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The Weekend Read: Mar 5

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Enterprise Ethereum Alliance

The Enterprise Ethereum Alliance formally kicked off earlier this week with an all day meet up in JP Morgan’s Brooklyn offices. The group consists of Ethereum-focused startups and large companies, with a focus on developing standards for private Ethereum deployments. The reaction by the press was curious, as many picked up a theme of Microsoft and IBM waging a proxy war via EEA (Microsoft) and the Hyperledger project (IBM). For example, American Banker noted “the IBM-led Linux Foundation Hyperledger Project” and their use of “a mainframe in a cloud” vs Microsoft as “more focused on openness — letting organizations choose the combinations of technology that work best for them.” Coindesk followed up with an article on the decentralized nature of the new group:

Still, while the board is also designed to give members a sense of accountability, more experimental governance models are also being considered. “Everything starts as an idea, with one person,” said Lubin. “That happened. But Ethereum is moving towards decentralization.”

The press loves a simple narrative (see below for a fine example), but both groups are very diverse and seek to move the whole industry forward, as we ALL have a lot of work to do to make this technology real for business users. One theme that did persist at Tuesday’s EEA launch was the desire to keep aligned, and in some minds perhaps eventually merged, with the public Ethereum chain (not to be confused with Ethereum Classic, or Ethereum Classic Classic!). This and Bitcoin’s recent price surge are most likely what is behind the recent ramp up in the price of ether. For an older, somewhat related article on public Ethereum, I recommend this Aeon article.

Et Tu, Blockchain?

The only good thing to come out of the R3 non-story was this new Tim Swanson meme...
The only good thing to come out of the R3 non-story was this new Tim Swanson meme…

Over the last two weeks, a blockchain butterfly flapped its wings, and the next thing we knew, R3 was caught in the oddest of fake-news hurricanes. In short: a tweeted pic from a Corda meetup was coupled with the quote “GAME OVER” (perhaps an early tribute to the great Bill Paxton?) and the next thing we knew, there were all sorts of nonsense articles and blog posts. For a run down, you can read Chris Skinner’s take (and yes, his is an intentional fake news headline…) and this Bank Innovation piece (Dave Birch: I would love to meet your tailor). In shorter: it was all complete BS. Which was disappointing, but not surprising. I just finished the Michael Lewis book The Undoing Project and the one thing the book taught me was that we are all “confirmation bias” machines. Or as The New Yorker put it: Why Facts Don’t Change Our Minds

As David Rutter pointed out in his blog post last week:

Humans are creatures of habit. As time went on, the term blockchain came to be associated with any type of distributed ledger, even as the technology matured and evolved to meet the needs of different groups of users. This isn’t an issue unique to our space. The marketing team at Canon must have spent countless hours working out how to stop people referring to all copy machines as Xeroxs.

We can see this in two other thoughtful articles that were recently published. Our very own Antony Lewis has a great take on Distributed Ledger Technology for post trade published in Tabb Group…yet the title chosen by the editors was “Applying Blockchain to Post-Trade Derivatives Processing.” Another from CFO magazine includes yours truly and does a great job in explaining why CFOs should pay attention to distributed ledger technology…which they term “Betting on Blockchain.”

Lost in the noise was the release of an 80 page report by the Aite Group. This Coindesk review of the report gives a flavor of the market landscape that Aite explored, including this key quote:

“A growing trend, adopted by five chaintech platforms and spearheaded by R3,” writes Paz, “calls for consensus taking place at the transaction level, requiring the consent of at least two counterparty nodes.”

Another bit lost was our new intro video to Corda, which declares in very plain language what Corda is (and isn’t):

But don’t just trust our word on it. Sign up for Corda training or sign up to our Slack, and see (and debate) for yourself!

Links

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: September 11

Sharing the blockchain pixie dust

Sharing the blockchain pixie dust

1. Talking Down the Hype

Bloomberg and Accenture lead this week’s edition with pieces that try to (somewhat) gently deflate the blockchain hype bubble. First up, Bloomberg columnists compare the lightly funded optimism of blockchains with the harsh reality of Europe’s massive and expensive Target2 overhaul:

Take one recent example of wholesale technological change: The very un-glamorous Target2 Securities pan-European settlement platform. (Next time, call it a blockchain, guys.) It was designed in 2006 as a way to improve efficiency, cut costs and reduce complexity for settling cross-border trades in Europe. A decade and 2 billion euros later (divided between the ECB and the financial industry) it’s still not fully rolled out. Official forecasts say the system will begin paying for itself in 2024 — two years, remember, after blockchain will have supposedly also started to save the industry billions.

So a real-world example, then, that it takes 20 years for a new, efficient 2 billion-euro post-trade system with full central-bank backing to start recouping its cost. It would be a miracle if blockchain could repeat this feat in a fraction of the time without similar backing or funding. To match such ambitious expectations would surely require some seriously large-scale resources — which, despite the hype, bank-friendly blockchain technology has yet to attract.

