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The Weekend Read: Mar 26

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by Todd McDonald

When they say ‘Blockchain’ just close your eyes and think ‘DLT DLT DLT’…

First up, some Corda love. This Australian Financial Review article (paywalled) highlights how our bank partner CBA used Corda in collaboration with their customer, Colonial First State, and a delivery partner, Hewlett Packard Enterprise, to show how it could help solve a key business problem of capital costs:

Colonial First State is re-engineering the process of buying units in the $2.2 trillion market for managed funds in a move it says will “dramatically” reduce the amount of capital banks will have to hold against wealth operations. A recent experiment with Commonwealth Bank of Australia’s emerging technology team and Hewlett Packard Enterprise using the R3 consortium’s Corda ‘distributed ledger’ allowed Colonial to eliminate arduous paper application process for managed funds and the three-day wait for the delivery of units.

Corda, which is being developed by a consortium of global banks, can remove counter-party risk for intermediaries like CFS by allowing assets to be exchanged and transactions settled instantaneously. It also provides transparency on what each counter-party holds across geographies. By removing the risk of the issuer defaulting or the investor failing to settle, banks will be able to reduce the amount of regulatory capital required to provide cover for those risks.

“If [a blockchain] was adopted locally, regionally or globally, the capital the industry would need to hold could reduce dramatically,” CBA’s group executive for wealth management, Annabel Spring, told the APAC blockchain conference in Sydney last week.

CBA is confident about Corda’s security protocols, which have been designed with input by dozens of banks around the globe. In the CFS trial, the units were transferred cryptographically with keys in the form of PIN numbers required to access the system through mobile apps.

We also got a nice shout out by our friend Michael Dowling of IBM with this in depth post on the evolution of Corda, along with some reference to the recent blockchain-not-blockchain kerfuffle. And since we have been, ahem, a few weeks between posts, here are some ‘catch up’ blockchain-y links:

And finally, a big congrats to ATB Financial as our newest Canadian member!

RegTech (cont.)

R3 was happy to announce another member recently, as we welcomed the State of Illinois to our growing list of Regulator Members. Read about this here and here, along with their overall plans to leverage DLT. Our CEO David Rutter and R3 world traveller Isabelle Corbett followed up with this conversation with CoinDesk that lays out some of the concepts behind the R3 ‘RegNet’.

The efforts and interest of regulators extends across the US, both at the State (see Delaware is Drafting Law That Would Recognize Blockchain Records) and Federal level; Acting (and now Nominated) Chairman of the CFTC J. Christopher Giancarlo recently gave a speech on his overall agenda. Of note was the section dedicated to FinTech, both due to its substance and to the fact that the Chairman gave the topic proper airtime even with his quite package agenda. Full text is here, quick pull quote below:

[M]arket regulation by the CFTC has not kept pace. In too many ways, it remains an analog regulator of an increasingly digital marketplace, curtailing its effectiveness in overseeing the safety and soundness of markets. But it doesn’t have to be this way, especially in an industry that is synonymous with innovation. The CFTC must be a leader in adopting the “do no harm” approach to financial technology similar to the US approach to the early Internet. We must cultivate a regulatory culture of forward thinking.

Couple the above with this post from ISDA on the ‘past and future’ of ISDA agreements, particularly on the role of Master Agreements in the world of smart contracts. As a reminder, our third Smart Contract Template Summit (suggestions for a new name welcome!) will be coming up this June.

MAS continues to push an aggressive fintech agenda of their own. A few weeks back, MAS announced the successful completion of the interbank payments projects that they executed with R3 and a collection of local banks. See here and here. And this past week they announced more details on their plan to roll out a national KYC utility.

Another organization at the intersection of regulation, infrastructure and fintech is CLS. This IBTimes article gives an interesting look at some of their thinking. The article also lays out the differences between ledger approaches, namely that of IBM’s Fabric vs R3’s Corda.

