Posted on

R3 Rejected in Attempted Takeover of Settlement Coin Blockchain Project

Enterprise blockchain is a tough old game.

R3, one of the most prominent startups in the sector, tried unsuccessfully this summer to muscle in on another blockchain consortium, the Utility Settlement Coin (USC) project, which is managed by U.K. technology vendor Clearmatics, CoinDesk has learned.

In early June, R3 proposed to the USC’s bank members that the project be built on the startup’s Corda platform, instead of Clearmatics, which has been building the platform since the project’s inception in 2015, according to four people familiar with the situation.

To entice the banks to make this switch so late in the game, R3 offered to fund the technical development itself and to pay a share of legal fees, the sources said.

However, the idea was unanimously rejected by the now 17 consortium members when put to a vote later that month. This happened close to a pivotal time for USC, as the project moved into “Phase IIIb” at the beginning of August.

Charley Cooper, a managing director at R3, said the company could not discuss individual discussions with prospective partners for confidentiality reasons. But as a general matter, he said, “We believe in open standards for critical parts of blockchain market infrastructure, such as cash and value on ledger, because such standards will benefit the whole industry. Part of our role is to identify opportunities for discussion with potential partners.”

R3’s overture to USC was an attempt to leverage work already done on cash settlement on its Corda platform. In order to execute this goal, R3 asked the USC banks to combine efforts and to bring all previously developed legal and regulatory intellectual property (IP) related to USC to a new proposed project. To this, R3 would contribute its sharable IP from projects done in collaboration with over 50 central banks, regulators, and commercial banks – over 20,000 lines of code and dozens of reports on implementation models.

The startup appears undeterred by the rejection. In late June, it came back with a revised proposal that would keep Clearmatics in the picture as a partner. 

At the same time, R3 argued to the USC members that they and Clearmatics were at risk of forgoing an important opportunity to pool resources and create standards in a critical area of future market infrastructure, according to one source familiar with R3’s position. It proposed going forward by way of a collaboration with Clearmatics to demonstrate that the two vendors’ technologies were interoperable. 

Bad timing

The USC project began life back in 2015 as an initiative of Swiss banking giant UBS and Clearmatics. It has the audacious goal of applying distributed ledger technology (DLT) to the way central banks move funds around and manage liquidity, and so addresses fundamental questions related to credit risk in the financial industry.

Over the past three years, the project has seen a brace of banks join and it was last publicly reported to comprise 11 financial institutions: Barclays, CIBC, Credit Suisse, HSBC, MUFG, State Street, UBS, BNY Mellon, Deutsche Bank, Santander and NEX.

Since then the consortium membership has grown to 17 banks, according to a banker involved in the project, who characterized R3’s bid to bring USC on to Corda as an “aggressive” move.

“This is a tough business environment and R3 is a business like any other and it probably didn’t cross the line of sharp business practice,” said this source, adding that it highlights the importance of the USC project.

Provided the USC project gets the full go-ahead from central banks and regulators, it could become comparable with SWIFT was 50 years ago or CLS was 20 years ago, said the banker.

As such, it’s understandable that other technology vendors might want to pitch to the project’s members, added the source, and going forward, it would not be surprising to see vendor selections being conducted in a manner that’s common in the financial industry.

However, because the USC project is at such a pivotal stage, this ensured a unanimous vote from the members declining R3’s approach.

“I think the reason for the unanimity was less about the technology and more about the timeline of the process,” said the source, concluding:

“The vote came like literally a week or two before the closing of the legal documents for Phase IIIb and I think pretty much the attitude was, ‘Let’s not allow this approach by R3 to derail going into that phase or delay the project.'”

R3 founder and CEO David Rutter image via CoinDesk archives

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Posted on

Axoni, Clearmatics Claim Milestone for Blockchain Interoperability

Two of the most prominent startups in enterprise blockchain are teaming up to tackle the hard, but now seemingly inescapable problem of interoperability.

