First it was Goldman Sachs to leave R3CEV. Then it was Santander. However you spin it, this is not good. As Anna Irrera reveals (from her new job at Reuters in New York), R3CEV “has reduced the amount it aims to raise from bank members in its first large round of equity funding to $150 million from $200 million and is changing the structure of the deal”.
Once means nothing, twice is coincidence, three times is a trend. R3CEV cannot afford a third defection.
R3CEV was one of the big Fintech stories of 2016, signalling that banks were embracing Blockchain and making it “respectable” by getting rid of Bitcoin and making it “permissioned” (meaning only banks can participate).
The R3CEV news is signaling a big shift that we shine a light on in this post.
Bitcoin climbs out of the slough of despond
2016 was the year when Permissioned Blockchain rode to the top of the hype rollercoaster and Bitcoin fell deep into the slough of despond (other than for a few true believers). As we move into 2017, Bitcoin is getting more traction and there is more skepticism about Permissioned Blockchain. The R3CEV news signals this shift under way; but it is not the fundamental reason why we are seeing defections.
The massive payoff from eliminating Settlement Latency in Capital Markets
There is massive payoff from implementing Permissioned Blockchain to eliminate Settlement Latency in Capital Markets (aka Real Time Settlement ). That can lead to Business Process Elimination and huge cost savings. In simple terms, this could give Banks the same efficiency as a born-digital startup. So there is no lack of motivation for the banks.
Who will be the Visa & Mastercard of the Blockchain era?
R3CEV was going for that prize. The idea was a cooperative owned by the banks that would deliver the Settlement Latency prize. In a different era, that is what Visa and MasterCard did. Dee Hook of Visa explains the Chaordic Organization business model in this paper.
Some of the issues at R3CEV may simply be a haggle over what % founders and management get vs the banks. Given the size of the payoff, this could be resolved with some negotiation. However, there are more structural issues at work as well.
Look at B3i in Insurance
The payoff from eliminating Settlement Latency in Insurance is even bigger than the payoff from eliminating Settlement Latency in Capital Markets.
That is why, in October, Aegon, Allianz, Munich Re, Swiss Re and Zurich launched the Blockchain Insurance Industry Initiative (B3i). At first glance it looks like R3CEV except that it was created by the Insurance/Reinsurance companies directly; there is no profit-seeking company in the middle.
It is no coincidence that Goldman Sachs was the first to leave R3. Not only is Goldman Sachs the best at technology among the Wall Street Banks, they are also shareholders in Digital Asset Holdings which owns Hyperledger.
Hyperledger is a cross-industry collaborative effort, started in December 2015 by the Linux Foundation to support blockchain-based distributed ledgers. Linux Foundation is a trusted, independent entity as far as the banks are concerned. If you need a place to hash out standards and protocols, Hyperledger is a good alternative to R3CEV.
The key point is that while the Banks definitely want to eliminate Settlement Latency in Capital Markets using Blockchain, they don’t care who will offer the service. It could be an existing intermediary (Exchange plus Clearing firm) or a startup. Owning shares in that startup if it is R3CEV, is only icing on the cake.
SWIFT – far bigger than R3CEV in Membership and not asleep at the Blockchain switch
SWIFT, derided by many as a dinosaur, has 11,000+ Members in 200 countries. R3CEV had 15 as of August 2016. SWIFT could make it easy for 11,000 members to use Blockchain – and seems determined to do so.
Richard Gendal Brown
I don’t care whether R3CEV goes into the dustbin of history. I do hope that Richard Gendal Brown (CTO at R3CEV) continues blogging about Blockchain and Bitcoin. He is my go to source when I want to understand something complex in that domain. I suspect others rely upon him the same way. Explaining complex subjects in simple ways is hard to do and essential for the ecosystem to develop.
On his blog he is currently writing about how Corda from R3CEV is going open source. This may help, although it might be too late (everything significant in Blockchain is already open source. For a discussion on patents in Blockchain please see this conversation on Fintech Genome.
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