Innovative Payments in FI: Block by (Sort of) Blockchain

Benjamin Foster

Financial innovation company R3 CEV and its 22 member banks have developed a new, blockchain-based platform to enable cost effective and near instantaneous cross-border payments, based upon Corda, a distributed ledger technology. At present, international transactions can take several days to be fully finalised, leading not only to delays, but the greater potential for fraud. With R3’s innovation Corda, however, banks and other financial institutions are approaching the capacity to execute payments almost instantly – building upon Goldman Sachs’ work on its Utility Settlement Coin from earlier this year (a system that envisions settling securities trades using a built-in cryptocurrency).

“International payments systems have struggled to keep pace with the explosion of global trade and the globalisation of the world’s markets,” said David E. Rutter, CEO of R3. “This marks a significant milestone for distributed ledger technology as we work alongside our bank members to harness its unique attributes to build the world’s first true international payments system.” The newly developed platform will sustain digitized versions of fiat currencies on a decentralized ledger and will look to also incorporate central bank-developed digital currencies in the future.

R3’s platform is not, however, a blockchain, with the company shifting away from its original research goal of developing an international payments blockchain, due to a number of key issues with the technology. The speed at which transactions can be processed, issues with the scalability of the technology (as Bitcoin’s ‘forking debate’ of the past year has demonstrated), and security concerns of irrevocably committing sensitive financial information to a public ledger have all forced R3 to shift towards the development of a Distributed Ledger Technology (DLT).

In addition to addressing many of the inherent obstacles for incorporating a blockchain system into international finance, R3’s DLT has also achieved API stability for the first time, allowing developers to build apps from within the ledger (CorDApps) that can be enabled without changing the core API or forcing the client to move its data outside of the secure platform. For instance, RegTech Accuity’s financial fraud screening capability has already been incorporated into Corda, with Accuity stating the feature is ready to use, but will likely only become accessible in 2018 when its licensing terms are finalized.

The integration is targeted at Corda’s financial institution users, including ING, BBVA, and HSBC, among others, and will allow Corda users to scan transactions using an “oracle node” (a key component of Corda that establishes a secure link between a DLT-based smart contract and external data sources), and cross-reference the transaction with regulations such as 4MLD and the US Patriot Act. Whilst Accuity’s integration into Corda is a key step in addressing major concerns of financial institutions regarding blockchain-based platforms – that is, ensuring processes are legally and regulatory compliant – Accuity has stated that it plans to strike similar deals with R3 competitors Hyperledger and Ethereum, suggesting that embedded compliance tools will soon become the standard among such providers and wiping away some of R3’s current, market-leading shine.

R3 is betting, however, that by leading the way in providing connectivity to existing networks, it will speed up the adoption of its open source applications and encourage banks to form coalitions with other network members to experiment with the technology. With R3 now working with over 100 banks, financial institutions, regulators, trade associations, professional services companies, including Barclays, Commerzbank, HSBC, Natixis, and U.S. Bank, the company’s vision for the future of its DLT will undeniably have a key impact on the development of blockchain-based FinTech.

This sector of the market is becoming increasingly key to innovation within both financial and technology giants, with Google and Goldman Sachs two of the most active corporate investors in blockchain companies according to latest reports. The number of corporate investors in blockchain companies hit a record high of 91 this year, just behind the 95 venture capital firms in the space, according to a report by data firm CB Insights published last Tuesday, with $327 million in equity investments made already this year and just trailing the $390 million for the whole of 2016.

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