ConsenSys, R3 and Digital Asset execs say enterprise blockchain is changing finance world

Forkast.News Editor-in-Chief Angie Lau sits down with Joseph Lubin, Founder of ConsenSys; Yuval Rooz, Co-Founder & CEO of Digital Asset; and David E. Rutter, Founder & CEO of R3 to discuss how blockchain technology is changing the world of finance and enterprise. The panelists shared their experiences and insights at Hong Kong FinTech Week during the Blockchain for Finance event on November 6.

The use of distributed ledger technology to facilitate the tracking and verification of data has wide-ranging potential applications in the finance industry. Blockchain technology allows transactions and financial activities to be recorded without relying on human resources, which slashes costs and mitigates human error. It also enables suppliers, banks, manufacturers, and other financial players to find and share relevant information all on one immutable ledger.

Governments have started warming to the application of the technology in various industries, as demonstrated by Chinese President Xi Jinping’s announcement on October 24 supporting blockchain development.

See related article: President Xi Jinping Endorses Developing Blockchain Technology in China

South Korean Minister of Economy and Finance Hong Nam-ki also laid out plans to use blockchain to bolster the country’s finance sector. “We will build a digital trading platform that can be easily and conveniently used in all stages of export, such as contracts, customs and logistics,” said Hong in a press release on October 14.

The playing field has started maturing for financial organizations as support and regulation for the technology emerges from governments around the world.

Target markets and their end beneficiaries are evolving faster than ever according to a report by the International Chamber of Commerce in 2018, which states that the change is most evident in financial services and technology due to blockchain technology. “Blockchain is proving a secure, transparent and reliable alternative, and fintechs transacted US$90 billion in the region last year, equivalent to the GDP of Panama.”

Key Highlights

• Joseph Lubin: Instead of being sold by a large sales forces… we’ll see smart contract infrastructure enable us to provision for our needs and negotiate and pay for those different kinds of services. And we’re going to need financial instruments because on these collaboration networks, there are people doing the validating, they’re lending their storage and compute resources and they should get paid. And so they’re providing services they need to hedge out their pricing risks. If I’m making use of this infrastructure, I need to hedge out my different risks. And so the maturation of financial instruments in this new emerging digital economy will be incredibly important.
• Yuval Rooz: So I think that, you know, One Belt, One Road, for example, could be a very interesting initiative for a deployment of blockchain. I think what we start seeing are exchanges in China, traditional exchanges that are signed to think about, well, how can we manage collateral that live within China or outside of China to actually allow liquidity to move more quickly between countries. So actually, I think that the speech gives a very good endorsement, but it’s also the regulators in China that are actually signed to not just think about how can we digitize the Chinese economy, but also how do we use this technology to give better access both in and out of China.
• David E. Rutter: I think the first thing is there’s a lot of work going on in custodianship of digital assets, which is important for all of us. And some of the largest financial firms in the world are really focusing on that in part. You mentioned UBS. You know, a lot of this is driven by their private wealth guys that wanted a little exposure to Joe’s ether and to other cryptocurrencies and the like. Joe and I, we’re talking about having insurance on exchanges and all. That’s going to be very expensive. So we’re gonna feel our way through. This is not going to be resolved overnight. And if you think about how difficult it is to figure out what math you used to figure out that question, it’s going to take a while.

Full Transcript

Angie Lau: Your pioneer days were helping Chicago Board of Trade really experience its first on-screen digital experience?

David E. Rutter: You did your research, that was in 1995 U.S. Treasury…

Angie Lau: Electronic trading overtook Chicago Board of Trade, and I started on the floor of the Chicago Board of Trade for Bloomberg back in 2008. Do you remember that year? As I’m sure we all do. But now, you know, fast forward, we’re in a space that blockchain has created, that 2008 created, that traditional markets, one could argue created. And now there’s a digital asset market that’s really kind of taken fervor. You heard from Ashley. You’re hearing more and more from policymakers. How does this help blockchain for enterprise solutions in finance? I’ll start with you, David.