At Consensus 2018 this week, Clearmatics and Axoni demonstrated how a financial derivative can be issued via a smart contract, trigger a payment and then instigate a cross-chain atomic transfer of value between two distinct networks. This marked the first time a derivatives contract has been originated on one enterprise blockchain and settled on another.

The milestone is important because interoperability is now emerging as a key design goal of distributed ledger technology (DLT).

While the financial world may be moving from a state of many ledgers to fewer ones, blockchain architects have come to realize that trades, deals and transactions will probably never be originated, processed and settled by a single, monolithic system.

Robert Sams, the CEO of Clearmatics, told CoinDesk:

“Facilitating end-to-end processing from point of trade to settlement, we need to make the assumption that that process is going travel through multiple systems, rather than a single monolithic settlement system, distributed or otherwise.”

The collaboration is significant also because of the clout of the players involved.

Axoni, based in New York, is working with a wide range of leading financial institutions and infrastructure providers to move trillions of notional value in U.S. dollars onto blockchain tech across a variety of asset classes.

Meanwhile, its partner in the demo, Clearmatics of London, is working with a consortium of banks and financial institutions to create digital fiat that is fully collateralized by cash at the corresponding central bank and transferable on a distributed ledger.

Axoni has also been doing a lot of work in the derivatives space and other areas of post-trade processes, while Clearmatics is focused on the settlement side of things, so the pairing was an obvious fit (both are building technology based on ethereum-derived architecture).

“If we can collaborate appropriately and facilitate linkage between those networks, what you end up with is a highly automated, highly transparent process all the way from trade agreement through to settlement finality,” said Greg Schvey, the CEO of Axoni.

Lessons from crypto

Stepping back, it’s fair to say blockchain interoperability is at the R&D stage.

To make sense of the problem involves a lot of requirements based on use cases and the domain applications, which all have to be considered together. Sams emphasized that the interoperability demo was just a proof of concept – but an important one, because it drives the spirit of open source collaboration.

“Interoperability needs to be tackled in a open and collaborative fashion and built around open standards and open source implementations,” he said, adding:

“There will probably be multiple types of interoperability solutions – not many, but more than one.”

The same spirit extends to the public blockchain community, where a lot of cutting-edge work is being done on the very technical aspects of the topic.

“There’s a lot of overlap between cross-chain atomic swaps in the cryptocurrency space and the stuff that we are doing,” said Sams. “Even though the domain application is entirely different, the underlying technological primitives are very similar.”

The contract in question was modeled using Axoni’s domain-specific language, AxLang, and then settlement finality of the resulting cash payments was achieved across different permissioned, ethereum-compatible ledgers.

Clearmatics’ contribution to the demo was Ion, an open source interoperability protocol, designed to perform atomic cross-chain transactions.

Lingua franca

The AxLang smart programing language used here was developed by Axoni to make working with smart contracts in an enterprise setting a sure thing, so to speak.

Axlang is based on Scala and enables formal verification of smart contracts, a rigorous mathematical method used to prove the correctness of computer programs. It can also compile to both the Java and the ethereum virtual machines.

However, developers are often asked, why another programing language?

Schvey said that doing lots of work with large-scale application design on blockchains revealed certain requirements not being met by Solidity, the first step into programming smart contracts among the ethereum community.

In particular, Solidity lacks formal verification, which is the ability to have mathematical proofs that the code written has compiled properly, Schvey said.

“Being able to check for certain error vectors is a very powerful concept, especially if you are deploying a large scale multi-party infrastructure with a lot of value going through it,” he said.

Indeed, the proof of concept marries two hard technical challenges: interoperability and formal verification. And there’s an important connection between the two, Sams pointed out.

“Imagine an end state of distributed market infrastructure where you have an end-to-end process flow, occurring through multiple systems,” he said.

“It’s obviously going to be very important that at the semantic layer, a system taking over a process from another system, and vice versa, understands and can demonstrate exactly what the business logic is that they are consuming or producing for another system to consume.”

Two roads image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Posted on

Is Blockchain Ready for Fiat? Why Banks See Big Promise in Crypto Cash

Central banks could soon see a wave of technological breakthroughs – that is, if the newest members of the Utility Settlement Coin (USC) project have anything to say about it.

