Charley Cooper
Charley Cooper

R3 grows more ambitious as its network widens

Launched by FX industry veteran David Rutter, R3 now operates in nine countries with 140 staff and is aiming to re-build the operating system for the financial services industry through a series of partnerships. e-Forex talks to head of external affairs Charley Cooper about the strengths of R3’s Corda platform and the potential of distributed ledger technology in FX and beyond.

First Published: e-Forex Magazine 79 / Blockchain and CryptoCurrencies / December, 2017

e-Forex: When was R3 launched and what is it trying to achieve?

Charley Cooper: We launched the company in September 2015 with nine banks and that number quickly grew to 42 by the end of the year. We’re now at more than 100 banks and have another 60 partners. We are developing Corda, which is our enterprise grade distributed ledger platform, designed specifically for financial services. We designed the platform with the requirements of all of our bank members and regulators in mind, but in so doing we found that the platform could have applicability more broadly across various commercial enterprises. Our network connects to various financial companies and we partner with them to build top-of-stack applications that solve specific business problems. Examples include syndicated loan systems, post-trade derivatives processing, anti-money laundering (AML), know-your-customer (KYC) and regulatory reporting. We use a partnership strategy to build the apps that sit on the Corda platform to solve specific problems for businesses in the real world.

EF: How would you describe R3’s mission?

CC: We’re trying to build the new operating system for the financial services industry, based on the best enterprise grade distributed ledger system that will underpin different asset classes and jurisdictions. We are part of the blockchain family of companies, but we have made critical design decisions that set us apart. We have taken the best attributes of blockchain that make sense for our clients and we’ve made changes to others. For example, one of the key issues for our clients has been the issue of data privacy. In a traditional open ledger system, all parties on the ledger get to see all of the data, even if it’s encrypted. The difficulty with that is not only does it require a massive amount of computing power, but it also means parties to a transaction can’t necessarily shield their data from non-parties to the transaction. 

One of the key issues for our clients has been  the issue of data privacy.
One of the key issues for our clients has been the issue of data privacy.

EF: How does R3 deal with data privacy?

CC: Corda’s approach to data privacy and security is ground-breaking in the blockchain space, as Corda only sends data to those who have a “need to know”. This unique feature of Corda addresses the requirements of financial institutions that need to ensure the confidentiality of trades and agreements while also capturing the benefits of a shared distributed ledger infrastructure. Whereas some DLT systems were built to disintermediate banks, we have intentionally built this to integrate with bank systems. By building our system to integrate with the existing ecosystem rather than turn it on its head, we’ve been able to avoid the problems some others have faced and onboard clients and partners at a quicker pace.

EF: How is R3 different from other distributed ledger technology companies?

CC: The ledger itself is different, in that we built it ourselves, and the network component is also unique. There are core components that are critical to the functioning of any ledger, and they allow the applications to work. Identity is one example, because if you and I don’t know that we’re trading with each other, and we haven’t been able to solve that identity problem, then we’re not able to run AML or KYC on one another, and we’re not able to track the trades we do with each other. We have worked with Calypso on post-trade FX processing and that has a set of core components that we need to be able to track all the trades that the members of our system are doing. 

The diagram above, (the vision Corda is attempting to help realise) illustrates a progression from a world where parties to shared facts record and manage their own records, with associated discrepancies and duplications (“Bilateral - Reconciliation”) or one where parties delegate control and responsibility over critical processing to centralised utilities (“Third Party / Market Infrastructure”), to one where they collaborate to maintain a shared record, assured to be consistent between them, consuming the services of existing and new service providers and market infrastructure providers on an open and competitive basis (“Shared Ledger Vision”).
The diagram above, (the vision Corda is attempting to help realise) illustrates a progression from a world where parties to shared facts record and manage their own records, with associated discrepancies and duplications (“Bilateral - Reconciliation”) or one where parties delegate control and responsibility over critical processing to centralised utilities (“Third Party / Market Infrastructure”), to one where they collaborate to maintain a shared record, assured to be consistent between them, consuming the services of existing and new service providers and market infrastructure providers on an open and competitive basis (“Shared Ledger Vision”).

EF: How far advanced are your partnerships?

CC: They are all in different states of maturity, but we have several specific partnerships that will result in commercial applications being brought to market in 2018. The partnerships span different asset classes, but what they have in common is that they seek to target those business problems that are most antiquated and rely most on legacy systems. 