This has been our opinion (from a much more optimistic perspective, of course) from the beginning, and one that is inevitable as things shift from pure innovation labs to business lines. In a similar vein, Accenture had this post in the NY Times that cautions about the challenges of blockchain immutability in a regulatory climate that increasingly tries to enforce a “right to be forgotten”:

The financial services industry needs to face the question of how to balance the appeal of pristine accounting with the demands of the real world, where some things simply need to be struck from the records.

This challenge is coming to light with new data privacy rules like the European Union’s general data protection regulation, which will add new consumer data privacy and ownership rights over the next two years. These rules will not just affect Europe; they will have a far-reaching impact on global companies, and not least on the back offices of major financial institutions.

[SNIP] One thing is clear: If the financial services industry is to embrace a new technology, it cannot be one in which mischief and mistakes are immutable and fraudsters can defend their actions on spurious ideological grounds. Even the smartest contracts can be susceptible to human error, and even the cleverest I.T. architectures will be hit by events that need to be undone.

On some levels the above concern makes sense, but at least in the capital markets perspective, I struggle to see how immutability creates issues, especially in ledger networks with clear governance. Using a simple markets “fat finger” example, the common and correct practice for unwinding trade errors is not to “strike them from the record” but instead to enter an equal and opposite counter-trade. Cancelling records of trades or obligations would quickly lead to that person looking for their next place of gainful employment.

2. Friends and Blockchain

Many thanks to our partners at BNP for inviting me to the kickoff of their Americas Innovation Zone and their “Bizhackathon” event, which was covered here and here. Our panel discussion and Q+A was very engaging and focused more on the challenges and opportunities highlighted in the above article, namely the positive friction that is starting to result as innovation and business reality start to intersect in the PoC-Pilot-Production journey.

Big ups as well to Gadi and the Wave team, which announced, in collaboration with Barclays, a successful use of a blockchain to digitize a part of the mountain of documentation needed in today’s global trade. And Thomson Reuters, another R3 partner, kicked off a weekend-long “HackETHon” in London to explore a few very important themes, such as secure smart contracts and the challenge of exposing trust-minimized distributed ledgers to “the great unwashed” of the external world of data.

3. Open Source

Hyperledger’s Executive Director Brian Behlendorf recent interview in Bitcoin Magazine lays out the Project’s vision to support the various communities emerging across the distributed ledger spectrum in an open way:

“Permissioned chains do not solve all the interesting problems out there,” he commented. “I think Bitcoin, Ethereum, and other cryptocurrency and distributed application platforms have a long, bright future. Specific currencies may come and go, but the problems they solve are real and worth solving and there are incredibly active user and developer communities around each. I think we’ll also find over time that there are many shades of grey between ‘permissioned’ and ‘unpermissioned’ and I’d love to explore that whole spectrum with projects at Hyperledger.

[SNIP] “We’ll have many public chains and technologies (I think Zcash looks really cool, technically) and many, many private chains, because there are many different kinds of communities and use cases, and expecting one chain to meet them all is unrealistic. We should be asking ourselves how we maximize the amount of re-use and code-sharing between the software driving all those chains. That’s what we’re hoping to help with at Hyperledger.”

We are excited to work with the team at the Linux Foundation as they expand the distributed ledger communities and help prove the model of open source in financial markets. It certainly seems like the right side of history, as the data points of “big bad banks” going all Linus increases (see this article on Goldman Sachs).

4. R3 and Exchanges

And finally, we are very excited to announce the addition of BM&F Bovespa as our third member in Brazil and our first exchange (the largest in South America). The Brazilian market is fascinating, as much of its infrastructure is years ahead of markets like the US. Brazilian markets have had to survive the crucible of hyperinflation and market instability time and again, and their market structure has been built in response to that. Fabio Dutra, Client and Business Development Managing Director at BM&F BOVESPA, says it well here: “We believe that strong collaboration with our customers, regulators and vendors is crucial to futureproof financial and capital markets. Innovation with appropriate regulatory oversight is paramount to making the Brazilian markets even more efficient and reliable. Shared ledger technology may play an important role here.”

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My thoughts are with those whose lives were impacted on this day 15 years ago. The years pass but the events that day will not be forgotten.

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: Back to School Edition

Summer is (un-officially) over and the Bitcoin livin’ aint easy
rodney-back-to-school-cameo1

1. Bitcoin Nerd Fight Update

Since our last posting, lots of e-ink has been spilled and reddit sock puppets besmirched over the Great Block Size Debate of 2015. There are countless articles and think pieces available on the topic; for a good high level review of both sides, see this New Yorker article. This week, the broadly anti-XT Bitcoin core dev crowd (representing roughly 90% of Bitcoin Core commits) penned an open letter to the community:

There will be controversy from time to time, but Bitcoin is a security-critical system with billions of dollars of users’ assets that a mistake could compromise. To mitigate potential existential risks, it behooves us all to take the time to evaluate proposals that have been put forward and agree on the best solutions via the consensus-building process.

