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The Weekend Read: Oct 15

R3 Meme Altar with a star turn

R3 Meme Altar with a star turn

The Weekend Read Watch

We have a fairly light news cycle this week (as the industry PR machine takes a breather in between Sibos and Money 20/20), but Techcrunch has helpfully provided a six-part web doc on Bitcoin and Blockchain. The series is based upon Nathaniel Popper’s recent book Digital Gold and it walks thru the origins and challenges of Bitcoin, the rise of Ethereum and ends with a chapter featuring R3’s Charley “Hollywood” Cooper (your author plays the uncredited role of “offscreen voice trying to crack up Charley Cooper”). It is a really well done series and will jump to the top of my list of “links to send to my Dad to explain what I do for a living.”

Speaking of Popper, he has a follow up article to last week’s speech by Fed Governor Brainard entitled Central Banks Consider Bitcoin’s Technology, if Not Bitcoin. The article echoes much of what the final Techcrunch episode above discusses, about how the promise of blockchain tech needs to coexist with the realities of the current and future regulatory system: 

“There are so many things going on that it is hard to keep track of all the contacts,” said Mr. Berndsen, the head of market infrastructure at the Dutch central bank. “I hear from other central bank colleagues that it is the same everywhere.”

[SNIP] Ms. Wilkins said the Bank of Canada was interested in the technology as a way to build a single, shared record of all the transactions among several institutions. That could leave much less money sitting idle while banks reconcile their different ledgers, as now happens.

It would also create a standardized way of recording transactions that would allow all the players in the system to communicate more seamlessly.

“There is currently a whole industry set up to reconcile and audit all these separate ledgers, and you can’t easily connect them,” she said. “This comprehensive shared data source could be a real benefit.”

This sentiment is also picked up by Currenex’s David Newns in this Global Custodian article (thanks for the shout out David!):

“There is a reason banks have the regulatory frameworks around them and in the long run nobody can be immune from those even if you are a technology company and not a bank,” said Newns. “Just because you’re not acting as a bank today, it doesn’t mean that you cannot avoid acting like a bank and it may be less comfortable to start doing so tomorrow. There remains a question over how Wall Street and FinTech get along but FinTechs should be aware that if you want to play in that pool you have to play by the rules.”

“Looking at R3 they have the right mindset and character to bring both of these communities together. The industry needs to think about how FinTechs are going to interact with legacy systems and the cultural divide is being addressed by larger industry initiatives.”

Blockchain Hype

Former UBS CIO Oliver Bussman sprinkles a bit of cold water on blockchain hype with FT article entitled Banks will not adopt blockchain fast (note to FT editors: “blockchain fast”? Aren’t the British meant to be more gooder at grammar and usage?):

Over the next 12 to 24 months, I expect we will see significant, if still limited, moves to blockchain-based platforms in areas like cross-border payments or trade finance. But financial services as a whole is much broader than just these isolated use cases. I therefore expect widespread blockchain implementation in other industries first — for example supply chain management, healthcare, real estate, or e-governance.

No doubt financial services will follow; when it comes to blockchain, I do not think you can escape destiny. But the dream of a fully blockchain-enabled financial system will take some time to fulfil.

The Streetwise Professor eschews a sprinkle of cold water for a fire hose of skepticism in this post on the potentially facile arguments and hidden dangers within completely decentralized clearing. He does a very nice job of highlighting the many roles of a CCP above and beyond the blocking and tackling of moving margin, such as mutualizing and managing default and liquidity risk. He also offers this sobering take of smart contracts:

When I think of these “smart contracts” one image that comes to mind is the magic broomsticks in The Sorcerer’s Apprentice. They do EXACTLY what they are commanded to do by the apprentice (coder?): they tote water, and end up toting so much water that a flood ensues. There is no feedback mechanism to get them to stop when the water gets too high. Again, perhaps it is possible to create really, really smart contracts that embed such feedback mechanisms.

But then one has to consider the potential interactions among a dense network of such really, really smart contracts. How do the feedbacks feed back on one another? Simple agent models show that agents operating subject to pre-programmed rules can generate complex, emergent orders when they interact. Sometimes these orders can be quite efficient. Sometimes they can crash and collapse.

In sum, the proposal for “distributed clearing to disintermediate CCPs” illustrates some of the defects of the blockchain movement. It overhypes what it does. It claims to be something new, when really it is a somewhat new way of doing something quite common. It does not necessarily perform these familiar functions better. It does not consider the systemic implications of what it does.

