A blockchain freight train careering through the financial services world has added 13 globally leading banks to the nine investment giants originally on board, as two men behind the initiative tell PaymentsCompliance the industry is about to be flipped on its head by the unprecedented show of unity.
Financial innovators R3 now have 22 of the world’s biggest banking names partnering to design and apply distributed ledger technologies to global financial markets.
They have placed legal compliance as a keystone at the apex of three new working groups, believing early engagement and input from financial regulators will help lock the ambitious plan into place.
Bank of America, Bank of New York Mellon, Mitsubishi UFJ Financial Group, Citi, Commerzbank, Deutsche Bank, HSBC, Morgan Stanley, National Australia Bank, Royal Bank of Canada, SEB, Societe Generale and Toronto-Dominion Bank are the 13 announced this week.
They join Barclays, BBVA, Commonwealth Bank of Australia, Credit Suisse, Goldman Sachs, J.P. Morgan, Royal Bank of Scotland, State Street and UBS in developing commercial applications for the emerging technology in the global financial services industry.
Charley Cooper, the managing director of R3, told PaymentsCompliance the project had been 18 months of discussion and debate between the founding partners of R3 - Dave Rutter, Jesse Edwards and Todd McDonald - and senior banking community executives.
“They [the founders] did their homework up front, analysed a whole set of companies, analysed the market place and tried to find out where this technology could be applicable,” Cooper said.
A unified approach with all names working together was considered the obvious choice.
Researchers believe ledger technology could replace settlement mechanisms, provide a new standard in security and verification, and cut glitches, potentially saving individual banks tens of billions each year alone.
Sceptics, among them regulatory figures, believe the decentralised aspect of ledger technology still carries risks not yet addressed as fervour grows around the potential for disruption.
Cooper acknowledged the levels of money and hype currently being thrown at potential solutions; where a model is built and then brought to the industry in the hope of a sale.
“Imagine if you ran a restaurant - do you go to the customers’ table and say 'here’s what we cooked for you for dinner tonight, we hope you like it. You don’t have to like it or pay for it'? Of course not. You provide them a menu with choices.
“The point is you either go to the customer first and ask how it should be built, in a way that makes the most sense for the financial services industry, which is what we did at R3, or you can follow the venture approach of building a lot of stuff, hope it’s fit for purpose and hope financial services thinks it’s the right way to go.”
The group, with ties to New York, San Francisco and London, was sceptical about seeking venture funds, and claims validation by the 22 names currently signed on.
Cooper said the regulatory side of the business is what he believes will give R3 the edge.
“We have to recognise that banking is arguably the most highly regulated industry in the world,” he said.
“There are a number of very smart people out in Silicon Valley who can build good products.
“But if they don’t do it with capital markets experience and awareness of the regulatory constructs in which they are building, their effort will fail because it doesn’t deal with regulatory constraints.
"By working with banks and the lawyers up front, the regulators up front, we plan to include them from the outset so our solution is not only built for purpose from a technology and business perspective, it’s from a regulatory standpoint too." – Charley Cooper
He said the spread of banks provided enormous geographical coverage, but also blanket specialisms in everything from investment to retail and corporate banking, mergers and acquisitions, sales and trading and custody.
“We believe the potential applications of this technology are far too broad and extensive for a handful of players to crack on their own,” he said.
“There is a recognition across the financial services industry that legacy systems and processes on which the system is running are outdated, expensive, are prone to failure, and have significant security concerns.
“If built properly this technology could address many of the problems these members have.”
More activity cannot be ruled out, and over the next 12 months it seems the list of names will only grow as Cooper said R3 will come out of the blocks firing.
The working groups are security, architecture, and legal and regulatory, as R3 begins to consult members on a variety of long-standing issues that banks have faced.
“We’ll look at, what do our partners and the industry overall need to worry about from that standpoint, both US concerns and international concerns?” Cooper said.
“There is always a tension between regional and nationalistic regulators trying to regulate a global marketplace.”
Tim Swanson, director of market research at R3 and financial technology expert, talked technical aspects of the partnership.
He equates blockchain, ledger technology and the birth of R3 to the development of free and open source software in the 1990s as developers hoped to break away from Microsoft and IBM.
He said a dialogue had been opened with technology firms as the design work begins.
“With the technology today, we prefer not to have to reinvent the wheel,” he said.
“If there are good technology partners out there we’d be more than happy to sit down and talk with them.”
Swanson said any enterprise on the fabric will benefit from others on it, and provide stability, in securing financial information.
“It has to be compliant with whatever regulatory regimes exist in the various jurisdictions, because if it is not those jurisdictions will not consider it a lawful entity,” he said.
“It has to be built in, we need to work with the institutions to figure out what the precise requirements are, but we have to ensure it is effectively compliant.”
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