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The Weekend Read: September 11

Sharing the blockchain pixie dust

Sharing the blockchain pixie dust

1. Talking Down the Hype

Bloomberg and Accenture lead this week's edition with pieces that try to (somewhat) gently deflate the blockchain hype bubble. First up, Bloomberg columnists compare the lightly funded optimism of blockchains with the harsh reality of Europe's massive and expensive Target2 overhaul:

Take one recent example of wholesale technological change: The very un-glamorous Target2 Securities pan-European settlement platform. (Next time, call it a blockchain, guys.) It was designed in 2006 as a way to improve efficiency, cut costs and reduce complexity for settling cross-border trades in Europe. A decade and 2 billion euros later (divided between the ECB and the financial industry) it's still not fully rolled out. Official forecasts say the system will begin paying for itself in 2024 -- two years, remember, after blockchain will have supposedly also started to save the industry billions.
So a real-world example, then, that it takes 20 years for a new, efficient 2 billion-euro post-trade system with full central-bank backing to start recouping its cost. It would be a miracle if blockchain could repeat this feat in a fraction of the time without similar backing or funding. To match such ambitious expectations would surely require some seriously large-scale resources -- which, despite the hype, bank-friendly blockchain technology has yet to attract.

This has been our opinion (from a much more optimistic perspective, of course) from the beginning, and one that is inevitable as things shift from pure innovation labs to business lines. In a similar vein, Accenture had this post in the NY Times that cautions about the challenges of blockchain immutability in a regulatory climate that increasingly tries to enforce a "right to be forgotten":

The financial services industry needs to face the question of how to balance the appeal of pristine accounting with the demands of the real world, where some things simply need to be struck from the records.
This challenge is coming to light with new data privacy rules like the European Union’s general data protection regulation, which will add new consumer data privacy and ownership rights over the next two years. These rules will not just affect Europe; they will have a far-reaching impact on global companies, and not least on the back offices of major financial institutions.
[SNIP] One thing is clear: If the financial services industry is to embrace a new technology, it cannot be one in which mischief and mistakes are immutable and fraudsters can defend their actions on spurious ideological grounds. Even the smartest contracts can be susceptible to human error, and even the cleverest I.T. architectures will be hit by events that need to be undone.

On some levels the above concern makes sense, but at least in the capital markets perspective, I struggle to see how immutability creates issues, especially in ledger networks with clear governance. Using a simple markets "fat finger" example, the common and correct practice for unwinding trade errors is not to "strike them from the record" but instead to enter an equal and opposite counter-trade. Cancelling records of trades or obligations would quickly lead to that person looking for their next place of gainful employment.

2. Friends and Blockchain

Many thanks to our partners at BNP for inviting me to the kickoff of their Americas Innovation Zone and their "Bizhackathon" event, which was covered here and here. Our panel discussion and Q+A was very engaging and focused more on the challenges and opportunities highlighted in the above article, namely the positive friction that is starting to result as innovation and business reality start to intersect in the PoC-Pilot-Production journey.

Big ups as well to Gadi and the Wave team, which announced, in collaboration with Barclays, a successful use of a blockchain to digitize a part of the mountain of documentation needed in today's global trade. And Thomson Reuters, another R3 partner, kicked off a weekend-long "HackETHon" in London to explore a few very important themes, such as secure smart contracts and the challenge of exposing trust-minimized distributed ledgers to "the great unwashed" of the external world of data.

3. Open Source

Hyperledger's Executive Director Brian Behlendorf recent interview in Bitcoin Magazine lays out the Project's vision to support the various communities emerging across the distributed ledger spectrum in an open way:

“Permissioned chains do not solve all the interesting problems out there,” he commented. “I think Bitcoin, Ethereum, and other cryptocurrency and distributed application platforms have a long, bright future. Specific currencies may come and go, but the problems they solve are real and worth solving and there are incredibly active user and developer communities around each. I think we'll also find over time that there are many shades of grey between ‘permissioned’ and ‘unpermissioned’ and I'd love to explore that whole spectrum with projects at Hyperledger.

[SNIP] “We'll have many public chains and technologies (I think Zcash looks really cool, technically) and many, many private chains, because there are many different kinds of communities and use cases, and expecting one chain to meet them all is unrealistic. We should be asking ourselves how we maximize the amount of re-use and code-sharing between the software driving all those chains. That's what we're hoping to help with at Hyperledger.”

We are excited to work with the team at the Linux Foundation as they expand the distributed ledger communities and help prove the model of open source in financial markets. It certainly seems like the right side of history, as the data points of "big bad banks" going all Linus increases (see this article on Goldman Sachs).

4. R3 and Exchanges

And finally, we are very excited to announce the addition of BM&F Bovespa as our third member in Brazil and our first exchange (the largest in South America). The Brazilian market is fascinating, as much of its infrastructure is years ahead of markets like the US. Brazilian markets have had to survive the crucible of hyperinflation and market instability time and again, and their market structure has been built in response to that. Fabio Dutra, Client and Business Development Managing Director at BM&F BOVESPA, says it well here: “We believe that strong collaboration with our customers, regulators and vendors is crucial to futureproof financial and capital markets. Innovation with appropriate regulatory oversight is paramount to making the Brazilian markets even more efficient and reliable. Shared ledger technology may play an important role here.”

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My thoughts are with those whose lives were impacted on this day 15 years ago. The years pass but the events that day will not be forgotten.