David E. Rutter: OK. So I told Yuval while we were sitting here, I know more about exchange trading than I do blockchain, so I’m in my comfort zone. So, you know, we need in order for this market to grow up, we need regulatory certainty. And, you know, it’s a start. We had the good fortune of listening to a part of the speech. You know, a couple of the things laid out that I think are going to be difficult in the short run. But importantly, I’m a series 7 24, 63, I owned a broker dealer until Friday. I just sold one. So I come from that background and I’ve been amazed at the Wild West that has been ICOs, over the last six years. In my opinion, it’s going to historically be reflected upon as as one of the biggest frauds ever. But, you know, the regulators are finally catching up. And I do think that we’re going to have this, you know, everybody’s talking about the tokenization of assets. Now we’re going to have responsible trading on regulated exchanges of digital assets in the future. So good start.

Angie Lau: Well, Yuval you are based in New York. You’re expanding here across Asia. You’ve got an office here in Hong Kong. You’re helping businesses think about enterprise solutions for finance. What are those conversations like? Is it easier to have these conversations now? Are we getting to a level of sophistication, of knowledge, of, dare I say maturity?

Yuval Rooz: Yeah, absolutely. So, first of all, I agree with what David said. And I think just to touch on the previous point, I think that there’s a lot of people in this space talking about how you bank the unbanked. And I think that a lot of what is happening is taking advantage of the unbanked. So I think that bringing regulation, like David said, the certainty is extremely important. But to your question, I think that what we’re seeing is that we don’t need to have conversation of explaining what is cryptography. How do you chain these blocks together? It’s more about how does that transform my business and how do I get into production, which are actually the conversations that you want to start having with businesses. So I think four or five years ago, when when we all entered this space in earnest, I think it was a lot of education. I think today you are actually seeing more concrete questions of how do I start using it?

Joseph Lubin: So blockchain is at its base, a trust foundation, a trust platform from a maximally decentralized or significantly decentralized base, you get this trust characteristic. The trust characteristic can manifest in digital scarcity. From that, you get cryptocurrencies and different kinds of assets or it can manifest in trusted collaboration. And so the blockchain space is essentially bifurcated in terms of use cases in those two directions, the issuance and trading of digital assets and enterprises and consortia building these collaboration networks. I think we’re going to see with increased regulation and increased clarity, we’re going to see those two worlds come together. We should have collaboration networks that can issue their own tokens that are tradable on regulated exchanges, especially if they’re securities.

And we’re seeing in the I.T. industry a granularization of the provision of services. And that’s going to look like trusted transactions, automated agreements on platforms like Ethereum, decentralized storage, decentralized bandwidth, decentralized, heavy compute, all of that. Instead of being sold by a large sales forces, by large software corporations can be essentially built and offered on these collaboration networks. And so we’ll see smart contract infrastructure enable us to provision for our needs and negotiate and pay for those different kinds of services. And we’re going to need financial instruments because on these collaboration networks, there are people doing the validating, they’re lending their storage and compute resources and they should get paid. And so they’re providing services they need to hedge out their pricing risks. If I’m making use of this infrastructure, I need to hedge out my different risks. And so the maturation of financial instruments in this new emerging digital economy will be incredibly important. So we’ll definitely see those worlds come together.

Angie Lau: And you’re talking about like a global client base of individuals who are able to participate in a global economy in a truly granular way. But as we kind of talk to this audience who are all senior executives, who are CEOs, who are policymakers and regulators at the highest end of the financial food chain, how are firms, traditional firms and banks and institutions engaging with enterprise solutions of blockchain? Is there an increasing familiarity? Is there an increasing comfort level?

Joseph Lubin: Sure. So all three of us on this panel can answer that. I guess I’ll start. We are building systems, blockchain systems for corporations who are building blockchain systems for exchanges. We’re building blockchain systems for consortia. So the people out in this audience might be part of something like a commodities trade finance blockchain consortium. We brought together fifteen major banks and energy companies into this trading infrastructure that brings tremendous efficiencies. We’re doing supply chain, track and trace, Proctor and Gamble, GlaxoSmithKline. We’re enabling consumers to scan a product on a shelf and track the provenance of the raw materials from essentially their origin all the way through the manufacturing process. So it is essentially coming to probably every organization in time. I expect that most large organizations will participate in probably several different blockchain networks that are trusted collaboration platforms for getting their work done with other organizations.

