The Weekend Read: Oct 30

Our regular posting schedule was slightly waylaid by sweat tea and a bit of SEC football, as your author was busy “Grovin‘” this weekend.

ICYMI: Richard Gendal Brown on Corda: What Makes it Different

Our CTO has returned to the public blog domain with this post that goes into more detail on the origins and differences of Corda (speaking of blogging, rumor has it that Richard will be posting ~twice a month, so please watch this space for more updates):

Early results were promising: the reductive, bottom-up approach we took to architecture and design, which is explored in our introductory whitepaper and on which we’ll elaborate in the coming weeks, was solid: we could model a diverse range of instruments; the design would allow for significant parallel processing; we did not need to send all data to all participants in all scenarios; the use of a mainstream virtual machine and its libraries led to high developer productivity; we were able to support multiple consensus providers on a single network; the use of a flat, point-to-point queue-based, peer-to-peer network mapped well to real business scenarios; and more.

We worked with our members to test the maturing codebase in a variety of contexts: interfacing Ricardian Contracts and Smart Contracts in the context of an Interest Rate Swap with Barclays and others; managing trade finance flows; and more.

And this focus on validated client requirements and a willingness to question some hitherto sacred beliefs (we have no blocks! we have no miners! we don’t put ephemeral data in the consensus layer! we allow per-transaction specification of consensus providers!) led to a unique design.

Had Corda ended up being a minor variation on an existing platform or a me-too copy of something else, what would have been the point in pursuing the work? But that isn’t what happened: we ended up with something quite distinct, something we believe is singularly well-suited to a wider variety of financial-services use-cases and something adapted to the practical reality that the industry is regulated and some rules simply aren’t going to change overnight.

Straight Zcash Homie

I asked newest R3 Asia team member Antony Lewis for his perspective on the launch of Zcash this week. If you like the below, please check out his personal blog Bits on Blocks:

Zcash launched on October 28 with much fanfare and considerably more user-driven hype than other cryptocurrencies. While many cryptos are little changed from their parent (usually Bitcoin or Ethereum), Zcash promises to add an important privacy-preserving feature missing from bitcoin: the ability to hide transaction details on its blockchain and still have transaction validators validate transactions without knowing the financial details of the transaction in question!

Zcash is in implementation of the Zerocash protocol and uses “zk-SNARKS”, or zero knowledge proofs: Rather than submitting a transaction containing clear-text details of your account, the specific coins you’re sending, and the receivers account, you instead submit mathematical proofs that you have control of a certain number of funds. Unlike Bitcoin, where knowing someone’s address/account allows you to see all transactions in and out of that address, this data is obfuscated in Zcash, and can only be viewed with a viewing key.

BitMEX listed ZEC futures since September 16 – over a month before the cryptocurrency existed.  Since launch (and the necessary destruction of the cryptographic toxic waste), ZEC futures have traded as high as 10 BTC per ZEC before falling to 0.25 BTC per ZEC within a few hours.  The price action on Poloniex has been even more nuts printing a high of almost 3300 BTC per ZEC (yep, that’s $2.3m per ZEC).  Cryptos, eh?

Cottoning to the Blockchain

Excuse the dad-humor in the title, couldn’t help myself. This week’s announcement of CBA and Wells Fargo using blockchain tech to track the shipment of a specific bale of cotton got quite a few media hits (see here, here and here). The attention to this story shows how the concept of DLT-enabled trade finance has struck a chord with market participants, and more work continues at R3 and elsewhere to make this promise a reality.

Standard and Poor’s talks our book by highlighting the impact that DLT can have on banking:

S&P Global Ratings says it believes the rising investment in this technology suggests that a transformation of the global financial industry could be underway. 

We believe that, at the very least, blockchain presents an opportunity for  financial institutions to cut costs by streamlining back-office operations; to shorten clearing and settlement times; facilitate payments; and even generate new revenue streams. As with any innovation, however, companies also need to be aware of the risks and implications for their operations. Over the next two years, we expect blockchain will gain momentum and that larger financial institutions may start using it, albeit in a narrow context.

…and finally, a big R3 welcome to Synchrony Financial, our first member from the credit card space. We are excited to have you on board!

