Welcome back to MondayMunday, my blog on all things fintech and crypto. Today we have The Intersection, where I chat with fintech/blockchain experts to uncover what they are working on and why they are essential to bridging crypto and the real world.
Intersection /ˌin(t)ərˈsekSH(ə)n/ noun. Where finance and blockchains meet to create endless new possibilities and products to better serve financial systems.
Today I am delighted to have Todd McDonald, the Co-founder and Chief Strategy Officer of R3, the team behind the platform Corda and originally a bank consortium consisting of 42 banks to innovate with Blockchain technology.
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Now to the post…
Inspirations at the Origin of Blockchain Technology
When R3 was conceptualised in 2014, the concept of blockchain was simply mainstream Bitcoin and the Ethereum yellow paper. As a ‘blockchain industry’ at the time, there was still much debate around the use cases for the technology and it was a nebulous concept.
R3 took the dominating mainstream concepts of crypto and blockchain and fixed them for the enterprise, which centred around identity of users, the privacy of transactions and scalability leading to them building Corda.
We have now seen a convergence of these blockchain concepts in the enterprise space with Enterprise Ethereum and R3’s Corda now being the leaders in blockchain, and its underlying distributed ledger technology, adoption.
How to Pitch Blockchain Networks?
R3 started life as a bank consortium and developed experience in trying to build a single network for banks to share and collaborate. However, R3 quickly realised that servicing market infrastructure plays, inter-company networks and creating new networks with unique value were easier propositions to pitch, sell and onboard clients to.
We are now seeing this ‘network of networks’ approach where leading use cases are serviced by individual networks. It is now critical to implement this “open network” approach, where we are seeing network operators expanding their use cases and interoperating.
Guidance on Network Formation?
The pitfalls of network building aren’t unique to blockchain technology, it is the same when trying to bring any ecosystem or consortia together. There exists an issue of incentivization between participants and ensuring you can attract early adopters whilst being able not to disrupt the status quo of the existing market landscapes.
The ASX CHESS failure highlights industry was not brought along on the journey. As a network, you need to think of incentives for participants and how the outcome of technology will affect them to get true buy-in.
Bringing Enterprises Along the Journey - An Example with DTCC
R3’s first engagement with DTCC was in 2016 and the first milestone was in 2018 to test the scalability of blockchain to prove that it could handle the US equity markets (Corda was proven to handle 6,300 trades per second).
In 2022, they selected Corda for equity clearing and settlement with Project Ion to reduce settlement times from T+2 to T+1.
More broadly for the ecosystem, this means DTCC can now explore bringing a broader range of private securities such as traditional private securities or novel ones, like crypto.
In my opinion, this showcases, how adopting modern core infrastructure for financial markets as a base layer allows you to innovate further in the market as you have compatible tooling.
A View on Interoperability
Todd states through working in regulated finance “it won’t converge to one ledger or one network”. The main focus for R3’s developers working on the next-generation of Corda is focused on interoperability, taking the “open network” and “network of networks” approach. This means Corda networks, still remaining private and permissioned for security and scalability, will be compatible with enterprise Ethereum and public blockchains to bring together the benefits and value propositions of different solutions on disparate systems.
An example of this is HQLAx and interoperability with Fnality, HQLAx is a network which tokenized High-Quality Liquid Assets to solve intraday liquidity management issues. Combining this network of tokenized securities with a solution like Fnality which is close to central bank money allows them to facilitate Delivery vs Payment solutions through cross-network swaps in a regulated fashion.
Thoughts on the dichotomy of stablecoins and Central Bank Digital Currencies, Regulated Liability Networks and Corda’s place?
If we take a step back to the origins of blockchain, Bitcoin was never a true threat to the banking industry. However, when Libra came along this was a wake-up call that private money could encroach upon public money.
In the regulated sense, Tony McLaughlin has coined the concept of the Regulated Liability Network (RLN), which extends the capability of Central Bank Digital Currencies (CBDCs), which allows tokenized deposits and other forms of tokenized commercial bank money to potentially interoperate given the creation of RLNs. R3 is committed to this future by creating interoperable networks via the optimization of Corda-based network functionality to bring tokenization solutions alongside CBDCs.
On Stablecoin depegging?
On stablecoin depegging, Todd states “it is often the tail risks that get you”. By this, he means the collapse of holdings underpinning the stablecoins, such as the witnessed USDC and DAI. One of the beauties of Ethereum DeFi is composability, the fact you can have numerous applications working together and being built on top of each other is fantastic for innovation. However, it makes it difficult to understand where these tail risks are in the stack which can pose a problem for crypto markets. Composability is therefore also a key focus point for the future of Corda.
The Future of Stablecoins in the Market?
Following the recent stablecoin depegging, it may be hard for providers like USDC to navigate the path of regulation and will have to become a narrow bank as regulation clamps down. Whilst solutions like Tether will stay firmly in the unregulated shadows to solve their core problem which is liquidity for crypto traders.
Despite the adoption of stablecoins, Todd states that we need to look at the use cases of existing stablecoins. USDC was a backdoor for regulated deposits into DeFi and Tether was for crypto-native folks to hold stable assets and trade.
This doesn’t solve the core issues for high-value payments for many institutions and thinks it is unlikely that stablecoins will solve this problem.
However, unless institutions adopt truly digital finance there is a tail risk that DeFi and Stablecoins could capture the value from traditional financial markets.
If you want to reach Todd add him on LinkedIn, follow him on Twitter or go to r3.com!
If you are a fintech/crypto builder or investor feel free to reach me by replying to this email or DM on Twitter or LinkedIn, I’d love to chat! 🙏