For an antidote to this skepticism, please read Massimo Morini’s excellent paper from earlier this year: From “Blockchain hype” to a real business case for Financial Markets

R3 Around the World

Forum Blockchain in Sao Paulo rocking a blue hue

Forum Blockchain in Sao Paulo rocking a blue hue

To wrap up this week, we are happy to share two “firsts” for R3 and our membership. R3’s Rob Sagurton shared this field report from Sao Paulo:

We are often get the question of, “Are historical bank competitors really collaborating positively within R3?” Case in point was the Blockchain Forum in Sao Paulo this week co-sponsored by Itau and Bradesco (together with R3). We were extremely proud to be invited by these two important Bank Members to co-sponsor the first full day Blockchain conference in Latin American specifically focused on DLT for regulated financial markets. The feedback was overwhelmingly positive on both the content and “energy” from the over 125 senior financial executives and regulators in attendance from Brazil and Latin America. Among the esteemed presenters were the Central Bank of Brazil and their Securities and Exchange Commission – CVM, along with R3 Members Emmanuel Aidoo (Credit Suisse) and Carlos Kuchkovsky (BBVA), to whom we owe special gratitude for making the trip to Brazil to provide their valuable global perspective.

And finally, we are very happy to announce our first Russian member Qiwi, the leading Russian payments service provider. Welcome aboard!

The Weekend Read: Oct 2

Apologies for the delay, as your author was busy wiping away Bubba Watson-sized tears of joy after watching ‘Murica make the Ryder Cup Great Again.

U.S. Fans cheer on the team at the Ryder Cup

U.S. Fans cheer on the team at the Ryder Cup

Sibo(ast)s

FoTWR’s Simon Taylor used to have a killer out of office message: “I love all your emails equally, and will respond to them as soon as I can.” So with that as inspiration, instead of having to pick, I will love each of the (many) Sibos press releases equally (even our own!) and list them below.

BackspaceChain (cont.)

Accenture’s “editable blockchain” mentioned last week prompted this response by Brian Kelly in CoinDesk:

In my view, for blockchain technology to move beyond “lab experiments”, it is critical that we embrace the features of immutability and use the tool for its intended purpose. A blockchain is a great way to keep a record that you don’t ever want changed – this is the heart and soul of a trustless system – it is a feature, not a flaw.

Interestingly, Accenture decided to respond in the comments section (!) to set (or edit, haha) the record straight:

So Accenture considers immutability very much an asset, and not a flaw. We simply believe that “absolute immutability” will become a challenge when it meets real-world compliance and risk management requirements. There needs to be a technical solution when things go wrong.

Blockchain Hype (cont.)

Vitalik Buterin gets another Vanity Fair-esque profile in this Fortune piece (which also has a bonus pic of our Mike Hearn rocking a v-neck sweater/jumper), in the wake of the second well attended DevCon in Shanghai. Pair this article with this cautionary posting from Nick Tomaino on Irrational Appcoin Exuberance:

Crypto enthusiasts (myself included) want to see these types of projects come to fruition; the visions are alluring. The projects haven’t delivered anything tangible yet though. These fundraises are getting done based on vision rather than any semblance of execution. This has been a problem on Kickstarter for years and I’m fearful we’re going to see a lot of the same in the ICO world.

IBM released a survey of over 200 global banks entitled Leading the Pack in Blockchain: Banking Trailblazers Set the Pace:

It found 15% of bank respondents intend to have fully implemented, full-scale commercial solutions in 2017. Behind them, another 65% indicated they plan to have blockchain solutions in production over the next three years.

Perhaps the report should be checked for proper usage, according to this handy, short guide by Ryan Shea on Blockchain Terminology:

The term “blockchain” is a noun, but it’s important to note the noun types that it can fit into.

Just like the term “rocket”, the term “blockchain” can be used as a concrete noun, but never as an abstract noun, like “genetic engineering”. One can say “I have a rocket”, “I see the rocket”, “there are rockets” and “we’re using rocket technology” but one cannot say “I am focused on rocket”.

Likewise, one can say “I have a blockchain”, “I see the blockchain”, “there are blockchains”, and “we’re using blockchain technology” but one cannot say “I am focused on blockchain”.

What is this Rocket you speak of? Can I get in on the pre-mine ahead of the ICO?? I want Rocket.

The Weekend Read: Back to School Edition 2016

Summer’s (unofficially) over, Hermine aint here, and it is time to get back to school.

1. Blockchain Hype

The Bloomberg article Maybe Blockchain Really Does Have Magical Powers produced a fair bit of chatter in the office this week. Some couldn’t get past the snark, but your author respects good snark when he see it. The article calls into question the hyperbole of the WEF report released this summer and also highlights our recent Corda whitepaper:

What’s new is that each transaction comes with attached code (a “smart contract”) containing standardized rules about how to decide whether it is valid. The parties download and independently run the code to verify the transaction. This is cheaper and faster than traditional reconciliation, because it eliminates the need for a bunch of back-office employees at each separate institution to reconcile transactions using their own unique sets of rules and data fields.

