The first thing DigFin asks Charley Cooper, a managing director at R3 in New York, is where are the use cases for its distributed ledger, Corda.
Cooper replies with a look that says he gets this question a lot, not least from the consortium’s members, mainly banks as well as insurance companies and other financial institutions.
His response involves both the foundational nature of R3’s work, and its mandate to deliver the ledger without involving crypto-currencies – although he adds the consortium expects to have a full enterprise version 1.0 of Corda ready by the end of the year.
First, the team has pivoted away from focusing on apps to an emphasis on the underlying operating system.
“A product built to address a specific use is like an app on your iPhone,” he says, cautioning that his engineers regard the analogy to be simplistic, but it gets the gist across. “You have to build the phone before the app can be used. Without a tech stack beneath, the iPhone would be just an incremental change over other smartphones.”
For R3, its distributed ledger, Corda, is the operating system plus a middle layer of core components that allow the ledger to interact with outside software and perform basic functions such as identifying users, transferring value on the network, and registering a trade or an asset.
On top, there is the user-facing version of Corda, which is akin to an app store, enabling things that banks actually want to do, such as facilitating trade finance, conducting know-your-client processes or reconciling an interest-rate swap.
Corda is about the operating system and interoperability. Unlike the blockchain solutions being developed by firms such as the Depository Trust and Clearing Corporation or the Australian Stock Exchange, which involve creating the full technology stack, Corda is leaving the app development to third parties, be it the banks themselves or vendors such as Calypso or Thomson Reuters.
Changing metaphors, Cooper suggests the better reference for R3 is Microsoft Windows, an ubiquitous operating system for all manner of enterprises.
“Initially, when David [Rutter, CEO] began the firm, we thought we’d focus on apps, but we couldn’t find a foundational distributed-ledger technology fit for purpose: our members didn’t think the solutions were ready,” Cooper said. “So we built the code from scratch” and partner with specialists for the apps.
The firm, in consultation with its members, decided to focus on building the distributed-ledger technology. But this is why Cooper and his colleagues continue to field questions about use cases: “The technologists at the banks get it, but sometimes the P&L folks do not, because they don’t see an immediate return to support a budget…we’re not focused solely on cases, but on building the foundation.”
No crypto-currency, please
The second reason why R3 prefers not to jump into a discussion around use cases is its mandate from members to develop distributed-ledger technology in isolation from digital currencies.
“Our clients said that for this to be scalable and deployable, they can’t rely on a virtual currency,” Cooper said. That meant building Corda to support smart contracts and a protocol for transactions that didn’t involve a crypto-currency or a digital token bespoke to the network.
This is distinct from the original blockchain that was invented to facilitate bitcoin, or the digital tokens underpinning Ethereum, Ripple and other DLT.
However, at the same time, Corda is being developed in order to support the advent of central banks issuing digital currencies – drawing a distinction between handling currencies issued by third parties, as opposed to generating a Corda-currency to facilitate network operations.
“We’re not replacing the status quo and everything must comply with existing regulation,” said Cooper, who is responsible for R3’s legal and government relations.
Technically, therefore, Corda isn’t a blockchain: there’s no underlying currency it mines and distributes, and validating transactions is not based on proof-of-work consensus like Bitcoin, or in other DLT under Hyperledger or Enterprise Ethereum Alliance. The reason is privacy. With a Bitcoin blockchain, consensus would require the entire network to see every transaction in order to validate the blocks being mined. On Corda, only a narrow circle of members, their counterparties, and trusted third parties (such as an exchange, a clearing house, or a regulator) can see a transaction.
Permissions for privacy
Moreover, to augment security, validation will require 100% consensus among permissioned players, rather than a simple majority of a broad network.
This arrangement will still enable Corda’s DLT to eliminate middle and back offices for reconciliation and confirmations. It also allows transactions to be reversed if all parties agree.
“You can’t have confidential and private banking in a pure blockchain,” Cooper said. In addition, whereas the consensus method on blockchain has no KYC – anyone on the network can create or receive value through a block – the Corda version requires stringent legal bona-fides for anyone to secure a node, while Corda’s technology maintains the system.
But this emphasis on legal permissions is a big reason why R3’s development has been slow, and why it takes longer and costs more to integrate its apps into a member’s existing systems.
As Corda nears its debut, however, R3 is also changing its business model. It launched with a membership model, providing advisory services to its banks, and charging them fees for ownership of the intellectual property and a seat at the development table.
But earlier this year, R3 completed a $107 million Series A fundraising, at which point members could turn into equity shareholders; and five large banks also dropped out.
Now over 40 banks are shareholders; others continue to pay consulting fees but Cooper says they will probably turn into clients, and R3 into a more traditional vendor selling enterprise software and integration services.
NexChange, Horton Point launch digital asset market
The aim is to create an environment for investors to build and manage portfolios.