The Weekend Read: August 14

Chris Khan, a project lead for our GCL, is filling in for Todd this week since most of you are probably reading this from an iPhone screen on the beach. 

1. Bitfinessed*

There’s no better reminder to store your personal cryptocurrency stash in cold storage than the news that Bitfinex is normalising losses across all their customers to the tune of 36%, including across other cryptocurrencies as well as USD. To compensate, they’re issuing a new token called “BFX” as a makeshift representation of the debt incurred to customers. In theory BFX is pegged 1:1 to the dollar, though tokens are selling for less than one-third of that. It remains to be seen what comes of Bitfinex, but the broader question about security still remains. What kind of recourse does one have in an unhinged situation like this ? Especially if your account only held US Dollars (which weren’t compromised in the hack), which were then taken by Bitfinex to socialise losses among all their clients ?

2.     Crusader Engines on a Clipper

In what was an unseasonably quiet week in the fintech space, R3 wrapped up two prototypes demonstrating how distributed ledger technology could address some of the key challenges facing the trade finance industry. Using self-executing transaction agreements built on Corda, 15 member banks tackled issues relating to accounts receivable purchase transactions and letter of credit transactions. At the same time, some of our consortium members undertook a similar task with the Infocomm Development Authority of Singapore (IDA) using code provided by the Hyperledger Project.

3.     Cocktail Party Conversation Pieces

Other good pieces (not necessarily agreeing with any of the points made therein):

* Second choice here was “Bitfleeced.”

The Weekend Read: July 24

1. Blockchain Report Bonanza

If only he had a blockchain

If only he had a blockchain

BoE has been exploring the topic of central bank digital currency (CBDC) for many months. Their report this week focused less on the technical aspects of CBDC in favor of exploring monetary policy implications. In short, would CBDC enable a central bank to perform quantitative easing (QE) directly to ‘end users’ and individuals? This could help prevent what some claimed happened in past QE episodes, especially during the Euro crisis, where banks were not “passing on” QE to the “real economy.” Said another way, blockchains could helps central bankers move beyond indiscriminate helicopter drops and instead deploy drone-like deliveries of QE goodness. Our research team has a much more nuanced review of the paper, so please contact us if you would like to learn more.

This is a very well done and welcomingly brief report that attempts to drag asset managers “off the sidelines” and into the blockchain arena. It is also novel in that it argues for both cost reductions and revenue generation.

Both of these reports serve as a nice review from different perspectives. The EY report highlights opportunity and risk from the perspective of tech companies instead of financial institutions. Couple it with this interview with Microsoft and IBM on their blockchain cloud strategies. The Bain piece reviews the payments opportunity, highlighting the oft-cited correspondent banking opportunity but also bringing into focus the ability to achieve cost savings in trade finance. This is an emerging area of focus for banks and for R3, as there is much room for improvement. This article gives just one example of commodity invoice fraud: “Trade misinvoicing is costing some developing countries two-thirds of the value of certain commodity exports.”

Taken together, the four reports show the potential and sketch out some of the challenges, all contributing to answer the “why?” that we hear often from financial institutions. Yet there was another short article that never even mentions “the B word” that answers the why (and why now) question most emphatically: a Reuters piece that highlights “the stubborn costs banks can’t erase.”

But as time marches on, it’s become increasingly difficult to find fat to trim. Long-suffering shareholders have gotten excited about these initiatives only to find they do not move the needle much. Banks are still struggling to meet targets they set, ranging from net interest margins to efficiency ratios and returns on equity.

“It’s tough to take out costs meaningfully from here,” said Patrick Kaser, a portfolio manager at Brandywine Global who invests in bank stocks.

As a result, bank executives are being forced to fundamentally rethink the way they operate and staff their businesses to make them less expensive – without also limiting the amount of revenue they can produce. As they hold the magnifying glass up to the expense ledger – especially in retail banking – they are finding some costs to be particularly rigid.

2. Ethereum Fork and the Death Throes of Classic

The Ethereum community has moved forward to execute the previously discussed hard fork. Our Tim Swanson weighed in on this earlier in the week in his post Archy and Anarchic Chains:

Perhaps the most controversial [issue] is that simply: there is no such thing as a de jure mainnet whilst using a public blockchain.  The best a cryptocurrency community could inherently achieve is a de facto mainnet.