In Corda, updates are applied using transactions, which consume existing state objects and produce new state objects. Consensus over transaction validity is performed only by parties to the transaction in question. Therefore, data is only shared with those parties which are required to see it.
In Corda, updates are applied using transactions, which consume existing state objects and produce new state objects. Consensus over transaction validity is performed only by parties to the transaction in question. Therefore, data is only shared with those parties which are required to see it.

EF: How big is the R3 team and who are the key staff on the management team?

CC: We have 140 staff in nine countries, and our key hubs are in New York and London. Singapore is our Asia hub, and our clients represent more than 30 countries globally. We no longer see ourselves as a startup, but rather a small- to medium-sized business. We’ve raised $107 million in capital and expect to raise more. David Rutter is our founder and we have three key staff on the technology side – Richard Gendal Brown is our chief technology officer; James Carlyle is our chief engineer and Mike Hearn is our lead platform engineer. 

R3 (formerly R3 CEV) started out as a family office. The “3” stood for the number of co-founders including David Rutter the CEO.
R3 (formerly R3 CEV) started out as a family office. The “3” stood for the number of co-founders including David Rutter the CEO.

EF: Which areas of FX could benefit most from DLT?

CC: Across asset classes, there are common areas such as operations and processing that are broken and need fixing. By contrast, trading platforms complete trades in milliseconds and in some cases microseconds. There’s no point in trying to convert that trading process to DLT at this stage because it is actually working quite well. The problems we’re attacking are the much more substantial ones that require wholesale solutions. 

EF: Do you have any partnerships that touch FX?

CC: Yes. We have partnered with Calypso to build a DLT application for trade matching confirmations. Westpac, ING and BBVA are among the institutions that will use Calypso’s processing capabilities to enter FX trades into a node on Corda, validate them and confirm matching.

One of the simplest Corda transactions: an issuance transaction.
One of the simplest Corda transactions: an issuance transaction.

EF: How much can the FX market benefit from DLT?

CC: I would say it’s a significant area of focus for us, but perhaps not the principle area. Other areas such as syndicated loans and trade finance still use systems that were put in place up to 70 years ago and therefore suffer from much more serious problems that need to be addressed. FX is certainly not in that space, but in every asset class there is a massive difference between how quickly a trade is executed versus how quickly it can actually be cleared and settled. Any drive towards greater efficiencies should focus on the post-trade space at this stage. There are definitely parts of the FX market that are not as efficient as they could be and we think DLT is a great way to solve many of those problems. 

EF: In the longer term, do you see DLT becoming more pervasive in FX?

CC: FX is the largest market in the world, and while we’re focusing only on parts of the post-trade space right now with Calypso, this is a market that I think could be greatly enhanced by moving the entire trade lifecycle onto the ledger. We are working with some of the biggest players in the FX market so you could see a migration over the course of several years and we could be the company that does it. The potential is absolutely massive.    

Corda operates in larger networks that they call interoperability zones. Such networks  are able to transact between any nodes in a point-to-point manner. The root of trust  in an interoperability zone is the certificate authority’s root. Corda uses this technical reality to create a global interoperability zone. Only Corda achieves this while  retaining all the privacy characteristics businesses demand.
Corda operates in larger networks that they call interoperability zones. Such networks are able to transact between any nodes in a point-to-point manner. The root of trust in an interoperability zone is the certificate authority’s root. Corda uses this technical reality to create a global interoperability zone. Only Corda achieves this while retaining all the privacy characteristics businesses demand.

EF: What attracts financial institutions to join R3?

CC: The power of this technology is in the network effect – the more people you have working on the network, the more powerful it is, the more useful the tools are, and the more efficient the overall ecosystem in any particular asset class can be. In becoming part of that ecosystem and having a seat at the table, firms multiply the benefits for everyone. 

We wanted our clients to be involved in the process from the very beginning, rather than building the technology without their input. We have structured the consortium so that our members sit on our architectural working group, their legal and regulatory policy staff work with us in our regulatory affairs efforts, and their product specialists work with us on designing the solutions. What that means is we have a much higher likelihood of producing a product that is genuinely fit for purpose from day one.

EF: How can regulators benefit from R3?

CC: We have partnered with the Monetary Authority of Singapore, the Hong Kong Monetary Authority, the Bank of Canada and the UK Financial Conduct Authority, among others. They get access to all of our research, and they are invited to participate in any of the projects that they want. We actually put them on a node on the system itself, and their technologists are invited to work with our technologists and the bank technologists, which allows them to participate in a whole set of experiments and pilots that will turn into real world applications. It also allows them to have input into how the ecosystem evolves. We made several design decisions on Corda based on feedback from regulators on issues like settlement finality and data privacy.