David Rutter, CEO and founder of R3CEV, said his banking technology consortium will build some apps unilaterally and likely partner with fintech firms to deliver other solutions across areas like payments and smart contracts.
R3 has employed a member-funded business approach, as opposed to being a venture capital-led startup, which has resulted in a completely unique consortium model comprising over 45 of the world's biggest banks.
In an exclusive interview at Consensus 2016 in New York, Rutter told IBTimes UK: "We are working with our members to examine a number of use cases that we want to take into our Global Collaborative Lab. Our lab is a critically important part of our service offering.
"At the moment, we have three different components for consideration. We're seeing a lot of activity in the payments world, and it is a key area we've identified for deeper exploration. There's also a lot of interest in how blockchain could streamline regulatory reporting and reference data, and we're also looking at interest rate derivatives and smart contracts. Our approach has always been to adopt, adapt or build technology, so in order to deliver these solutions we will build some apps ourselves and we will also partner with other firms in the industry."
Rutter said this differentiates R3 from other players in the space such as Digital Asset Holdings (DAH). "That's what makes us different from other companies in the space who maybe wouldn't necessarily partner with other fintech companies because they are trying to provide a single solution. We hope to use our ecosystem and our network to provide multiple solutions and focus on the adopt, adapt or build principle."
Asked if he thinks there is a race to production among Wall Street's blockchain building startups, Rutter is philosophical. "I think firms that need to get a product to market very quickly are acting quite logically. They need to provide an entire solution, including a blockchain, middle layers, other components etc, and get it into the market as quickly as possible.
"We are looking at things more broadly. We're continuing to build our Corda fabric which is our blockchain platform where members can test proof-of-concepts, and we are also thinking about utilities such as calendar functions and digital identification and other elements that will help everybody build applications. Our goal is to build a sustainable ecosystem for the next 30 years for transactions for the leading banks and institutions.
"We should also remember that we have an incredible opportunity here to shape how blockchain is developed and applied to the industry, laying the groundwork for future developments in digital ledger technology."
While the blockchain universe is busy measuring the distance to the lowest hanging fruit in financial services, many capital markets veterans are resistant to a shared ledger upgrade, citing sensitive issues like information leakage and the settlement times as barriers. IBTimes UK asked R3 if there was anything in terms of assets or instruments that didn't look do-able.
"First of all, I don't see the execution of a transaction itself being used except in very illiquid products, such as corporate bonds; for example, if every bond is on the cloud and I need to find a potential buyer or seller, it would streamline the process if I knew who owned which bond.
"Clearing and settlement is another area which is attracting a lot of interest at the moment, but it is unlikely that we will see blockchain solutions in this space in the first wave, it's more likely to be the third or fourth wave."
A question often asked when considering financial services as a fully automated software business concerns the likely reduction of intermediaries that will follow.
Rutter agreed we will see a reduction, but said this, like every other change to the system, will be bound by regulations. He mentioned Swift, CLS (Continuous Linked Settlement) as well as lots of custodian services which have a technology component.
"There's been a lot of talk about what will happen to companies like SWIFT and CLS but we have to remember the crucial role these institutions play in financial markets. If we look at CLS, there's certainly a technology component, but there are also legal contracts with hundreds of countries and regulatory underpinnings that would need to be considered. It's not a question of replacing these infrastructures but helping them adapt to conform with new standards."
Rutter said anyone with concerns about privacy should read R3 CTO Richard G Brown's posting on the subject. If a transaction is carried out on behalf of some customers in a certain derivative or security, for example, then that customer information and price information is private. "Information is less sensitive two minutes from now, it's less sensitive an hour later, and by tomorrow it might not matter at all. So how do we protect those data elements that really matter? We have successfully achieved that through Corda," said Rutter.
One problem with having only the counterparties to a trade reaching consensus when validating the data, is that these are the very nodes most likely to disagree, given they are involved in the trade. IBTimes UK asked Rutter how Corda mitigates the potential for disputes that might prevent consensus in a restricted privacy setting.
He said: "It is solved by the very first step with Corda, which is where the two parties to the transaction agree all data elements involved in that transaction. You have a strong digital identity, they passed AML/KYC and we know they are authentic parties. The traded security was within x-standard deviations of what was reported on the public tapes, so it meets requirements.
"There are different ways that you can use publicly available material to confirm that a transaction is valid and so we think we can cut down on a tremendous amount of error by taking our approach."
R3 has a powerful balance of capital markets experience and technology expertise. So who steers the ship – the technology, the business acumen, or is it the member banks?
"The company is led by our executive management team," said Rutter. "We work closely with our members to decide which use cases we should focus on and develop and the technology team also plays a significant role in the decision making.
"However, ultimately the decisions are made by our executive committee. We have managed to strike a good balance, but so far we're driven more by the business side than the technology side.
"That's very different than what you'll see coming out of Palo Alto. Often you'll have great technology and a really shallow understanding of the problem companies are trying to solve. We have a very deep understanding of the problems we are addressing and then work together to identify what technology can be applied."
During a recent presentation in London, R3 co-founder Todd McDonald said his experience as a trader had taught him timing is everything, pointing to the immaculate timing of the R3 project.
Rutter agreed wholeheartedly: "Absolutely -100%. In my opinion, it was a confluence of events. Having started so many businesses, timing is perhaps the most valuable variable in that equation.
"There was a lot of discussion and excitement around Bitcoin, we had the banks under incredible cost and capital pressure; we have a regulatory environment that's becoming an increasingly heavy burden.
"On top of that, low interest rates challenged share prices; technologies such as cloud computing, big data, and then blockchain. So for what we wanted to do, we luckily hit a perfect storm, and we are grateful that we timed that just right."
"Everyone knows that humans naturally resist change. It's always harder than you think and it takes longer than you expect. And I think that resistance to change is greater on Wall Street than most places. We have made sure that we have the longevity to be around in 20 years."