Angie Lau: October 24th, Xi Jinping made his remarks and kind of created a little seismic shift in blockchain. Where China committed to blockchain is part of the pillars of innovation of growth for China. That kind of endorsement came at a time that really surprised people. But for those of us who have been reporting on it, who have been experiencing it, it is no surprise. But Yuval you were just in China. They’re very excited to talk to everybody on the stage. What were some of the conversations that you had in China? What were some of the curiosities, the questions that you would like to share with our audience to give us greater insight?

Yuval Rooz: Yeah. So a few things. So first of all, the interesting thing that I saw is actually the willingness even to not just use blockchain within China, but actually to see how you can use this technology outside of China. So how do you actually give access into China from countries outside of China? So I think that, you know, One Belt, One Road, for example, could be a very interesting initiative for a deployment of blockchain. I think what we start seeing are exchanges in China, traditional exchanges that are signed to think about, well, how can we manage collateral that live within China or outside of China to actually allow liquidity to move more quickly between countries. So actually, I think that the speech gives a very good endorsement, but it’s also the regulators in China that are actually signed to not just think about how can we digitize the Chinese economy, but also how do we use this technology to give better access both in and out of China.

Angie Lau: And so, David, what do you think the opportunities are? I mean, you are in this region. I think one of the key things about R3 is that you’re very conscious of what regulators globally and nationally are thinking, and you think about policy in a way that is integrated within the architecture and the design of blockchain implementation. What should this audience be thinking about?

David E. Rutter: Well, getting back to kind of what Joe said, our product is kind of on the far right side. But I agree we’re going to see these markets come together. I think and reflecting on couple of other things is that we’re beyond the years of what is blockchain and what is the advantages of blockchain and had debates, what distributed ledger technology is versus blockchain. And I now kind of referred to us as as a distributed computer network that uses smart contracts. But I think what this audience ought to be thinking about is a look at the use cases that are alive and in the process of going live, because you don’t have to want to sell blockchain to any of you anymore.

We just want to sell solutions that help your business. And the big thing and the easiest way to think about it is that we all have always solved our firm’s issues through our I.T. spend or part of a larger collaborative industry. We now have this technology that allows us to solve problems at the industry level, which brings savings to everyone while still protecting through privacy features, things like our customers and our trade data and the stuff that that matters to us. So right now, I was just one of my product guys told me yesterday there’s two hundred and six applications on R3, you can go to R3 marketplace. I’m sure these guys have the same thing and browse around and see if trade finance works for you, if insurance works for you. Food provenance is of interest to you or digital ID or KYC. There’s just so much going on out there. There’s got to be something for everybody.

Angie Lau: And I want to remind the audience that you are also part of this conversation. So please feel empowered to share your questions on the Slido app. We will be taking your questions. So think about it and think about what you really want to dig deep a little bit more from, really a powerhouse panel here. Look, they can’t all have been winners. You’ve been in this space as veterans for a while. You’ve built when nobody believed that anything should have been built, quite frankly. And now we are getting to a stage where there’s a recognition of not only efficiencies, but inclusion. What are the experiences of the growing pains and the lessons that you could share of, you know, how to also help this audience think about why you’re saying what you’re saying and how they can sharpen their thinking when they think about blockchain in their own industries and in their own firms.

Yuval Rooz: I think that there’s no difference between any type of technology. I think that four years ago, three years ago, your CEO asked the question, what are we doing in blockchain? And effectively that… a bit smaller scale than the president of China saying something like that. But it admittedly it sent this ripple effect into the organization where a lot of people on the technology side said we have to do something in blockchain. So I think that some of the trends that we’re seeing and some of the mistakes that we’re now seeing less and less of is are there really inefficiencies or opportunities that you’re seeing in your business that you can transform?

And if that’s the case, if the answer to that is yes, and I haven’t said the word blockchain yes, then you should ask yourself, is the tool called blockchain or DLT applicable to solving this problem? Where I think that four or five years ago it was the opposite way. We have to use blockchain. And now let’s figure out what what to do with it. So that’s one thing. The other thing that we’re seeing is that a lot of people associate blockchain with cost saving. A lot of people associate it with how do we reduce costs from our system, where what we’re seeing now is actually players, for example, here in Hong Kong, we’re working with UBS on creating a new traditional asset class, which is structured products.

