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The Weekend Read: April 9

1. Introducing

Many thanks to The Swanny for filling in for me last week. Its great to be back, as I have the pleasure to recap two pretty awesome announcements. On Tuesday, our CTO Richard Brown returned to the blogging world to announce Corda, a distributed ledger designed for, and with, financial institutions:

Corda is a distributed ledger platform designed from the ground up to record, manage and synchronise financial agreements between regulated financial institutions. It is heavily inspired by and captures the benefits of blockchain systems, without the design choices that make blockchains inappropriate for many banking scenarios.

Just reading a few pull quotes wont do the post justice, so I urge you to read it in full. I particularly liked this passage on Bitcoin as an odd architectural choice for financial institutions:

But what is often missed is that the cleverest part of Bitcoin isn’t actually its architecture; I think the cleverest part was to articulate the business problem.  We don’t tend to think of Bitcoin as being the solution to a “business problem” but it can perhaps be thought of as a wonderfully neat solution to the problem of: “how do I create a system where nobody can stop me spending my own money?”

[Yet] Satoshi Nakamoto didn’t wake up one morning wanting to “apply Blockchain to finance”. Blockchain was the tool that was invented to solve a real problem. So we have a conundrum, right?  If that’s the case, then what on earth is the argument that says blockchain has any relevance at all to banking?!

Indeed, last time I checked, banks have the inverse of my Bitcoin problem statement!

Matt Leising at Bloomberg also has a great overview of the Corda approach in this article.

The announcement was followed up with Richard’s participation in Money 2020 Europe, where his R3 panel was SRO.

On Monday, Microsoft CEO Satya Nadella used the first ever Envision event to announce an R3 – Microsoft partnership (see other coverage: WSJ, Bloomberg). We have been working closely with the Microsoft Azure team since the start of the year. The combo of Microsoft technology horsepower with the undeterred energy of the Azure team has been a massive help in launching our Global Collaborative Lab (thanks Marley!). Microsoft’s EVP of Business Development, Peggy Johnson, also commented on the partnership:

Navigating the changing digital landscape can be daunting. Success demands a trusted and collaborative network of partners – particularly in a highly regulated industry with billions of dollars and sensitive financial data at play. We’re proud that organizations like R3 trust Microsoft as a partner to build the financial technology systems of the future. With next–generation technologies like blockchain poised to disrupt the way we do business in nearly every industry, we’re committed to continue earning the trust of business leaders and their customers around the world.

Change is never easy, but with partnerships built on trust, together we can change the idea of “disruption” from a threat to an opportunity – one that will empower us all to achieve more.

2. Blockchain Announcements

Our friends at Intel announced late this week the open sourcing of their blockchain approach, dubbed Sawtooth Lake, which was also one of the five protocols tested across 40 banks in our February Lab project. Intel has provided comprehensive documentation here if folks want to dive in. Their aim is to provide “a highly modular platform for building, deploying and running distributed ledgers,” with an emphasis on unlocking the power of a Trusted Execution Environment.

IBM announced this week that they are in the midst of getting their Watson AI’s chocolate into some blockchain peanut butter via an early prototyping exercise. If they manage to get some unstructured Big Data in there they will have hit the rather elusive Disruption Trifecta. And another win for the Axoni/TradeBlock team with the announcement of their CDS trial with Markit, DTCC and 4 banks.

3. Fintech etc.

The NY Times Dealbook posted a special section on Fintech this week, called “Fintech’s Power Grab.” It highlights that the sudden focus on all things fintech by the very institutions targeted as the ‘disruptees’ may signal a turning point, with the upstarts being consumed by the big guys. It also has some cool profiles and stories, including one on Chris Larsen at Ripple.

And in a different “tradition unlike any other” yet a tradition nonetheless, the long awaited decentralized marketplace OpenBazaar went live earlier this week…and within hours started to build up quite the inventory.

The Weekend Read: July 24

Count me among the ‘many’:


1. Gimme a Blockchain…hold the Bitcoin

The “you can’t have blockchain without bitcoin” debate continues…Fred Wilson of USV kicks things off in this short post, in response to a room full of VCs sitting on their hands when asked if they would invest in a Bitcoin startup: “Maybe the distinction is bitcoin vs blockchain. I understand that. But bitcoin and blockchain are joined at the hip. You don’t get one without the other. So I’m still scratching my head.”

