The latest fundraising round for the R3 consortium recently led to a record-breaking US$107 million close for its second round of its Series A funding. The New York-based consortium raised US$59 million in 2016. Originally founded in 2014 with eight founding members, the consortium now has 100 odd members. This second round was led by ING Groep, Banco Bradesco, Itaú Unibanco, Natixis, Barclays, UBS Group, HSBC, Bank of America Merrill Lynch, Credit Suisse, Wells Fargo, Abu Dhabi Global Market (housing the countries financial regulator), and Nomura, among others. The two first rounds were open only to members of the consortium, although Temasek (the Singaporean state investment company) and Intel Capital were exceptions, as neither are part of R3. A third round will be launched later in 2017 to close the Series A, and will be open to non-members, as well.
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The latest fundraising round for the R3 consortium recently led to a record-breaking US$107 million close for its second round of its Series A funding. The New York-based consortium raised US$59 million in 2016. Originally founded in 2014 with eight founding members, the consortium now has 100 odd members. This second round was led by ING Groep, Banco Bradesco, Itaú Unibanco, Natixis, Barclays, UBS Group, HSBC, Bank of America Merrill Lynch, Credit Suisse, Wells Fargo, Abu Dhabi Global Market (housing the countries financial regulator), and Nomura, among others. The two first rounds were open only to members of the consortium, although Temasek (the Singaporean state investment company) and Intel Capital were exceptions, as neither are part of R3. A third round will be launched later in 2017 to close the Series A, and will be open to non-members, as well.
Despite the record amount raised in this latest round, it falls short of the US$200 million (and later US$150 million) originally planned. Further, the consortium lost a few high-profile members, including Goldman Sachs, Santander, and JP Morgan, all of whom have decided to go their own way or back competing projects elsewhere.
Ledgers without Blockchain
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IMPACT
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Despite the media storm surrounding the latest funding announcement, the consortium’s current project is not in fact a blockchain-based one, but a distributed ledger technology. The original goal was to research blockchain technology, notably the development of private blockchains for use in the financial system. The consortium developed an open-source distributed ledger platform called Corda. In January 2017, the consortium released a statement to the effect that Corda was not based on blockchain technology, but was simply a distributed database. By centralizing and privatizing the technology, the resulting efforts of the consortium led it to the conclusion that distributed ledger technology did not necessarily need to be built on a blockchain.
However, to add to the confusion, the consortium continues to use the blockchain terminology on its website, and with this second round of funding, announced continued investment in blockchain-based technology. It is unclear at this stage whether the funds will continue to support Corda, be leveraged for other actual blockchain-based projects, or continue to support distributed ledger technology research.
An Uncertain Direction
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COMMENTARY
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The potential of blockchain is little understood beyond the cryptocurrency application. The disruptive features (decentralized and public) that make Bitcoin so popular (current value is 1 bitcoin to US$2,700 as of May 25, 2017) poses a threat of obsolescence to established financial players. It directly challenges their role as the trusted third party, as the centralized authority through which all transactions must pass. The rise of Bitcoin pushed many financial organizations to defensive action, and its continued persistence forced them to acknowledge the technology as a potential disruptor. After a few years of dismissal and rebuttal, financial services organizations started actively seeking ways to leverage it for their own benefit.
The difficulty with blockchain is that its advantages are voided if transformative features such as decentralization and openness are removed. It is clear that R3 sees its role as one that is centralized and that access to Corda should be permissioned. The imperative R3 consortium is to remain relevant to the blockchain disruption, but decentralization may result in the elimination of its own members as the trusted third parties. Alternatively, blockchain could be leveraged only for the back-end infrastructure, and some of the front-end mechanisms in place remain as they are today.
When considering payment transactions, there is additional cost and a certain loss of privacy in having these on a public ledger. The resulting conclusion appears to be that R3 members need a centralized, private platform that could still leverage the benefits of a distributed ledger technology to simplify operations and cut cost, reduce time on clearing and settlement, improve regulatory efficiency, reduce counterparty risk, and minimize fraud.
The consortium seems unsure if blockchain is the distributed ledger technology that the financial industry needs just yet, but is not keen to distance itself from it altogether. It remains to be seen how the Corda platform will answer financial needs and align with market interests, and if other R3 projects will emerge, whether they will be blockchain-based, or simply legers based on distributed databases. Likely, what will happen is that the investment will be funneled into the Corda platform and the research process will focus on exploring how to improve the back-end infrastructure using distributed computing technology for a closed party of financial stakeholders.
