R3 and BankChain
The way banking is done these days is going to change drastically. Wait for the changes possible through the work being carried out by R3
When we discuss distributed ledger technology and the developments therein, the maximum space is occupied by R3. R3CEV is a distributed database technology company that is leading a consortium of more than 70 of the world’s biggest financial institutions in research and development of distributed database usage in the financial services system. The consortium is headed by former ICAP electronic broking CEO David Rutter and has several financial industry veterans, technologists, new tech entrepreneurs and subject matter experts as members, they together envisaging to change and improve the ecosystem that governs the financial markets.
The consortium’s work does not involve use of blockchain. Instead, it has on its own created an open-source distributed ledger platform, which it is calling Corda. Corda is totally focused on the requirements of the financial services domain and it claims better security. While operationally it would be more like blockchain, it is not a blockchain. Corda is expected to contribute to Linux Foundation’s Hyperledger project in order to create common standards.
In March 2013, R3 had said it had completed a trial involving 40 banks testing the use of blockchain solutions offered by Monax, IBM, Intel and Chain to facilitate the trading of debt instruments. But later in 2017, it said what it has built is not a ‘blockchain’, emphasizing it was never building a blockchain, though it mentioned that it has not given up the concept of blockchain. Corda, it maintained, is never designed to be a traditional blockchain platform.
It is an accepted fact that several cryptographic projects - Bitcoin and Monero being the top ones - have issues with security. The researchers involved have openly stated that use of a centralized blockchain network is prone to security breaches and that the technology is not structured to handle millions of data sets and several millions of data points in real time.
A COMPATIBLE SYSTEM
R3 has a development team that possesses high technological knowledge and domain experience. The team has experts in blockchain and bitcoin and it is widely accepted that the team will finally churn out a system that will drastically change the way the financial services industry in the world is working. The system, many say, will be compatible with industry-standard protocols like AMQP, JDBC and PKIX. Such an approach is essentially adopted to avoid possible regulatory issues.
What do distributed ledgers offer? In simple terms, distributed ledgers are software systems maintained by a network of nodes, which can validate, register and track complex transactions in a dynamic fashion. For example, in capital market transactions, the existing system is that the software sits in the back office, the systems are very old and they rely on reconciliation among separately maintained databases to register, track and account for the transactions. There is risk of human error.
On the contrary, distributed ledger - read R3 - ensures that transactions are validated by the network and would be registered in one ledger. This facility allows financial firms to track and manage risk more dynamically as the transaction data would sit in one place held among legally culpable actors. The transactions are cryptographically assured. This would be an authentic system of record keeping, which can in turn be securely shared among firms without having to worry about costs, security issues, legal complications or compliance issue.
That’s about R3’s platform. R3 is not without controversy. In November 2016, global bankers Goldman Sachs, Santander and Morgan Stanley withdrew from the consortium. Subsequently, in April 2017, US banking giant JP Morgan, which was part of R3, also let the consortium. While Goldman Sachs is rumored to have quit R3 over issues relating to higher stakes and control, JP Morgan left R3 to create another technology platform, said to be at odds with the one chosen by R3 and approved by major global financial services institutions. The US bank is said to be developing what is described as Quorum, which is a private blockchain based on Ethereum. JP Morgan has also invested considerable funds in Digital Asset, a competitor for R3.
However, these developments did not prevent R3 from securing $107 million as part of its Series A funding round from 40 institutions from 15 countries. The funding is described as the largest ever investment in distributed ledger technology. Intel, HSBC and Bank of America Merrill Lynch are among the 40 investors. This funding marks the first two tranches of a 3-tranche financing process, with the final installment likely to be raised later this year.
R3’s three-tier investment program saw the first tier open to all investors, the second tier required investors to put in more money but gave them governance responsibilities such as sitting on certain committees and the third tier meant investors had to put a
larger sum and in return they will get board seats. SBI Group, Bank of America Merrill Lynch, HSBC, Intel and Temasek, were among the top tier investors.
R3 has said it will use the funds to speed up technology development and grow strategic partnerships for project deployment. It has already developed a ledger that can be used to develop applications. It also supports an infrastructure network for financial services firms and technology companies to build their own ledger-based applications and services. The technology development is focused on business applications like verifying transactions between banks, or automating processes. Later on, developments could involve systems that concern consumers more directly - like the possible creation of a digital currency of universal acceptance.
This may look little far-fetched now, but look at the institutions behind the scene. What is sure to happen in the immediate future is the creation of an infrastructure for the global financial services industry that can facilitate payments efficiently through bank systems and regulated financial networks.
R3’s chief technology officer Richard Brown had outlined the consortium’s vision: “Over decades, banks and other firms have built systems for themselves. [But] with shared or distributed ledgers, perhaps we can imagine a world where participants share this infrastructure, so rather than everyone running their own systems that have to be reconciled, we [will have] an open platform that multiple firms can connect to.”