Ryan Shea of Onename picks up this thread with another short read, making the valid distinction between a blockchain that is permissioned vs permissionless.

Gideon Greenspan wades in with the confident-sounding title Ending the bitcoin vs blockchain debate:

In bitcoin anonymous miners must perform expensive useless computations, and are incentivized to do so by the block rewards (and transaction fees) denominated in the blockchain’s native currency or token. Do we have any other options?

It turns out that we do. We can have a closed list of permitted miners, who identify themselves by signing the blocks that they create. Rules about distributed consensus (or “mining diversity” as we call it in MultiChain) provide a different way of preventing minority control of the blockchain, so long as you can accept that miners are pre-approved. Of course for bitcoin this is not acceptable, because part of the point is to permit anonymous mining, so there is no way to censor transactions centrally. But if, say, we had a highly regulated financial system, in which bitcoin’s model was inapplicable, perhaps we could accept a pre-approved list of miners after all? If we had enough of them, and spread them well enough between institutions, and had legal contracts with all of them, are they really likely to gang up and undermine the network they depend on, when doing so will land them in jail?

We close with the latest post by Richard Brown, riding to the rescue once again to save this debate, with his adapted speech Bitcoin and Blockchain: Two Revolutions for the Price of One?:

So… the blockchain revolution is so fascinating because it could actually be TWO completely different revolutions… both profound in their implications:

  • Censorship-resistant digital cash providing a new platform for open, permissionless innovation driven from the margins
  • And industry-level systems of record driving efficiencies for incumbents.

Neither of these are “sure things”… they are both high risk speculative bets… but they’re also very DIFFERENT bets…

2. Blockchain on Wall St. (cont.)

Greenwich Associates releases their survey Bitcoin, the Blockchain and Their Impact on Institutional Capital Markets, highlighted in this Bloomberg article:

Greenwich Associates found 94 percent of respondents say blockchain — the ledger that drives bitcoin — could be used in finance, according to a report to be released Wednesday. The software is touted as a way to speed up and simplify how trades of everything from stocks to loans and derivatives are processed.

“Revolution in the making — that’s what this feels like,” Kevin McPartland, a co-author of the study with Dan Connell, said in a phone interview. “There’s a real opportunity for some change here.”

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Barclays Blockchain (and Beard Groomer) Subject Matter Expert Simon Taylor has a nice, wide ranging piece on the potential of distributed ledgers:

The key gap is education, we often conflate “The Blockchain” and “A Blockchain”. This terminology is especially tricky because the technology is so new, terms are emerging daily to try and understand and make sense of it.

This is a nascent technology and while the opportunities are exciting, certain obstacles will need to be overcome before some of these use cases can come into being. It’s also clear that the security and controls associated with blockchain technology will need development before many of these applications can become mainstream.

That said, the opportunities are so significant that it’s a question of when, not if, these applications will emerge. In order to smooth the way for greater development and adoption, financial service providers and start-ups will need to collaborate closely.

Level39’s Eric Van der Kleij backs up the assertion that banks are keenly interested in this interview: “The real powerful work being done in fintech is blockchain. I can tell you now with certainty that every major western bank we’ve spoken to, and some eastern ones, are looking at blockchain technology.” Level 39 resident and UBS Crypto 2.0 Lead Alex Batlin gives another excellent rundown of the inherent potential:

Bank’s operating efficiency is also likely to improve as you exercise the previously mentioned inversion of control – technology debt is replaced by common rails. If you couple that with a reduced need for intermediaries due to the smart and distributed nature of blockchain and thus cut market participation costs, you can improve margins and reduce customer fees at the same time.

As a bonus you reduce operational risk, as you no longer have a single point of attack and failure in a peer-to-peer network i.e. safer and more reliable systems that are always there when you need them.

Last but no least, as regulators can now see in near real-time all transactions, they can analyse system risk in a way that has never been possible before. They can also validate that asset’s business logic supports regulation as intended.