They’ve been doing it for a long time, but they’re actually seeing that by using smart contracts and DLT, they can actually bring new front office revenue that today is hard for them to generate. So they’re actually looking at a new opportunity rather than just a cost reduction of how to use this technology. So I think that the biggest the biggest recommendation is think about your business independent of blockchain. Are there things that you can do better? And are there opportunities from the specialty of your business that you would want to go after? And then the second question is, should blockchain be the tool that I use to solve these problems?

Angie Lau: That’s a great point because at the end of the day, you have to start from your own needs. What are your clients needs? What do your customer needs? What are your needs as a business? And when it comes to finance, there’s no doubt that financial institutions take a long term view. So questions about upgrade ability and backwards compatibility come up a lot. So I’ll go back to David here who’s the finance guy, the finance veteran. How do you help explain the technology in these terms?

David E. Rutter: Well, first off, I don’t talk about blockchain too much anymore, which is a really good sign. I had said two years ago, someone asked me: what does success mean for R3 and its product Corda? And I said, and in five years time and I said, when it’s used everywhere and no one knows it. And in some ways we are we are getting there already. But as it pertains to large corporations, insurance companies, financial institutions. And kind of serious business,  we took a very different path four years ago than super cool and very interesting technologies like Ethereum and bitcoin.

And we went down the permissions pathway and we’re very specific for the reasons we did that. And that touches on your question, which is, you know, I’ve spent 30 years mostly on the trading side, trying to implement technologies into large corporations and financial institutions, and it’s hard. So we looked at how are we going to integrate? So we made decisions around using Java. We made decisions around using SQL databases. I’m not a technology guy. But I contributed one thing early on. I say keep it simple. Make sure it’s proven. I was around in the Java years. I know how long it took for that to integrate into the banking community. So we aren’t that cool, but it works and it works well for for certain enterprises.

Angie Lau: And I don’t want to limit blockchain or emerging technology or any of these technology tools to just how it’s being experienced within enterprise. Because, Joe, you bring up a really good point. There is a parallel system that is also evolving in the financial space that is completely separate and distinct from what the world has seen in terms of traditional finance, and that is complete decentralized public blockchain P2P. And what is the promise of that? And so is this a conflict? Is this something that people in this room should be paying attention to? How are regulators thinking about it? How are you thinking about it?

Joseph Lubin: Yeah. So we call it open, decentralized finance. So once you have your maximally decentralized trust layer, you can put significant assets on top of that infrastructure and be comfortable that well-resourced actors aren’t going to figure out how to cheat that system, how to steal those resources. And so we’re seeing on Ethereum now and it’s mostly happening on Ethereum, lending, borrowing systems, savings accounts, payment systems, tokens representing whole portfolios of tokens so that the whole portfolios can be automatically guaranteed to be rebalanced. We’re seeing licensing systems and subscription systems and synthetic assets and derivatives prediction markets. And all of these programs are sitting in essentially one computer, one world computer, a single execution space so they can all interact with one another. It’s called composability or synergy.

Angie Lau: So it’s not either or it’s interoperability.

Joseph Lubin: Yeah. So each of these things can work with each other in extremely fluid ways. And so you’ve got a money market system interacting with a different collateralized debt product system. And it’s driving tremendous innovation. We’re seeing the Ethereum network interoperating with the Bitcoin network because the people with Bitcoin want to make use of this financial infrastructure. But you can’t really do that because Bitcoin is not very programmable. And so they’re ways of wrapping bitcoin and bringing it over to Ethereum. so that they can participate as well. So the base trust layer enables this decentralized finance plumbing, financial plumbing infrastructure. And on top of that, we think that not only is it going to interact with more traditional financial assets like U.S. Treasuries, people are thinking about tokenizing treasuries, sort of wrapping them in a sense and making them available to decentralize finance. But once you have that financial infrastructure, then we’ll see industries being built on top of that.