[SNIP] The only thing previously stopping the standardization of reconciliation processes was the unwillingness of financial institutions to collaborate. Financial institutions spend $65-80 billion on back office reconciliation every year. The employees working in back offices probably offered lots of excellent reasons why their roles couldn’t simply be standardized away.

[SNIP] Standardization of rules and data fields is a good idea that could save billions of dollars in back-office reconciliation costs. Maybe one of the biggest effects of all the blockchain hype will be getting a bunch of security-conscious egoists to come to an agreement that benefits them all. That would truly be magical.

More in don’t believe the hype: Adam Ludwin of Chain tries to slow the roll of “put a blockchain on it” enthusiasts:

It’s strange to hear chief executives pour cold water on technologies that are at the heart of their own companies. Yet that’s what Adam Ludwin, who is the CEO of blockchain company Chain, did when I met with him this month. The hype over blockchain—a new form of record keeping that relies on a shared digital ledger—is causing people to lose sight over what the technology is meant to do, according to Ludwin. “Blockchain is a database for money,” he said. “I don’t understand why people talk about it in terms of health records and home deeds and voting systems.”

Couple these articles with the recent Gartner Hype Cycle warning, and it shows how important delivery becomes as we head toward 2017.

2. Catching Up

A few updates and announcements to share:

Visa eyes new link in blockchain payments

The project is designed to cut costs, speed up settlement time and reduce credit risk in the market for moving money between banks both domestically and across borders. It could represent a challenge to the Swift interbank payment system, the main messaging system used by banks to handle large money transfers. Swift has recognised the potential threat and has itself been examining blockchain’s potential.

Swift warns banks about successful raids by hackers

Swift — the Society for Worldwide Interbank Financial Telecommunication — warned its members that while there had been fewer publicly reported cases of banks being attacked, hackers were still on the hunt for weaknesses in their security systems. “We have seen new cases of input fraud since we last wrote to update you on these issues,” Swift said in its letter. “The attackers have followed a broadly similar modus operandi, but have specifically tailored every attack to each individual target.”

Smart Contracts Firm Taps Wall Street Vet as President, Chairman

Symbiont, a developer of software for self-executing smart contracts, has hired Wall Street veteran Caitlin Long as president and chairman.

IBM Bridges Blockchain, AI With New Business Unit

IBM is reorganizing its internal blockchain team into a business unit that encompasses its artificial intelligence and cloud computing efforts, called ‘Industry Platforms.’ In addition to the work on blockchain tech, the business unit will lead IBM’s efforts to bridge its financial services work with its Watson artificial intelligence initiative.

Key themes from the R3 summit on smart contract templates

A nice summary of our recent summit (rumor has it that there may be a follow on summit in the coming months…)

Eleven Reasons To Be Excited About The Future of Technology

Not exactly an announcement, but this is a really cool summary of all the things to be optimistic about in technology. When you get bored of being excited and feel like trying on some dread and paranoia, check out this review: Homo Deus by Yuval Noah Harari review – how data will destroy human freedom (!)

3. An R3 Welcome

Two big shout outs this week. A warm R3 welcome to China Merchants Bank and to Met Life!

The Weekend Read: Valentine’s Day

And Lo! A Rutter brought forth The Words of The Swanson (see article)

And Lo! A Rutter brought forth The Words of The Swanson (see article)

1. (D)App Store

FoTWR Alex Batlin has a thought provoking post on the potential evolution of smart contracts where the protocol and business logic are separated (i.e., Ethereum and its ilk). This is a topic that we have been discussing quite a bit internally and one which our newest team member Kathleen Breitman will expand on in the coming days. Alex does a great jonb in framing out possible market models as well as being candid that the introduction of business logic into such a protocol will inevitably (and rightly) introduce some level of trust into the system:

Based on that assessment, we may end up with a DApp Store model where folks purchase a licence to deploy an instance of a well written, standards compliant, tested and proven DApp onto a blockchain. This however implies that the DApp creator does not provide operational guarantees, so who does?

There are parallels today e.g. iOS developers rely on Apple to provide the device, the OS and the App Store, and both rely on the broadband and mobile internet service providers (ISPs) to provide connectivity, but none of them guarantee entire front to back service to the app user.

Conclusion therefore is that a new type of entity is required – a blockchain service provider (BSP).

2. Blockchain 90210

We were thankfully treated to a lighter news week, giving everyone a chance to catch up on the recent deluge of white papers published in January. Instead we have a selection of articles that are less New Yorker and more US Weekly.