3. Bitcoin Bull and Bear Corner

r/bitcoin Redditors are cyber-high-fiving over this report from IB Times that BNP is considering adding Bitcoin to one of its currency funds. Meanwhile, the Winklevii have evidently filed for their (still to be opened) Gemini exchange to receive a NY trust charter. Meanwhile, the Justice Department has arrested the founders of Bitcoin exchange Coin.mx, accusing the two gentlemen with “[facilitating] transactions for hackers who would prevent innocent computer users from accessing their devices unless they paid a ransom.” Sounds like a fine business model.

4. And in case you missed it

Here is the R3 feature story from CoinDesk. Could have done with another choice of words than ‘plot’…makes us sound like Coin.mx employees!

The Weekend Read: July 10

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 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

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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 Weekend Read: May 16

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1. Bitcoin vs. Blockchain: don’t call it a comeback?

There was a ton of e-ink spilled this week in discussing the Nasdaq announcement. Here is the money quote from their press release:

In its first application expected later this year, Nasdaq will launch blockchain-enabled digital ledger technology that will be used to expand and enhance the equity management capabilities offered by its Nasdaq Private Market platform. Nasdaq’s blockchain technology will offer efficient, fully-electronic services that facilitate the issuance, transfer, and management of private company securities.

The mention in that release of Open Assets as the tech partner and their use of “the blockchain” made a few folks claim victory for Bitcoin (such as Coin Center, Chris Skinner and even my man Richard Brown). There has been healthy debate on whether the coin can be separate from the ledger, and the Nasdaq case seems to give credence to those who say it cannot. My view is that the reading of the press release is off the mark. In fact, I would be willing to bet a few Satoshis that this Nasdaq effort never colors any coin on the Bitcoin blockchain, if anyone wants to take me up on it (with all proceeds going to GiveDirectly…)

2. Blockchain FTW

Reid Hoffman: Why the block chain matters:

[P]erhaps surprisingly, when one of the very smart people I know in Silicon Valley recently told me he’s a major “Bitcoin sceptic” who has not yet seen “many real use cases” for the technology, I considered it a good sign. Why? Because in my experience, the most transformative ideas are not the ones that achieve broad consensus early on. Instead, they’re the ones that are so uniquely out there, so contrarian, that even informed observers have wildly differing opinions regarding their potential value.

Factom joins with the Honduran govt to build a land title registry on a blockchain:

By building an immutable title record, backed by blockchain, Honduras can leapfrog systems built in the developed world, Kirby said. He added that this would allow for more secure mortgages, contracts, and mineral rights. “This also gives owners of the nearly 60 percent of undocumented land, an incentive to register their property officially.”

Cryptotechnologies, a major IT innovation and catalyst for change by EBA Working Group on Electronic and Alternative Payments:

Asset-centric technologies are potentially the most interesting category for the transaction banking and payments domain, both for processes within and between organisations. Apart from possibly being able to speed up processes and reduce their complexity, cryptotechnology applications in this area can also be integrated with legacy IT, legal frameworks and existing assets (currencies, stock, bonds etc). Therefore, existing financial services could be ‘powered by cryptotechnologies’ offering financial institutions potentially lower costs, better products and faster time to market. This paper describes four actual use cases: 1. foreign exchange/remittance, 2. real-time payments, 3. documentary trade and 4. asset servicing.

3. Bitcoin pulp

The mystery of Satoshi continues to fascinate the press. The NY Times gives it a go in a fairly meh investigation of Szabo-as-Satoshi (the verdict? Kinda probably not but whatevs):

When I asked if he believed that Satoshi had been familiar with his work, Mr. Szabo said he understood why there was so much speculation about his own role: “All I’m saying is, there are all these parallels, and it looks funny to me, and looks funny to a lot of other people.” [snip] When I emailed him on Wednesday, he repeated his denial: “As I’ve stated many times before, all this speculation is flattering, but wrong — I am not Satoshi.”

The Untold Story of Silk Road, Part 2: The Fall. The (very lengthy) conclusion of last month’s piece:

Tarbell had been reading DPR’s correspondence in reverse order, and it was a strange thing, winding DPR’s life backward, from willing executioner back into idealist concerned with individual happiness. Some libertarian utopia, Tarbell thought. Although he wasn’t exactly surprised. All systems are vulnerable to corruption. Like the Internet itself, Tarbell thought, which began as a wonderful free prairie until people took advantage of that freedom. That’s why, he thought, it needed a sheriff.