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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 20

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MAS MD Ravi Menon announces MAS-R3 Interbank Payments project at SGFintechFest

by Todd McDonald

Singapore Fintech Festival

MAS MD Ravi Menon announces MAS-R3 Interbank Payments project at SGFintechFest

I asked Antony Lewis for a field report on this week’s Singapore Fintech Festival:

11,000 sweaty people couldn’t be wrong…Singapore was the hottest place for FinTech this week, as the world’s first regulator-managed FinTech event kicked off for a week-long collab confab.  Ravi Menon, the MD of the Monetary Authority of Singapore, opened the festival by announcing R3’s collaborative efforts with 10 banks and partners to put the Singapore Dollar on a distributed ledger. (see BBG article here). This garnered quite a bit of inbound interest from other parts of the globe as the week wore on, and we look forward to pursuing this piece of collaborative work in a “jurisdiction near you” soon.

Tim Grant insists that he didn’t pay off the Audio/Visual crew during his panel on Wednesday when Blythe Masters’ microphone didn’t work. The whole panel, including Oliver Bussmann (independent) and Sandra Ro (CME), generally agreed that we need to see some traction next year.  Tim’s “5 Ps” of DLT (Proof-of-Concept–>Prototype–>Pilot–>Permission–>Production) crashed Instagram as the audience became bewitched by the power of alliteration. ABC (AI, Blockchain, Cloud) grew a little more mature and became ABCD (AI, Big Data, Cloud, DLT). Our CEO, David Rutter, was also featured at the ASIFMA Annual Conference (all pics above).

The above, and the MAS’ partnership with R3 announced last week, all paves the way nicely for our Lab of Excellence in Singapore. Lattice80, the world’s largest FinTech co-working space, will be the perfect location to light up those Bunsen burners. If you would like to join us, we are hiring in Singapore.

RegTech and CBDC (cont.)

Continuing the MAS RegTech focus elsewhere, there continues to be a steady drumbeat of news stories concerning the regulator’s role in fintech and DLT. First up is the U.S. SEC and CoinDesk’s profile of the SEC DLT lead Valerie Szczepanik. The article reviews the SEC working group’s focus to date, as well as raising the topic of regulation and ICOs:

Since an ethereum startup called The DAO raised over $100m by selling digital tokens without an exchange, a rush of companies have followed suit. So-called initial coin offerings can be launched from anywhere in the world and cross borders as easily as the Internet itself. With millions of dollars worth of capital raised so far and dozens of ICOs in the works, how the SEC will handle the technology is one of the biggest areas of regulatory uncertainty in the industry. Regardless of whether Gemini and SolidX ever win approval or if ICOs might displace traditional fundraising, the SEC will likely play a role.

Speaking of The DAO, the team behind the dream/nightmare, Slock.it, are back with another project, pushing the “fail fast, fail upwards” concept to its limits. I happened to see this being compared to the advent of flight and aviation inventors, yet the comparison falls flat (like many early aviators (groan)) as these innovators fail the “skin in the game” test popularized by Nassim Taleb. As far as I can tell, there was no repercussion from the absolute failure that was The DAO, whereas those early aviators had the ultimate skin in the game! (For more on that story, check out David McCullough’s excellent book on The Wright Brothers).

Sweden’s Riksbank made headlines this week with talk of issuing digital currency:

The so-called e-krona may be introduced within two years. “The less those of us living in Sweden use bank notes and coins, the clearer it becomes that the Riksbank needs to investigate whether we should issue electronic money as a complement to the money we have today,” Riksbank Deputy Governor Cecilia Skingsley told the Financial Times.

Sweden’s Riksbank is the world’s oldest central bank, and was the first to issue paper banknotes in the 1660s.

Central Bank Digital Currency (CBDC) remains an area of focus for R3 and our Research team. For R3 members, please reach out to us if you have seen our recently published private reports on this topic.

India has also made headlines with their recent demonetization scheme. Once again, many armchair economists/sociologists on the Twitter have been giving their “two paise” on the subject, but since I at least admit total ignorance to all the nuance, here instead is what looks to be a great run down of the issue at hand by The Diplomat.

Bonus link: no idea where to put this but here is CoinDesk’s summary of their recently released State of Blockchain.

R3’s Second Smart Contract Templates Summit & RGB on Corda

We were very pleased to host the second summit dedicated to all things smart contract, with participants in person in Barclays London and New York, with many more across the globe dialed in (Ed. note: need to clarify how time is measured by organizers of upcoming event billing itself as “The Industry’s First Event Exclusively Dedicated to Smart Contracts”…). Dr. Lee Braine of Barclays once again set a high standard for the proposed agenda, and all the contributors managed to outdo themselves. IB Times has a great rundown of the event, and we have provided all of the presentation materials via this link. Allow myself to quote…myself:

The summit featured presentations by Barclays, CIBC, Nordea Markets, ISDA, FIA, Norton Rose Fulbright, Thomson Reuters, University College London, Cardozo Law School, and R3. Todd McDonald, co-founder of R3, said: “We wanted to hold this second summit to keep up the cadence and to continue what we at R3 and all the participants feel is important: progressing this in the open and it being industry led, rather than by just one organisation or one company.”