David E. Rutter: So Angie, if I could jump in, this is where I admire a lot of stuff Joe’s doing. This is a guy that’s been in finance for so long. And those pipes in finance exist for a reason. And they’ve been laid over the course of the last hundred years with the regulatory wrappers around them all. So Joe’s trying to solve such a bigger problem than we at R3 are trying to solve. We want to make your businesses work better and cheaper and we want to create revenue opportunities and we want to, you know, solve problems at an industry level. So if you think of things that are non differentiating non-proprietary, middle and back office services that you and your trade counterparties are doing, or if you’re in a supply chain and you need to know who filled out that document and win on a rules based smart contract and how that brings value to you, that’s what we’re trying to do. And I think the Ethereum crowd is just trying to do something kind of much more ambitious, which I admire, but is outside of our focus.

Joseph Lubin: So do that sort of work as well. But we and tens of thousands of technologists and entrepreneurs are trying to build out new, better ways of rendering financial services, making them permissionless, in some cases making them global, building a global settlement layer for assets. And the legacy financial world came from somewhere. It wasn’t always as broadly and rigorously regulated.

David E. Rutter: That was like a thousand years, Joe. It was like over a thousand, more, several thousands of years.

Joseph Lubin: But innovation has to start somewhere and we pay a lot of attention to regulation. But it’s a powerful new technology and each jurisdiction around the world is going to have to have conversations with the technologists, with the regulators about how essentially what is acceptable of this technology in each jurisdiction.

Angie Lau: Kind of like media, I’ll just jump in and say it could be a pen to paper or it could be word programming on the computer. It could be old time radio. It could be digital. I mean, these are really tools, but in the hands of people and this is what we’re talking about here, because these systems are all made up. And to David’s point, it evolved over thousands of years. But it was still made up by the vision of men and women of human civilization. So we fast forward to today and this is yet just another tool. So how are you going to use this tool that truly empowers you in an extraordinary way, not just blockchain, but all of these emerging technologies? We’re hearing incredible innovations in quantum technology in AI, IoT, 5G, and Cloud. I could go on, but I’ll let you ask the questions. Let me ask this one question from the crowd. Corporates in Asia are studying prototyping enterprise blockchain at a small scale. Enterprise wide implementation seem far off. What’s stopping them?

Yuval Rooz: I actually think that Asia is actually pretty active. So if it’s starting from the project that we’re doing in Australia, which is close to Asia, effectively replacing an entire G10 country, entire equity infrastructure. So just put that into perspective. In 2020, the Australian market is actually going to test a production system that is going to manage all cash equities in Australia. I mentioned UBS is very active. BNP Hong Kong Stock Exchange has been very active. You’re seeing the regulator talking about some of the regulatory framework around virtual assets. So I actually think that Asia is actually doing some very impressive, impressive projects here in Asia. I think that is there is a similar question about like is there a tangible data and why is it taking so long? So I just want to put things into perspective.

We all started building the technology stack about four or five years ago. The Internet that was started in, you know, 60s all the way to the 90s really start seeing the value that gets created, actually post the dot com, really starting to capture it. And I’m not saying that it’s going to take 30 to 40 years to see blockchain show its value. But I actually am seeing a lot of customers here in Asia. But David can talk about a very exciting projects that they’re doing in Europe, at the US and also here in Asia. You’re actually seeing clients really understanding how they can use this technology to really transform their business. And it will take time. It takes time to deploy these things in a way that people can trust it, that the regulatory [industry] can trust, that the customers can trust that. But I do think that within the next year or two, you’re actually going to start seeing data come out of these systems.

David E. Rutter: Yeah. So just real quickly, because as Siam cement company, for example, the largest conglomerate in Thailand, has put their entire procurement system on Corda. They claim it’s cut their costs by 50 percent. I think there’s 5000 of their customers on that. And actually in Japan, we’re actually seeing the corporates focusing on trade, finance, supply chain, food provenance, driving the banks’ activities and not the other way around. So I’m with Yuval, and I think Asia’s kind of deserves more credit. I find they’re more willing to take risks and try things on. And we’ve seen some really cool stuff out here.