In other words, you can stick your XT hard fork…Let’s see if anything constructive comes out of next weekend’s Scaling Bitcoin nerd summit in Montreal.

2. Blockchain on Wall St. (cont)

The ‘bank love for blockchain’ articles continued unabated during our brief hiatus. First up was this NY Times article, which features a mention of our own David Rutter and reviews the blockchain excitement across Wall St:

Many in the financial industry hope they can find a way to use the blockchain concept — what is often referred to as adistributed ledger — without using the blockchain associated with Bitcoin. Although the bankers working on the idea disagree on how this will happen, they show surprisingly little disagreement on whether it will happen. One of Goldman’s top Internet analysts, Heath Terry, said in a recent company podcast that “the whole blockchain tech behind Bitcoin has massive implications for really any kind of asset — and the ability to transfer ownership of digital goods.”

“It’s hard to see a world where that blockchain technology doesn’t end up changing the way we think about asset
ownership,” he said.

Next up is Bloomberg Markets magazine with their blockchain cover story on Blythe Masters and DAH (which also includes a pic of Sunil practicing for the Staring Contest finals). The always excellent and irreverent Matt Levine followed this up with one of the most on-point rundowns I have read in Blockchain for Banks Probably Can’t Hurt:

You could have a centralized model where the participants get together, set up a DTC-like entity, and let that entity keep track of ownership and transfers. Or you could have a semi-decentralized model where the participants get together, agree to run the same blockchain code, and keep track of ownership and transfers by consensus. There might be good technological or practical reasons to prefer one or the other, and certainly the blockchain excites many technologists. But the point is: Either of those models seems much better than waiting 20 error-prone days for a trade to clear.

Then for the banks themselves. Here is Aditya Menon, managing director of global digital strategy at Citigroup, quoted in The Economic Times: “For us it’s not so much about bitcoin because bitcoin is something that has very volatile value, questionable in terms of an entry in and entry out from a regulatory perspective. But if you think about the distributed ledger -that is extremely valuable.” Barclays also garnered some headlines, with ArsTechnica managing to over-interpret the announced charity pilot with Safello into the headline Barclays to become the first major bank to accept Bitcoin [later updated and somewhat softened to reflect the truth]. Chief Design and Digital Officer Derek White followed up in other stories with more updates on Barclay’s work: “We looked at how many experiments we wanted to do internally with the blockchain. The first wave led to 22 experiments, we’ve now got over 45 experiments our businesses want to do.” And finally, UBS made a big splash late in the week with an overview of their efforts in distributed ledger, which includes a smart bond prototype as well as a ‘settlement utility coin.’

3. Odds and Ends

ICYMI, in late August Richard Brown channeled Barclays’ Lee Braine in FREE ADVICE CAN BE VALUABLE… BUT ONLY IF YOU TAKE IT:

Thirdly, consider the complexity of banks’ existing IT environments. An idealised, “wouldn’t the world be perfect if…” solution is no use to anybody if it requires the whole world to move at once and/or if there is no credible migration path. This points to a need to listen to the incumbents when they object. Furthermore, consider the non-functional requirements which are simply a given in this space.

Fourthly, if we assume that today’s current hyperactivity will lead to a new understanding of the possibilities for banks but don’t assume that today’s blockchain platforms (permissioned or permissionless) are the (whole) answer, then surely we’re back in the land of engineering, architecture and hard work? Perhaps this means that the combination of persistence, data models, APIs, consensus, identity and other components that we need won’t all come from one firm. So a common language, some common vision and an ability to collaborate may become critical. Where is your distinct differentiation? Where would you fit in an overall stack?

And for something completely different…music royalties on the blockchain have been getting quite a bit of buzz lately. This Billboard article How ‘the Blockchain’ Could Actually Change the Music Industry gives a good overview. I bring this up for two reasons. One, this potential use case is one example where Bitcoin itself could ‘win’ as it is applying new principles to create new markets, as opposed to trying to optimize existing financial infrastructure. Second, it led me to read this very good reply to the hype by Alan Graham. The reply is meant to be specific to the music industry, but Graham does an excellent job of playing the optimistic skeptic for blockchain:

The blockchain, in theory, shows some promise as an immutable public ledger that provides some needed transparency when it comes to important transactions, whether they be purely financial or a public statement of fact. However, if it is going to get past the point where it is being funded for the sake of finding the next big thing (beyond bitcoin), to actually being the next big thing, it has to solve five main issues, Authority, Immutability, Scalability, Legacy, and Privacy.

I encourage you to read it in full. Enjoy!