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The Weekend Read: Dec 11

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by Todd McDonald
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R3 at TechCrunch Disrupt

Our CEO David Rutter hit the stage during TechCrunch Disrupt in London earlier this week for an extended interview. Among the highlights was his call that we will see substantial activity on a distributed ledger in 3-5 years, and that R3 will have a DLT-based product in the market by the end of 2017, much the delight and cheer of our product department. (Side note: Dave called me and asked for any background on this event. I pointed him to this clip…not sure it was helpful). In a DLT world, he noted, the idea of hiding a ticket or manipulating a trade will be a thing of the past, which could bring much needed trust back to Wall Street. On trust, he also pointed out the irony of many libertarians and bank antagonists: We all trust our banks, though we like to say we don’t. If we get a chunk of money, we put it in a bank. And for the quantitative participants in the audience, he noted R3 and others in the space addressing a $3.6tn opportunity to re-work the global payments infrastructure, cited from a recent McKinsey report.

Smart Contract Debate

The Chamber of Digital Commerce put out a doc this week entitled Smart Contracts: 12 Use Cases for Business & Beyond that features a forward by Nick Szabo. Luckily for your lazy author, R3’s Ian Grigg has written a very concise response to some of the points in the paper on his Financial Cryptography blog:

The finance end of town is only interested in smart contracts within the fully contractually-informed framework. That’s because accidents happen and the go-to place to sort out disasters is the courts, with their facility for dealing with the unexpected or unusual. This notion goes back to the Magna Carta, which was ultimately a brawl over the right to a fair day in court.

If you want a pithy principled statement, it is like this: people who trade in large values want someone to mind their backs. These people believe that smart contracts will always break, and we need a way to get predictability back into the contract.

Which brings us to the DAO – that $150 million lesson in how not to build a smart contracts platform. [SNIP] To interpret a short, pithy principle, the investors in the DAO found that nobody’s minding their backs. And when that happens, the brawl starts. Magna Chaina?

I know that some folks can’t stomach it, but for the rest that have an interest in what legal and financial professionals have to say about smart contracts, please see this excellent summary of R3’s recent Smart Contract Templates summit by Burges Salmon.

RegTech (cont.)

The Federal Reserve released a paper this week called Distributed ledger technology in payments, clearing, and settlement:

In the context of payments, DLT has the potential to provide new ways to transfer and record the ownership of digital assets; immutably and securely store information; provide for identity management; and other evolving operations through peer-to-peer networking, access to a distributed but common ledger among participants, and cryptography.

I asked Tim Swanson for his views on the paper: “The new paper provides a good objective overview on what distributed ledger technology is and what it is being used for., as well as a number of interesting data points. For instance, “In the aggregate, U.S. PCS systems process approximately 600 million transactions per day, valued at over $12.6 trillion.”  I actually ended up citing this number several times this past week at an event in Korea. The paper also makes a distinction between the settlement finality that permissioned ledgers can provide versus the probabilistic finality that un-permissioned / public blockchains provide.”

The Fed also provides a comment to add to the Smart Contract debate above:

DLT has also raised the possibility of writing terms and conditions between parties into computer code to be executed automatically. In order for these “smart contracts” to be enforceable, they must have a sound legal basis. Contract law is an established set of rules that govern the basic principles of contracting, including formation, amendment, termination, and dispute resolution.

Open Development and Other News Across the Industry

I had the pleasure of attending the Hyperledger Annual Member Summit this past week. It was a great opportunity to connect with folks from across the globe and to hear more about the projects underway underneath the Hyperledger umbrella. Chris Ferris, head of the Hyperledger Technical Steering Committee, put together his reflections in this blog post.

One highlight for me was to watch our CTO Richard Brown keep the audience in rapt attention with his overview of Corda and some of its unique design decisions. The R3 tech team has continued to post to the corda.net blog with more updates on their thinking behind the code. ICYMI, click here for James Carlyle on distributed ledgers as a ‘truth layer’ and click here for Mike Hearn on ‘why UTXO?’ We also had the chance to catch up with our friends at Digital Asset, who released their non-technical white paper earlier this week, which I believe Richard will share some thoughts on in the coming weeks.

The folks at Circle made a splash with their announcement this week of their open source platform Spark and their intention to focus exclusively on “global social payments” that happen to use blockchain(s) as rails. Or, if you are r/bitcoin, totally betraying the Bitcoin community…And for those with a penchant for oral histories of ‘cryptographic ceremonies’, be sure to check out this article on the launch of Zcash. Or if you like Bloomberg articles with all the snark of Matt Levine yet with none of his wit or deep understanding of financial markets, click here (but I wouldn’t recommend it).

…and finally, many thanks to my colleague Tim Grant for letting me crash his set for the debut of Project dR3am, and to the thousands dozens of folks who turned out to support us. Rock on.

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.”

Announcements

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 July 4th Weekend Read

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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…

dorian-satoshi-nakamoto

The Weekend Read: June 20

bitcoin comic
 

1. Santander Innoventures Fintech 2.0 Paper: Rebooting Financial Services

Very well done high level summary of the opportunities in re-engineering financial services, with an emphasis on the collaborative uses of IoT, big data and distributed ledgers.

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In time, distributed ledgers will support “smart contracts” – computer protocols that verify or enforce contracts. This will lead to a wide variety of potential uses in securities, syndicated lending, trade finance, swaps, derivatives or wherever counterparty risk arises. For example,smart contracts could automate pay-outs by the counterparties to swap contracts.

Cutting operational costs is not the only benefit in securities trading. Distributed ledgers can increase investor confidence in products whose underlying assets are now opaque (such as securitisations) or where property rights are made uncertain by the role of central authorities. Our analysis suggests that distributed ledger technology could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by between $15-20 billion per annum by 2022.

2. UBS Crypto 2.0 Legathon

Alex Batlin of UBS hosted an afternoon brainstorming session at UBS’s Level 39 Innovation Lab. You can read a review in his own words here, along with a list of attendees here. Ian Grigg expands a bit on the discussion to revisit his thought experiment of smart contracts as the genesis block of a new blockchain, where any legal dispute is settled by siding with the longest chain.

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3. The Weekend Read Watch

4. Odds and Ends