It’s Blockchain, Not Bitcoin, That’s
Relevant to Finance


Richard Brown, CTO at R3, says that blockchain allows us to, for the first time, build systems and technologies that run between different organisations that don’t trust each other and bring them to consensus. This means potentially significant savings for financial services, especially in file reconciliation and manual activity. For blockchain to succeed in finance, multiple firms must work together, and Corda is helping to do just that.

What is R3?

“We’re a consortium of over 75 of the world’s largest financial institutions. We first came to prominence in September of last year…we grew to 42 members in November…and we now have over 75. And we have quite a simple mission. It’s to understand, apply, and develop blockchain technology in the financial markets and financial services arena.”

 

How did you end up being CTO of R3? What was your journey?

“I ask myself that quite a lot! Until I joined R3, I was an IBM lifer…. And what I realised quite quickly was that engineering was very interesting…but I had no idea why anybody bought this stuff or who the customers were…. So I worked through a variety of roles in IBM…but almost always focussing on financial markets, financial services and banking.

“And then…I came across this thing called ‘bitcoin’…this strange, new virtual currency that piqued my interest…. So I had a play with it and put it to one side. It was really only a year or so later…that it really came to prominence. There was a huge amount of talk about [bitcoin] on the news, and it really occurred to me that all the technologists that were talking about it really didn’t understand banking. So all these ideas they had about how it was going to destroy banks and change the world – I thought, that doesn’t make any sense. And all the people that were petrified by it and thought it was the worst thing ever didn’t really understand the technology.

So I started writing about it…and I got more and more down the rabbit hole, realising that, actually, it’s the underlying technology – it was this blockchain, not bitcoin – that could be relevant to finance…. If this underlying blockchain technology is going to be deployed in finance…it will have to be done by multiple firms working together. And, therefore, when R3 came to prominence, and it was clear that David, our CEO, had managed to pull together this astonishing consortium of banks, I jumped at the opportunity to join as a CTO.”

 

Why should anybody care about [blockchain and DLT]?

It’s not often there’s a breakthrough in computer science. There are waves of hype all the time, but it’s not often that there’s something new. So let’s be really, really precise about what’s new, what’s different. And we came to the conclusion…that what is new about this space, about blockchain and distributed ledgers is, for the first time, we can now build systems and technologies that are run between different organisations that don’t trust each other, yet allow them to come to consensus…about the existence, the evolution, the shared facts and data….

It just becomes self-evident that there’s a massive opportunity in finance, wherever firms record the same data that their counterparts do, and then have to manage it, that this blockchain technology…can be used to massively simplify and reduce that cost and complexity by just doing it once and knowing for sure that what you see is what your counterpart sees.”

 

But if I’m just doing it once, surely I just centralise everything?

“Well, sure, that’s a perfectly legitimate and honourable approach…and that’s been the recurring theme in finance for decades now: if you get to a point when there’s just too much complexity or too much risk, we’ll create a central infrastructure – and that’s often the right approach. What distributed ledgers and blockchain is showing us is that you don’t, for risk purposes or regulatory purposes, need to create a new central infrastructure, but you still do need to get the benefit of knowing that the data is consistent and is accurate. You can do it through a technological solution through distributed ledgers, so that you know that your system is in sync with your peers,’ without having to go and create yet another central institution.

 

Why is that exciting? Is there a real benefit to this for the banks?

“A huge amount of the work that goes on [in a bank] – the cost, the complexity, the risk, the duplication, the error – is caused by people whose jobs essentially are to check that all the information that sits in that tower block is in sync with the data that sits in the tower block next door.”

 

How is Corda different from traditional blockchains?

“Ironically, Corda is actually, in places, quite similar in philosophy to the underlying design of bitcoin, but it is in general very different to some of the blockchain platforms….

When you look at the technology that has inspired all this…it wasn’t designed to solve the problem of banks. Satoshi Nakamoto, when he invented bitcoin, one: he didn’t wake up thinking, “I want to blockchain,” and two: he didn’t wake up thinking, “I want to solve the problems of the world’s investment banks”…. [These technologies] are designed for different problems. So, in general, they’re designed in a way that requires all data to be processed by all peers…but that’s not how finance works and it doesn’t solve our problem.

“So, Corda really came from a thought experiment that said: how do we build a system that gets these benefits of consensus, that allows us to manage and automate deals between different financial institutions. But how do we do that in a way that doesn’t leak data everywhere, doesn’t run at the speed of the slowest computer, doesn’t require everybody to validate everybody else’s transactions if they shouldn’t. And we started simulating….

The short answer to your question…it is designed by and for financial institutions, its focus is not on crypto-currency or virtual machines; its focus is managing legal agreements between regulated institutions, is designed to integrate and inter-operate with existing systems in banks, and is designed to integrate well with the legal system…. So this isn’t the idea of computers running amok and controlling the world. This is computer code. This is computer data that, in the event of dispute, is grounded firmly in legal reality.”

 

Is it fair to say this isn’t a silver bullet that fixes all of the banks’ ills? What’s the scope?

“This turns out to be quite useful for finance, but it’s more useful generally, this idea of representing a contract between two or more parties, and evolving it and linking it to legal prose. That’s not just relevant to finance, and it’s one of the reasons we’re open-sourcing it, so that we have our vision for how to deploy it in finance, but it’s applicable elsewhere, and we’re looking forward to a much broader community contributing to it.”

 

Now that distributed ledger exists, do we need complementary technology still? Do we still need to think about other technologies?

“It’s additive. This is not going to replace everything…. You still need to report, you still need to be able to back it up, you still need to move data around internally….

We said, what is the essence of what needs to be built for this consensus layer? This layer than can represent agreements – that’s where we’ll focus. But actually moving the data around: there’s messaging systems for that. Storing the data: there’s already existing databases…. There’s some work we have to do to make it deterministic: we have to make sure that if I run a calculation and you run a calculation, we both get the same answer…. But if I look at the dependencies for our codebase, there’s a large amount of code we’ve written, and the last time I checked it, I think there are 55 open-source projects that we also depend on – there’s a huge amount of reuse.”

 

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About the Author

Sarah Mikutel

CMO

Sarah is Chief Marketing Officer at 11:FS. For more than a decade, she’s honed her strategic communications and marketing skills at some of the world’s best brands, including Apple and Barclays. She loves rolling up her sleeves, crafting a good story, and collaborating with people to create positive change for business, customers, and society.