevent duplicate invoicing in trade finance;
  • a shared infrastructure for a know-your-client utility

3. Cryptonerd Corner

As follow up to last week’s post, Blockchain University has posted the full video of Tim Swanson’s presentation on the distributed ledger landscape.

And finally, Ian Grigg has a great short post on simplifying the explanation of the Bitcoin blockchain:

The blockchain is a shared ledger where each new block of transactions – the 10 minutes thing – is signed with a Nakamoto signature.

What’s a Nakamoto signature? Note: it is not this…