First up, there seems to be a resolution to the Ripple-Jed McCaleb break-up and subsequent XRP sale “crime of passion,” with Jed maintaining ownership of his coins but agreeing to a strict sale schedule overseen by Ripple. Both sides have claimed victory and hope to move on. Next up, the “he said, he said” Bitcoin block size slow motion train wreck continues, with this article giving a good overview.

…and finally, we have a front runner for most overheated blockchain headline of 2016: How fire departments can use Bitcoin technology. It is official: BLOCKCHAIN SAVES LIVES!

The Weekend Read: Jan 24

Greetings from London, your author’s last stop on a three city tour. Many thanks to those in Sydney and Singapore for their hospitality. Now for the jet lagged links.

Test driving the latest VR goggles / Tim Swanson gets his fortune told

1. RegTech

RegTech is a theme that is picking up some momentum. The UK Government Office for Science released a very well done report (which includes a chapter from our CTO Richard Brown and FoTWR Simon Taylor) on the potential for distributed ledger technology in both the public and private sphere:

In summary, distributed ledger technology provides the framework for government to reduce fraud, corruption, error and the cost of paper-intensive processes. It has the potential to redefine the relationship between government and the citizen in terms of data sharing, transparency and trust. It has similar possibilities for the private sector.

For those looking for a summary of the lengthy paper, this BBC article does a very good job.

The FCA’s Makoto Seta further highlighted the interest in RegTech at a recent conference, noting that “the FCA was interested in how blockchain technology could reduce the burden of regulations.” Which is a key point, as the use of smart contracts could allow for the implementation of regulations at code level instead of via post-hoc enforcement.

The People’s Bank of China (PBOC) issued a very positive statement on digital currency, with a report recommending to “set up a clearer strategic target for launching digital currencies, overcome the key technological barriers … and aim for an early launch of the central bank’s digital currencies.”

Pascal Bouvier extends this thought experiment, taking as a given the eventual adoption of what he calls “fiatcoin” and running thru some of the implications:

Until fiatcoin would be made available to the public – and I am also convinced this will happen sooner than we think – how would financial institutions intermediate between fiatcoin and physical currencies (physical or digital cash)? I realize all these questions lead us to rethink what a bank will do in the future and how it will compete. Deposit gathering and credit intermediation may not be the end goal anymore.

2. Distributed Ledger Headlines

Congrats to the Digital Asset team on their announcement this week of a $50m funding round, which includes an extended PoC with the Australian Stock Exchange (ASX) on a distributed ledger based post-trade solution.

Another congrats to UBS and Alex Batlin for their decision to donate their “smart bond” code to an organization working on HIV research: “Finclusion, a London-based fintech firm, has developed a blockchain platform for HEAL Alliance, a non-profit organisation looking into a cure for HIV that wants to issue social impact bonds.”

And a final high five to the mad Lab scientists at R3 on the announcement of the first of many collaborative experiments across the R3 member banks. In the words of Tim Grant, “Rather than just talking about what we might do, we’ve moved into a new phase, which is actually executing these plans and demonstrating how this technology might work in practice.”

3. Blockchain Hype

Davos fired up the blockchain hype machine, welcoming not only the usual bloviators and bureaucrats but also evidently Satoshi himself. Fintech and blockchain were on everyone’s panel talking points, reports the FT. (For a snarkier blog version of the above article from Izabella Kaminska, click here). MasterCard’s head of innovation Garry Lyons also expressed his company’s strong interest in the tech in this article, which allows me to repost this gratuitous R3 shout out:

So what does Mastercard think about the consortium? “In order for blockchain technology to move to a wider scale, it needs regulation and investment,” says Lyons. “R3 is an interesting way of doing that because it brings several interested parties together to experiment with underlying tech. It’s a good opportunity for the banks and there’s more chance of blockchain technology succeeding as a group than disparate parties.”

A recent Goldman Sachs podcast with co-head of technology Don Duet offers a nice antidote to the hype, while still striking a positive chord:

I think that, you know, you could ask the question of, well, why couldn’t this have been designed before? And I think that that’s a very valid question. I think part of what we find, or I certainly find personally very exciting about this is just the awareness. I think the awareness that’s happened within the financial community that there is a technological answer that can help drive change and improve our system is just very encouraging.

And finally…

One last posting on the bitcoin news cycle from last week. Eris Industries’ Casey Kuhlman does a great job of framing the arguments on both sides. I plan on pointing folks to his post when they ask me on this topic in the future with a short addendum of “What he said”

The central point of this piece is basically to say this. Calm down bitcoin. It’s gonna be alright. No single banker I’ve met, and I’ve met and work with plenty, has ever said to me that they were in competition with bitcoin. Indeed, most find this idea laughable.

They have much bigger, more immediate problems to solve. Problems which the raw blockchain and smart contract technology is better suited to help them with than any one application built on the technological core.