R3 and BankChain

Banking Frontiers - - Highlights -

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.

NOT BLOCKCHAIN

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.

DY­NAMIC

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.

FUND­ING

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.”

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