Get the Papers Get the Papers

Our Research team and amazing collaborators have been busy recently, with three new papers:

  1. R3’s Survey of Confidentiality and Privacy Techniques, with an accompanying piece in American Banker
  2. R3’s Report on Fedcoin with JP Koning
  3. R3’s Bridging the Gap Between Investment Banking Architecture and Distributed Ledgers by my good friend Martin Walker

Others have been busy as well. BIS recently release The Quest for Speed in Payments (summary article here), while G20 Insights released The G20 Countries Should Engage with Blockchain Technologies to Build an Inclusive, Transparent, and Accountable Digital Economy for All

The Weekend Read: Dec 11

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by Todd McDonald
david-rutter-r35.jpg

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: Nov 27

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by Todd McDonald

How do you write a summary of the weekly news when you are the news? I have been thinking about that for the last few days. I have mentioned in the past that one of the lessons that I took from my trading days is that everyone is talking their book, always, even if they don’t realize it (or won’t admit it). I try to guard against that in this blog, but it is inevitable to some degree. I also don’t want to pull a ‘Zuckerberg in China‘ gambit and ‘erase’ the news. So, for a selection of articles on R3 this week, click a few of these links.

With the Thanksgiving holiday here in the US, I was in a reflective mood on all the things that I am thankful for this year. I am thankful to be part of a wider ecosystem that is trying hard, in many diverse ways, to find the next thing. I am thankful to work with a team that has the strongest collective resolve I have ever witnessed. I am thankful for creative Tim Swanson memes. I am thankful to work with folks like Richard, James, Mike and our whole tech/product team who are focused on building things (instead of with those focused on trying to tear things down from the sidelines of life). I am thankful to be working harder than I ever have in my life and enjoying (almost) every minute of it. On to the links.

Corda Open Source

This Wednesday, November 30 is the day for Corda open source. Richard Brown weighed in with another update/preview of what is to come:

Distributed ledger technologies will have such phenomenally powerful network effects that it is unthinkable that serious institutions would deploy base-layer ledger software that is anything other than fully and wholeheartedly open. And it’s why we’ve been committed all along to releasing Corda just as soon as we were sure it was heading in the right direction. It is and so we are.

We’re really proud of Corda and its progress to date. But, that said, Corda is far from finished. Mike Hearn will soon be publishing a “warts and all” description of quite how much work we still have to do. This is true for all other platforms in this space, of course, but I feel a particular responsibility to be transparent given the ambitions we have for Corda and the uses to which it will be put.

How to get Corda on November 30: Corda’s home will be corda.net. Head over…for links to the codebase, simple sample applications and a tutorial to get started writing your own CorDapps.

Corda is still young, but to echo what Hyperledger’s Brian Behlendorf states below, we feel it is better to open up early rather than late. Now is the time to invite contributions from outside. As the code matures further in the coming months and reaches a stable enough point where detailed code review makes sense, we’ll be looking forward to analysis and review from the industry’s leading experts. And others.

American Banker has a fantastic review of open source in DLT, highlighting both the advantages and risks to this approach. It is worth a read in full:

“Let’s say someone wishes to connect a Chain network that has digital assets running on it with a Corda contract,” [Adam] Ludwin said. “If those projects are open source and well documented, and that documentation is public, then whoever might be building the interfaces or connectors for these networks and services will have a much easier time doing so. That’s why open source is a boon for interoperability.”

[SNIP] Moreover, it is a way for engineers to give back to the engineering community.

“When external engineers can review the architecture and code, they can assess the quality of the projects companies are working on. This serves as a great recruiting tool,” said Max Levchin, CEO of the digital lending startup Affirm and a co-founder of PayPal. “When you open-source, it allows third parties to build applications on top of yours, [a process] which acts as a distribution channel for your own product.”

Ethereum Forks

As the article points out above, open source is hard. This week saw Ethereum initiate a planned fork on Tuesday, which lead to an unplanned fork a few days later, which the Ethereum community rushed to fix. This seems to have led to a bit of schadenfreude twitter style from the Bitcoin community. as they reposted this article in quite a few threads. Meanwhile, earlier in the week the head of strategy for Ethereum-based Consensys penned this article entitled What Venture Capitalists Got Wrong About Bitcoin:

Instead, the infrastructure built for bitcoin can increasingly be co-opted for use by new tokens. These new tokens don’t necessarily add any value for the venture capitalists who originally invested in bitcoin. To illustrate what is happening: Imagine if a railroad company in the 1800’s spent millions laying tracks, only to see a second (and third, and fourth) railroad come along and use the finished tracks for free, to ship more cargo in faster and safer cars.

Interesting to see the perspectives of the two sides, with some viewing all this activity as zero-sum, winner (chain) takes all…while others share our view that success in one ‘camp’ can serve as a positive multiplier across the whole space.

