From a Blockchain based to a Blockchain inspired world, SWIFT could deliver verdict at Sibos

test-hand-chains

Image Source

This time last year, the dust hadn’t settled on the Blockchain hype, and several key players within Fintech and Financial Services were quite upbeat about the possibilities. However, as results of PoCs from various consortiums, central banks and payment providers emerged, the results were mixed. Daily Fintech covered an article on R3’s miseries towards the end of last year when Goldman Sachs left the consortium.

Since then, R3 publicly moved away from Blockchain, into a Blockchain inspired world using an open source distributed ledger named Corda. The R3 consortium lost three major banks towards the end of last year. This is vastly attributed to the fact that they chose to move away from a pure Blockchain implementation to a Distributed Ledger implementation for Corda.

The three banks Goldman Sachs, Santander and JP Morgan left the consortium and invested in Axoni that was a pure Blockchain firm. It got worse when R3 blogged that they were not a Blockchain firm, and had always been a distributed ledger company and got trolled on social media for that.

This was shortly followed by the news that SWIFT had launched its inter-bank payments platform that it believed would be the future of its cross border payments platform. The platform was called GPI (Global Payments Innovation), and had a founding consortium of 12 global banks. The GPI, at that time was based out of traditional technologies and not Blockchain. However, earlier this month, SWIFT announced that GPI was being beta tested on Blockchain with 22 new banks validating the system. Verdict on this PoC is going to be at Sibos later this year.

Swift GPI

Image Source

Apart from this, the Bank of England (BoE) haven’t delivered a conclusive verdict on the PoC with Ripple for Cross border payments. The detailed report on the PoC was released earlier this month. The key message was:

” Cross-border payments when applied to wholesale markets present different challenges than when compared with retail and corporate transactions, which the Ripple product is designed to handle. The availability of liquidity is one such challenge, and the PoC allowed the Bank and Ripple to begin exploring these questions. “

In other words “Ripple’s solution wasn’t fit for purpose”, although Ripple chose to see it differently.  A few days later, Ripple announced that a pure Blockchain based approach was not scalable for banks and advocated a “Hybrid approach”.

Wearing my technology hat on, I see some fundamental lessons here, and I may be repeating what has been so often mentioned.

  • Find technologies that can solve your problems – it may not have to be Blockchain.
  • Do not interchangeably use Decentralised Ledgers and Blockchains. You can photocopy on a Canon machine too (not just on Xerox).
  • Innovation doesn’t always have to be on sexy technology. SQL Server and Oracle can do the job too.
  • Simplicity is often overlooked and massively underrated.

I believe that SWIFT’s announcement of the results of their Blockchain PoC at Sibos could provide a decisive direction for Blockchain in Financial Services/Payments. And it might well be “Let’s Move On”.


Arunkumar Krishnakumar is a Fintech thought leader and an investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.


 

Why the R3CEV Blockchain consortium is splintering & what that signals

fullsizerender

First it was Goldman Sachs to leave R3CEV. Then it was Santander. However you spin it, this is not good.  As Anna Irrera reveals (from her new job at Reuters in New York), R3CEV “has reduced the amount it aims to raise from bank members in its first large round of equity funding to $150 million from $200 million and is changing the structure of the deal”.

Once means nothing, twice is coincidence, three times is a trend. R3CEV cannot afford a third defection.

R3CEV was one of the big Fintech stories of 2016, signalling that banks were embracing Blockchain and making it “respectable” by getting rid of Bitcoin and making it “permissioned” (meaning only banks can participate). 

The R3CEV news is signaling a big shift that we shine a light on in this post.

Bitcoin climbs out of the slough of despond

2016 was the year when Permissioned Blockchain rode to the top of the hype rollercoaster and Bitcoin fell deep into the slough of despond (other than for a few true believers). As we move into 2017, Bitcoin is getting more traction and there is more skepticism about Permissioned Blockchain. The R3CEV news signals this shift under way; but it is not the fundamental reason why we are seeing defections.

The massive payoff from eliminating Settlement Latency in Capital Markets

There is massive payoff from implementing Permissioned Blockchain to eliminate Settlement Latency in Capital Markets (aka Real Time Settlement ). That can lead to Business Process Elimination and huge cost savings. In simple terms, this could give Banks the same efficiency as a born-digital startup. So there is no lack of motivation for the banks.

Who will be the Visa & Mastercard of the Blockchain era?

R3CEV was going for that prize. The idea was a cooperative owned by the banks that would deliver the Settlement Latency prize. In a different era, that is what Visa and MasterCard did.  Dee Hook of Visa explains the Chaordic Organization business model in this paper.

Some of the issues at R3CEV may simply be a haggle over what % founders and management get vs the banks. Given the size of the payoff, this could be resolved with some negotiation. However, there are more structural issues at work as well.

Look at B3i in Insurance

The payoff from eliminating Settlement Latency in Insurance is even bigger than the payoff from eliminating Settlement Latency in Capital Markets.

That is why, in October, Aegon, Allianz, Munich Re, Swiss Re and Zurich launched the Blockchain Insurance Industry Initiative (B3i). At first glance it looks like R3CEV except that it was created by the Insurance/Reinsurance companies directly; there is no profit-seeking company in the middle.

Hyperledger

It is no coincidence that Goldman Sachs was the first to leave R3. Not only is Goldman Sachs the best at technology among the Wall Street Banks, they are also shareholders in Digital Asset Holdings which owns Hyperledger.

Hyperledger is a cross-industry collaborative effort, started in December 2015 by the Linux Foundation to support blockchain-based distributed ledgers.  Linux Foundation is a trusted, independent entity as far as the banks are concerned. If you need a place to hash out standards and protocols, Hyperledger is a good alternative to  R3CEV.

Qui Bono?

The key point is that while the Banks definitely want to eliminate Settlement Latency in Capital Markets using Blockchain, they don’t care who will offer the service. It could be an existing intermediary (Exchange plus Clearing firm) or a startup. Owning shares in that startup if it is R3CEV, is only icing on the cake.

SWIFT – far bigger than R3CEV in Membership and not asleep at the Blockchain switch

SWIFT, derided by many as a dinosaur, has 11,000+ Members in 200 countries. R3CEV had 15 as of August 2016. SWIFT could make it easy for 11,000 members to use Blockchain – and seems determined to do so.

Richard Gendal Brown

I don’t care whether R3CEV goes into the dustbin of history. I do hope that Richard Gendal Brown (CTO at R3CEV) continues blogging about Blockchain and Bitcoin. He is my go to source when I want to understand something complex in that domain. I suspect others rely upon him the same way. Explaining complex subjects in simple ways is hard to do and essential for the ecosystem to develop.

On his blog he is currently writing about how Corda from R3CEV is going open source. This may help, although it might be too late (everything significant in Blockchain is already open source. For a discussion on patents in Blockchain please see this conversation on Fintech Genome.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.