Asia-based blockchain venture firm NexChange Group announced a partnership with New York alternative investment firm, Horton Point, to launch a marketplace for the institutional digital asset management industry.
The Nexyst platform will provide access to a broad range of professionally managed, actively traded crypto strategies and passive investment solutions. Nexyst will debut its initial offering in October 2019.
Nexyst is created to provide better transparency and to improve investment decisions for institutional investors interested in the digital currency asset class.
The platform will enable qualified investors to perform online fund sourcing, due diligence and monitoring, and customize portfolios by a number of parameters such as risk, return, correlation and drawdowns. Nexyst utilizes proprietary optimization technology powered by Eleven Marketplace OS to deliver customized portfolio solutions to each investor.
Nexyst will also provide fund managers with integrated access to CRM, data room, behavioral analytics and customer engagement solutions for enhanced marketing and investor relations.
The Nexyst ecosystem is supported by an active global blockchain community developed by the NexChange Group. Horton Point is responsible for manager sourcing and due diligence. In addition to a transactional component, the platform will provide manager research, value-added content and tools enabling both sides to interact efficiently.
“Our goal is to create a one-stop platform where qualified investors and fund managers can actively engage with each other in a secure and compliant manner,” said NexChange Group CEO and Nexyst co-CEO, Juwan Lee.
The intent is to create an environment in which qualified investors can make informed decisions about this new asset class, said Nexyst co-CEO and Horton Point CEO Dimitri Sogoloff.
OKEx seeks global standards for crypto exchanges
OKEx seeks partners to develop a global self-regulated organization aimed at standardizing practices.
OKEx, one of the world’s largest spot and futures digital asset exchanges, announced an initiative to create a self-regulated organization (SRO) aimed at standardizing exchange practices and policies. Similar to the World Federation of Stock Exchanges, FINRA in the United States, and the World Economic Forum, OKEx is engaging exchanges and market participants in the global crypto-trading community to become members of this initiative.
This SRO will be an independent, membership-based organization that is neutral and open to exchanges of all sizes and jurisdictions. Member exchanges will work together to define and adopt standards that will promote digital asset adoption globally, educate governments and regulators, and develop metrics and criteria for trading, listings, and reporting.
“Cryptocurrencies are global and decentralized, and the industry remains nascent, thus regulations by jurisdiction are not enough,” said Andy Cheung, head of operations for Malta-based OKEx. “The only way for exchanges to grow and deliver impact is by joining together to develop practices and policies that will set a global standard and adapt to regional regulatory frameworks.”
Exchanges must clarify their operational practices and procedures in order to best cooperate with governments and encourage innovation in this sector.
OKEx invites other exchanges to join the company in establishing standards for market-making, listings, delistings of digital assets, and other items critical to the growth of the entire industry. Crypto exchanges share a common goal to protect investors and traders, and to foster innovation in the cryptocurrency ecosystem.
“While other organizations have introduced initiatives to elevate standards for crypto exchanges, most are focused on one jurisdiction. Our initiative is focused on creating a global SRO that can provide international standards,” said Enzo Villani, head of international strategy and innovation at OKEx.
SWIFT and HSBC to define API standards for Hong Kong
The new standard will ensure higher levels of interoperability and improve customer experience.
SWIFT and HSBC announce today they are joining forces to define a common industry standard JSON for APIs, re-using ISO 20022 components, the initiative will see the Hong Kong banking community working together to review and agree on this standard.
In July 2018, the Hong Kong Monetary Authority introduced its Open API Framework, to facilitate the development and broader adoption of APIs by the banking sector. Since its launch, over 500 APIs have been made available by the 20 participating banks.
The new standard allows merchants to setup direct debit authorization and initiate the collection instruction to bank on behalf of their consumers. This initiative by SWIFT and HSBC aims to avoid fragmentation on common use cases, speed up and ease API integration efforts and incremental investment for industry participants, and ensure interoperability with the Hong Kong Faster Payment System’s (HK FPS) underlying clearing and settlement system by reusing ISO 20022 as a standard.
ISO 20022 is already widely adopted by market infrastructures across the world, including HK FPS, and is set to become the new standard for cross-border payments in the years to come, making it a logical choice when adopting a new technology.
Lisa O’Connor, managing director, capital markets and standards, APAC said: “In recent years, the financial industry has moved from safe payments to fast payments, and is now embracing richer data payments as the world is moving towards Open Banking. In this context, the adoption of a common set of standards, such as ISO 20022, is a necessity to ensure interoperability between systems and reap the full benefits of Open APIs.”
Nadya Hijazi, head of digital, global liquidity and cash management at HSBC, said: “At HSBC we understand that the market is rapidly changing, with customers more technologically sophisticated and digitally oriented in their approach. We are thus committed to meeting the demands for an industry that is faster, more personalized and easily accessible. At HSBC we see immense value in defining an ISO 20022 JSON standard and have adopted these standards in our Treasury APIs for collections in Hong Kong.”