Blockchain Revolution

The Financial Utility
In the autumn of 2015, nine of the world’s largest banks—Barclays, JPMorgan, Credit
Suisse, Goldman Sachs, State Street, UBS, Royal Bank of Scotland, BBVA, and
Commonwealth Bank of Australia—announced a plan to collaborate on common
standards for blockchain technology, dubbed the R3 Consortium. Thirty-two more
have since joined the effort and every few weeks a new batch of the industry’s Who’s
Who signs up.
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Questions remain about how seriously these banks are taking the
initiative. After all, the barrier to joining the group is a commitment of only $250,000,
yet R3’s formation marks a clear leap forward for the industry. Setting standards is
critical to accelerate adoption and usage of a new technology and so we are optimistic
about the initiative. R3 has poached some of the leading visionaries and technical
practitioners in the sector to move the ball forward. Mike Hearn joined in November,
adding to a team that includes Richard Gendal Brown, formerly the executive
architect for banking innovation at IBM, and James Carlyle, now chief engineer of R3
and ex–chief engineer at Barclays.
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In December 2015, the Linux Foundation, in collaboration with a huge group of
yet more blue-chip corporate partners, launched another blockchain initiative, dubbed
the Hyperledger Project. This is not a competitor to R3; indeed, Hyperledger Project
counts R3 as a founding member, along with Accenture, Cisco, CLS, Deutsche Börse,
Digital Asset Holdings, DTCC, Fujitsu Limited, IC3, IBM, Intel, JPMorgan, the
London Stock Exchange Group, Mitsubishi UFJ Financial Group (MUFG), State
Street, SWIFT, VMware, and Wells Fargo.
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Still, it demonstrates how seriously the
industry is taking this technology and also how reluctant it is to embrace fully open,
decentralized blockchains like bitcoin. Unlike R3, Hyperledger Project is an open
source project that has tasked a community to develop a “blockchain for business.”
This is certainly laudable and may very well work. But don’t be mistaken: This is an
open source project designed to build gated technologies by, for example, limiting the
number of nodes in a network or requiring credentials. As with R3, one of
Hyperledger’s priorities is standard setting. David Treat of Accenture, a founding
member of the group, said, “Key to this journey is to have standards and shared
platforms that are utilized across industry participants.”

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Blockchain has also opened up a broader discussion about the role of
governments in overseeing the financial services industry. A “utility” conjures images
of natural monopolies, highly regulated by the state. However, because blockchain
technology promises to reduce risks and increase transparency and responsiveness,
some industry players suggest that the technology itself functions like a regulation.
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If regulators can peer into the inner workings of banks and markets, then surely we
can simplify some laws and repeal others, right? This is a tricky question to answer.
On the one hand, regulators will have to rethink their oversight role, given the
breakneck pace of innovation. On the other hand, banks have a track record of acting
without integrity when government steps away.
Will the big banks reign supreme by deploying the blockchain without bitcoin,
cherry-picking elements of distributed ledger technology and welding them to existing
business models? R3 is only one of many signs banks are moving in this direction. On
November 19, 2015, Goldman Sachs filed a patent for “methods for settling securities
in financial markets using distributed, peer-to-peer and cryptographic techniques,”
using a proprietary coin called SETLcoin.
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The irony of a bank patenting a
technology originally intended as an open source gift to the world is not lost on us,
nor should it be on you. Perhaps this is what Andreas Antonopolous feared when he
warned an audience that banks would turn bitcoin from “punk rock to smooth jazz”?
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Or perhaps banks will have to compete with best-in-class products and services amid
radically different types of organizations whose leaders oppose everything these
companies represent.
The financial utility of the future could be a walled and well-groomed garden,
harvested by a cabal of influential stakeholders, or it could be an organic and spacious
ecosystem, where people’s economic fortunes grow wherever there is light. The
debate rages on, but if the experience of the first generation of the Internet has taught
us anything, it’s that open systems scale more easily than closed ones.