Initially designed as a way to minimize the role of clearinghouses by letting financial institutions pay each other directly using collateral-backed crypto tokens, the implications of the work could have a broad impact. Since the collateral associated with those tokens is to be held by central banks, the project is increasingly being seen as a step toward reimagining how fiat currency could be issued.

But the potential improvements go far beyond faster transactions with less risk to counterparties, according to several members of the consortium.

If both an asset and the currency used to pay for it are issued on a blockchain, entirely new financial products could result, they argue.

Lee Braine of the Barclays investment bank told CoinDesk:

“By focusing on new collateralized digital currencies linked to major fiat currencies, the Utility Settlement Coin project could potentially create new asset-backed regulated digital cash instruments on distributed ledger technology.”

Echoing Braine’s enthusiasm was the head of blockchain research and development at Banco Santander, Julio Faura.

In interview with CoinDesk, Faura framed the benefits another way, emphasizing the power of using distributed ledgers to run encrypted, self-executing agreements:

“The idea of having a fiat-backed proxy of central bank money issued on smart contacts for financial institutions to exchange liquidity globally seems a very powerful concept,” he said.

Eliminating risk 

The idea of central banks issuing fiat currency on a blockchain also has the attention of Emmanuel Aidoo, the head of Credit Suisse’s distributed ledger and blockchain program, who says the change could do more than streamline post-trade processing.

Aidoo said he’d been monitoring the USC for 18 months before concluding that the time was right for his bank to get involved. Indeed, it was his belief that the project could impact financial stability on the largest economic scale, that eventually led him to “help drive momentum” for its support.

He told CoinDesk:

“The applications of USC extend beyond payments, and could ultimately optimize efficiencies in margin and collateral obligations and reduce systemic risk.”

Already, central banks around the world are exploring how blockchain technology could assist in a wide range of applications.

Central to such large-scale, diverse promise, is the ability to minimize risk between each of the individual counterparties involved in an agreement.

For example, currently, there’s substantial risk in an exchange process called “delivery versus payment,” which is designed to ensure securities are only moved down the value chain at as close to the moment of payment as possible, minimizing possible exposure to loss due to sudden changes in price.

Another new USC member, digital product manager of cash solutions at State Street bank, Swen Werner, said that “ensuring the settlement of financial instruments follows a strict delivery-versus-payment process is of critical importance to the industry and the success of new distributed ledger solutions.”

Similarly, the head of fintech partnerships and strategy at HSBC, Kaushalya Somasundaram, explained how the solution developed with the help of blockchain startup Clearmatics, could help reduce the number of times such risky exchanges occur.

“It would be a lot more efficient to actually link up the digital currency to the central bank collateral and to be able to transfer the digital currency across,” she said. “Ensuring the cash fungibility happens at once across all the legs of the transaction, and not multiple times, across each leg in a sequential manner.”

Pushing interoperability

Currently, the USC platform is being designed so that the value of the token is derived from collateral stored by Utility Settlement Coin members in central banks – but use of the platform itself is not contingent on central bank adoption.

However, as with any distributed ledger technology, the solution can only be only as powerful as the number of parties who adopt it. At every point of exchange between a blockchain-based asset and a centralized asset the element of risk increases, minimizing the potential benefits of a partial implementation, according to Hyder Jaffrey, the head of strategic investment and fintech innovation at UBS.

In order to minimize those vulnerabilities, Jaffrey joins many of his fellow USC members in his belief that fiat currency issued on a blockchain is essential. To help increase the chances that adoption occurs, several members said they aim to leverage their membership as a way to engage directly with central banks.

“In order to see the benefits on-ledger, you really need the breadth of [central bank currencies] available in similar time frames,” he said.

Still, he concluded with a cautious afterthought:

“That’s probably going to be some time before we see that.”

Digital cash image via Shutterstock

The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Interested in offering your expertise or insights to our reporting? Contact us at [email protected].