RegTech (cont.) and LegalTech

This week saw the big finale of R3’s initial global regulatory tour, culminating in Eltville am Rhein, where our very own Charley Cooper spoke to the Deutsche Bundesbank’s Central Banking conference devoted exclusively to blockchain technology. For those curious about the participants, see this link. Here is Charley’s report:

The conference lasted for four days and covered a wide range of topics, with my remarks focused on the importance of public/private collaboration as a driver of technology innovation in the highly regulated financial services industry. In the lead up to that event, Isabelle Corbett and I barnstormed through four other countries in seven days, meeting one-on-one with Swiss and Nordic regulators as part of our relentless efforts to involve government agencies and oversight bodies in our work from the outset. A huge thanks to Credit Suisse, UBS, Danske Bank, Nordea, and OP Financial for helping us navigate their home turf. R3 representatives have now met with regulators in almost all of our member jurisdictions, including central banks, securities and derivatives overseers, consumer protection agencies, law enforcement, tax authorities, NGOs, trade associations and legislators. It feels good to be home.

Risk Magazine posted a very thoughtful piece as a follow up to R3’s Smart Contract Template Summit (it is even worth the pain of signing up for a free trial!). Our partners at Norton Rose Fulbright announced the publication of our joint white paper on the legality and enforcability of smart contracts. You can request a copy of the paper here or members can contact R3 directly.

Announcements

Swift announced this week that they would become more open and vocal about their exploration into DLT, which is very welcome news. They also announced some details on their latest POC.

Damien Vanderveken, head of R&D at Swift Labs, says: “Swift has been targeted in the press as a legacy incumbent that will be doomed by DLT. But we believe Swift can leverage its unique set of capabilities to deliver a distinctive DLT platform offer for the community.”

Congrats to our friends at the JP Morgan Blockchain Center of Excellence for their open sourcing of Quorum, which you can access here. This is yet another example that the above American Banker article highlighted of the growing acceptance of open source within finance, and the advantages that even the world’s biggest banks see in an open source approach. We look forward to exploring Quorum more during the upcoming Hyperledger events in December.

And finally, we are very happy to welcome China’s Minsheng Bank to the R3 consortium, as another member in our growing network China and North East Asia.

The Weekend Read: Nov 13

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by Todd McDonald

An emotional week comes to an end in the US. This will be a thinkpiece-free zone save for one article written and posted by Ben Thompson back in March (but still very relevant today). I did a media detox (hence the late posting) and took a hike instead (literally).

On to this week’s links.

 

R3 Announcements

Another busy week here at R3. First up, we announced our partnership with the Monetary Authority of Singapore for the launch of R3’s first physical lab. We have been working with MAS on this concept for some time and they have already proven to be great partners. I am beyond excited for this collaboration, especially since it increases my chances of enjoying real nasi lemak again soon. This announcement comes on the eve of the Singapore Fintech Festival, which will feature both Tim Grant and David Rutter. David’s remarks at this week’s Risk USA event were featured in this article: “When I sit here today versus a year ago, this is no longer ‘if’ or ‘will’ this happen. I don’t think there any doubt that we’re going to see these distributed ledger technologies change how transactions are processed globally.”

Later in the week we announced the successful work to represent identity data on our shared ledger system Corda in collaboration with 13 member banks. This work showed how smart contracts could be used in the collection of relevant KYC data for both legal and natural persons, with the key twist being that the data remains in the control of the entity or person themselves. Another example of DLT helping to push power to the ‘edges’ of the system, with the various smart contract pieces then being able to represent a completely new (and potentially much less costly) way to conduct KYC and onboard clients. You can also reference this identity overview post for a different perspective, and R3’s Ian Grigg will be following up in the coming weeks with more on the R3 perspective to identity with (hopefully!) a series of posts.

Another week, another Gendal post (I told you he was back to the land of the blogging!). This is a short post titled On Distributed Databases and Distributed Ledgers:

In Corda, nodes are operated by different organisations and do NOT trust each other, but the outcome is still a consistent view of data.

Nodes of a distributed database trust each other and collaborate with each other to present a consistent, secure face to the rest of the world. By contrast, Corda nodes can not trust each other and so must independently verify data they receive from each other and only share data they are happy to be broadly shared.

And so we call Corda a distributed ledger, to distinguish it from distributed databases. A distributed ledger that is designed painstakingly for the needs of commercial entities.

 

The Week in Links

Digital Asset paper to the Hyperledger project on The Global Synchronization Log (with Corda shout out)

FCA announces participants in their regulatory sandbox: Meet the 18 companies joining the FCA’s regulatory sandbox

HKMA and ASTRI: Whitepaper On Distributed Ledger Technology. Summary article here.

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!