Speakers: Kathleen Breitman
Transcript By: Bryan Bishop
Distributed Ledger Group
I work at R3. It manages the distributed ledger group, of 42 banks interested in using blockchain or distributed ledger tech. People wonder when I tell them that I work for a consortium that wants to use electronic ledgers. What does that have to do with capital markets?
Ledgers can track transactions. Typically in a capital market context, this responsibility falls to the backoffice. After a trade, you finalize it and actually transfer value. In te case of trading equities, this can take up to three days. There’s also balance sheet risk. It is hard to trade money if you are not sure if you have that money. Thta makes it difficult to finalize trades and what not.
What’s kind of driving this is that most of the technology in the back office is about as old as I am. And there’s many reasons for this, I think Alex brushed over this. There have been many different efforts. It’s hard to coordinate a group of actors to instate a new technology. It costs hundreds of millions of dollars to maintain these existing systems which does not offer a large amount of efficiency anyway.
So at R3 we have united 42 banks who said we are really interested in improving these processes which have been stuck in 1980s or 1990s tech. What we want to do is find a better way to implement tech. This happened to be the case and sales pitch at a time when blockchain was hitting a new found popularity. What I find now is that blockchain is a stone soup for capital market applications. If you think you know your collateral management process is archaic because it’s done in a spreadsheet on someone’s computer, yeah sure blockchain can change that.
So we are thinking about systematizing and creating a global ledger to bare the costs of these transactions. That’s what our financial grade ledger is. That’s what we’re doing. We are also doing product development. How do we create a new digitization standard that reflects the times rather than 1980s or 1990s when most of the backoffice processes were made?
How do we register and creat eauthority around these transactions in a 21st century way? Finally our approach is centered around a lab. There are many solutions in the space. We are building our own solution. We are trying to extract value from other vendors and their insights from trying to operationalize this. Last week we announced we united 40 of our 42 banks among 5 different cloud platform in our lab. From a tech perspective this was not remarkable, but I think this issue is as much a political issue as it is a tech issue.
Our consortium model is to facilitate adoption by a network effect here.
At Bitcoin conferences and Bitcoin talks I often here what I might see on reddit which is that R3 is trying to do something bad to Bitcoin. Uh, this is in particular not the case. We don’t have an official view as a company. It is the case that the solution does not use Bitcoin’s code necessarily. Many design coices in Bitcoin are tradeoffs motivated by a threat model. It’s a censorship-resistant cryptocurrency and many of the design choices that have led to the success of bitcoin are not suitable for capital markets, where we want to be able to punish people if they do break the law.
Blockchain has been a catch-all for people trying to think outside the box. This gets a little tension in front-office processes like trading and whatnot. Rarely do we see people thinking about how you look at risk comprehensively by using one distributed ledger. How do you have multiple datasets and actually auditing them in a dynamic fashion?
Bitcoin is a way to think outside the box and push the boundaries. We do not rely on Bitcoin’s code.
Q: Thank you for the presentation. The 42 banks, are any of them Chinese banks?
Q: Is there any intention for R3 to address consumer paymetns?
A: Right now, what we’re trying to tackle is capital markets. There are many parallels to what we see in the payment space right now. The type of adoption schemes that we could implement with capital markets. Ultimately this will benefit the consumer, it will put a lot of pressure on the sell side, we will see a new way to look at finance. It’s Bitcoin-inspired but we’re not imitating Bitcoin.
Q: One of the biggest things attracting people to Bitcoin is decentralized. Why would it make sense to centralize blockchain?
A: You mean for private use cases? If we want to reconcile internal records… that’s a sort of false application of distributed ledgers. Whta people tend to not appreciate if they don’t work in a bank, I come from consulting for banks, you might think that these are machines that are finely oiled and stuff, but they have lots of databases that need reconciliation. When they say internal databases, they mean a construction database, you want the guy sitting in the department over from you who looks at your expenses, to be able to say hey that’s weird why didn’t that transaction clear. To have a more aduitable ….
Q: You have 42 banks in the consortium. People don’t want to see other transactions. Zerocash? Confidential transactions?
A: Within groups in a bank, you can’t see what they are doing, for regulatory reasons. At R3, our architecture group which is trying to build this financial-grade ledger which will underpin everything. We have three main concerns. Scalability, privacy and smart contracts business automation because you can’t get to these numbers without automation.
Q: R3 is a part of hyperledger. How?
A: We are not focused on syndicated loans. Use cases are something we are dealing with on an interest by interest basis for each bank. For the hyperledger project, we represent our members’ interest. There are 5 donated code bases donated to the hyperledger project. It will be an experiment to see which one serves the best uses of our members. It’s open-ended.
Q: My question is about privacy. What sorts of transparency and auditability do banks really want? How do you plan to enforce that? What about permissioned access and revoking permissions?
A: This will fault to our product team which will be more of a case by case basis. Bilateral transaction between two parties.