Joseph Lubin: So we have two prominent projects in Asia and several others around the world. The first is private equity exchange. I would say it’s based in Singapore, but it’s not really because it’s on the public main net of Ethereum, but it is regulated by the monetary authority of Singapore. So it’s called one exchange. We built it with a company called CapBridge. The second very significant success is a project that we did with Union Bank in the Philippines. It’s called i2i. It’s essentially an intra-national remittance system. So clearing and settlement across islands takes days and has been taking days and weeks for citizens. And essentially, we onboarded I think there’s over 100 essentially local mini banks onto this system to enable effectively real time payments, clearing and settlement so that people can move money to their family members much more efficiently.

Angie Lau: That’s a huge issue here in in Asia. As you know, remittances make up for some economies, a very critical part. Cross-border transactions are the lifeblood for a lot of sovereigns in this region. And so the regulatory space is going to be part of an important aspect of this conversation. I’d like to ask another question that one of our audience members provided, asking all of you if you could provide and discuss implications on regulatory capital requirements on securities, custody and settlement as blockchain develops in the next five years.

David E. Rutter: Whose question is that? It’s a great question. And I mean, it was a question about what the impact will be. I think the first thing is there’s a lot of work going on in custodianship of digital assets, which is important for all of us. And some of the largest financial firms in the world are really focusing on that in part. You mentioned UBS. You know, a lot of this is driven by their private wealth guys that wanted a little exposure to Joe’s ether and to other cryptocurrencies and the like. But listen, and I don’t know if you noticed in the comments. Joe and I, we’re talking about having insurance on exchanges and all. That’s going to be very expensive. So we’re gonna feel our way through. This is not going to be resolved overnight. And if you think about how difficult it is to figure out what math you used to figure out that question, it’s going to take a while.

Yuval Rooz: I think that the reason why I love this question, because what Corda is doing with XQLX. But really, if you think about what is blockchain, it’s certainty around data where it lives in real time. What is a capital requirement? It’s how do you manage risk because of settlement risk. So I actually think that if anything, this is super exciting for capital requirements. We were working with some dealers that are actually saying if we actually put our treasury management system on a blockchain and we can know in real time where we have our cash and actually prove to the regulator in literally milliseconds which entity has how much capital, I actually think that will help relieve as long as you take the regulator, of course, on the journey with you.

I think that that’s one very interesting, very interesting aspect. But then a lot of people talk about real time gross settlement. And this goes back to my point. Do you understand the business? Because whoever talks about real time gross settlement doesn’t necessarily understand what market makers do, which market makers do not like real time gross settlement. So I think that it’s really understanding what are the implications of the technology on different parts of the market, but specifically for capital requirements, I think this is very exciting.

Joseph Lubin: So aspects of securities laws are about protecting the consumer in some cases from the custodian of their assets. And in a context where you can participate in trading or otherwise being exposed to different financial instruments without giving up custody of your underlying assets, that has huge implications for how securities laws are constructed in the future. And so we, as the technology gets more mature and better understood, we’re going have some really interesting discussions about how securities laws should evolve.

Angie Lau: And so we’ve got 30 seconds left. And about 30 questions here. I tell you what I’m going to do. I’m going to get the organizers to collect these questions and we’re going to continue this conversation on Forkast.News, I’m going to share my platform with this audience with you guys.

David E. Rutter: Is your platform on a blockchain? Because if not…

Angie Lau: We have the best of blockchain on Forkast.News, as evidenced by these three gentlemen here. Thank you so much to our panelists. And I’m going to commit all of you to answering these questions. OK. So we’ll tag you on social media. Come join us. But I can’t even tell you how many more questions.

David E. Rutter: Angie, would you ever consider a sales role at R3? You’re one of the best sales people I’ve ever met in my life. Global head of Asian sales?

Angie Lau: You know what I truly want to sell? The fact that technology is truly a human tool, that we can be intimidated by the technology, digitization, the assets, the vernacular that circles and envelops this technology. But if you can simply understand that this is a tool for you in the way that you are, in the way that you’re already thinking, in the way that you’re already experiencing. This is simply another tool that can honestly create a much more efficient, greater future. Thank you to all of you for using these tools. Thank you.