Our CTO Richard Gendal Brown was featured on two 11FS podcasts this week. First up, RGB was joined by Richard Crook (Head of Innovation Engineering, RBS) and Ajit Tripathy (Fintech and Digital Director, PWC) for a more wide ranging chat. The second is a video link to a 1-on-1 chat with Richard Brown. Both pieces were moderated by our old friend Simon Taylor, aka The Blockchain Beard (who evidently put his size smedium t shirts on a high-heat drying cycle in order to show of his Blockchain Biceps in the attached video…). Richard as always delivers an extremely lucid explanation of not only the functionality but more importantly the benefit of DLT, and specifically Corda, to financial institutions:

On why anyone should care about blockchain and DLT: It just becomes self-evident that there’s a massive opportunity in finance, wherever firms record the same data that their counterparts do, and then have to manage it, that this blockchain technology…can be used to massively simplify and reduce that cost and complexity by just doing it once and knowing for sure that what you see is what your counterpart sees.

On how is Corda different from traditional blockchains: The short answer to your question…it is designed by and for financial institutions, its focus is not on crypto-currency or virtual machines; its focus is managing legal agreements between regulated institutions, is designed to integrate and inter-operate with existing systems in banks, and is designed to integrate well with the legal system…. So this isn’t the idea of computers running amok and controlling the world. This is computer code. This is computer data that, in the event of dispute, is grounded firmly in legal reality.

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!

A Brief History of Governance in Cryptocurrency Land

I recently had dinner with someone who holds sizable cryptocurrency positions. He reiterated what I hear often from people bullish on public blockchains: private projects like R3 are great insofar as they will win the banks over to using a cryptocurrency as their form of value transfer.

Though I’m sympathetic to cryptocurrencies as a social and economic experiment, I believe this transition will never happen. Most cryptocurrencies are optimized to achieve a high-integrity ledger while evading censorship. The design choices that allow for cryptocurrencies to thrive in hostile environments also pose a tax on the throughput and efficiency of these systems.

Many of the design choices that render cryptocurrencies unsuitable for financial services can be altered through forks, whereby the cryptocurrency’s protocol uses new conditions for validating transactions in the network. While these events can make cryptocurrencies more attractive to financial institutions* (likely while alienating their existing user base), the methods available to implement forks point to a larger issue with cryptocurrencies: a lack of robust governance structure.

Two Case Studies
The world has already seen two major crises arise from a lack of governance mechanisms in the two most popular cyptocurrencies: Bitcoin and Ethereum.

Over the last eighteen months, the Bitcoin community has undergone a debate over how the Bitcoin protocol should scale to support more transactions. Without getting into the technical details, several proposals were made to achieve this – some of which were mutually exclusive to one another. Ultimately, the debate over how to amend the protocol led to intense disagreement among the Bitcoin developer community. The path forward had no means to transfer from debate to enforcement in a dynamic fashion.  

More recently, some aspiring former Ethereum developers created a smart contract-based, kickstarter-esque, investment project called “The DAO.” Unlike traditional investment management shops, The DAO was to be governed exclusively by a few thousand lines of code and the votes of its token holders to pick investments. Though it was known to have several critical deficiencies prior to launch, the brazen developers behind the project pushed it to market. When one of the many issues with The DAO was exploited to the tune of ~$50 million going to one clever hacker, Ethereum holders were incensed and called for some form of time-out.

In the heat of The DAO exploit, a hard fork to “undo” the DAO was proposed. At first, the Ethereum Foundation said that they miners would decide if a soft fork to freeze the hacker’s account would take place. Then, the Ethereum Foundation incented miners to soft fork. Soon after, a proper hard fork emerged. For concise summaries, see my colleague Tim Swanson’s posts on the topic – and related ppt for consultants. Long (and unfinished) story short: though the Ethereum Foundation, miners, etc. pursued a course of action, it remains unclear what threshold of dispute over ETH/ETC at the hands of buggy code will cause them to hit “reset” again. 

Closing Thoughts
In short, cryptocurrencies allow stakeholders to benefit from the integrity borne of the incentives for miners… until they don’t. This is a poor value proposition for banks, which are already subject to the will of many external parties. In order to survive, cryptocurrencies will have to learn how to incorporate governance.

* – Though probably not ever because the world still does their accounting in terms of dollars, pounds and the like.