What does that mean?

Public blockchains such as Bitcoin and Ethereum intentionally lack any ties into the traditional legal infrastructure.  The original designers made it a point to try and make public blockchains extraterritorial and sovereign to the physical world in which we live in.  In other words, public blockchains are anarchic.

As a consequence, lacking ties into legal infrastructure, there is no recognized external authority that can legitimately claim which fork of Bitcoin or Ethereum is the ‘One True Chain.’  Rather it is through the proof-of-work process (or perhaps proof-of-stake in the future) that attempts to attest to which chain is supposed to be the de facto chain.

However, even in this world there is a debate as to whether or not it is the longest chain or the chain with the most work done, that is determines which chain is the legitimate chain and which are the apostates.

Speaking of apostates, it looks like there is a bit of an internecine attack brewing against the “Ethereum Classic” chain. Never a dull moment!

[ed. note: I will be handing over this space to the deep bench of the R3 team through the end of the summer. Enjoy the attacks, forks and twitter battles without me and see everyone after Labor Day]

The Memorial Day Read: May 30

1. Goldman Sachs Profiles in Innovation Report

Goldman Sachs Investment Research joins the recently steady stream of bank blockchain pieces with a very cogent overview of the potential of blockchain tech, subtitled Putting Theory into Practice. The report goes into detail via seven case studies and does a very good job in walking thru the business case and risks in each. The money quote:

A key takeaway across these applications is that blockchain is not just about disintermediating the middleman. In some cases, blockchain could disrupt markets and existing participants, while in others, it promises to help drive cost savings by reducing labor-intensive processes and eliminating duplicate effort. And in some instances, it can create new markets by exposing previously untapped sources of supply. The common thread is that by enabling a fundamentally new type of database technology that can be distributed across organizations, blockchain creates the foundation for solving problems or seizing opportunities that have eluded current systems.


2. Bitcoin, why can’t you be more like your little brother Ethereum?

Fred Ersham from Coinbase, fresh off the listing of Ether on their GDAX exchange, has a very thoughtful post on how he has come to appreciate the growing Ethereum ecosystem, especially in comparison to both Bitcoin the protocol and community:

What is very real, though, is the possibility that Ethereum blows past Bitcoin entirely. There is nothing that Bitcoin can do which Ethereum can’t. While Ethereum is less battle tested, it is moving faster, has better leadership, and has more developer mindshare. First mover advantage is challenging to overcome, but at current pace, it’s conceivable.

Test of $650/700?

Test of $650/700?

But…Bitcoin price just broke out (on low volume) to new year highs and past previous strong resistance around $465 (see chart), while Ether may be tracing out an interim double top.

But…large mining company KnCMiner declares bankruptcy just as prices shoot past their supposed break even point. Very odd.

But…our old bailiwick TheDAO comes under increased scrutiny, with some calling for a DAO moratorium.

Stay tuned…

3. The Race to Innovate…Ahead of the Ongoing Innovation of Fraud

SWIFT remains in the news, with more reports of attempted hacks surfacing. They even get the badge of honor to have their attacks linked to the same (potentially North Korean) group behind the Sony hacks! We may be coming to the point where we have a version of Godwin’s Law for hacks…eventually all will lead back to (alleged) North Korean hackers. In the meantime, banks are stepping up the pressure for SWIFT to adopt new safeguards.

Banks are also looking to attack fraud in the guise of honest trade finance. Bloomberg details the drive behind and some of the detail of the recent PoC conducted in Singapore, with Ripple, DBS, SCB and the Infocomm Development Authority of Singapore. The application of distributed ledger tech can go a long way in preventing the “double spending” of invoices.

4. R3 In The News

Our own Tim Grant had the honor to present at the President’s Council of Advisors on Science and Technology recently, and his talk (skip to minute 32) and others is posted here. Unfortunately he divulges a bit too much of our “pixie dust and unicorns” business strategy. Oh well, back to the drawing board.

And finally, we are proud to welcome Ping An, our first Chinese institution, and our first insurance company, to the R3 family. Welcome aboard!