Protecting Trade Secrets Challenges Wall Street Blockchain Play

  • R3's Corda blockchain platform to run tests in coming weeks
  • There's a fine line between sharing data and exposing secrets

Collaboration usually isn’t the engine that drives the shiny new innovations that capture Wall Street’s attention and fatten bankers’ wallets. But if banks want blockchain to deliver on its promise -- the biggest overhaul of their critical back-office operations in decades -- fierce rivals will need to learn to work together.

Several blockchain startups and consortiums are trying to strike a balance between the open nature of blockchain, a ledger technology that could dramatically speed up transaction times and reduce regulatory costs, and banks’ desire to shield confidential details from competitors.

“The banks touch everything,” said Charley Cooper, a managing director at R3, a blockchain startup backed by more than 40 financial firms. The vast majority of all financial deals have a bank on one side of the trade, said Cooper, who previously worked for State Street Corp. and Deutsche Bank AG. “Because of that, the privacy piece becomes much more important.”

With that in mind, R3 hired Richard Gendal Brown, the former executive architect for industry innovation and business development for IBM, in September. Since then, Brown has been building a blockchain platform for the company called Corda. From day one, the aim has been for the banks to only share what’s needed for the rest of the firms in the group to confirm that assets and cash have changed hands and nothing more, he said in an interview.

“We don’t send it to other people encrypted, we simply don’t send it at all,” said Brown, head of technology for R3. “It seems obvious but that doesn’t mean it’s a universally shared view.”

Digital-ledger technologies have captivated Wall Street executives because they offer a way to process virtually any kind of trade or money transfer in minutes rather than days. That vastly reduces the amount of capital that must be set aside until transactions are settled. Targets include trade finance and syndicated loans, areas where it can take days or weeks for transactions to be completed.

The feature of distributed ledgers now being built and tested by companies like R3 is known as consensus. In the bitcoin blockchain, for example, anonymous users must verify, or consent to, a transaction before it’s added to the history of all bitcoin deals.
With bitcoin, however, all details of every transaction are shared with every computer on the network. That would never fly on Wall Street, so banks and their customers are now working out how to create a consensus model that shields confidential information.

The way in which Wall Street moves ahead here could have a profound influence of whether the technology takes hold in finance. The question for banks and other financial firms is whether they should work together on a standardized consensus model that everyone agrees on or work independently on different versions and let the market decide, said Mark Smith, chief executive officer of Symbiont, a blockchain startup focused on building so-called smart contracts.

Picking the right consensus model “is important because if there’s a desire for standardization” the industry “needs to be focused on that immediately,” he said in an interview. On the other hand, he said, maybe the competitive process will deliver the right model. “All the different ideas should be allowed to blossom and the market will decide,” Smith said.

Another group working on consensus models is the Hyperledger Project, which is made up of a wide range of companies including IBM, JPMorgan Chase & Co., Cisco Systems Inc., Digital Asset Holdings and others. It’s pursuing a variety of open-source software approaches including one where all details of a trade are cryptographically secured and shared with all members of the network, said Jerry Cuomo, vice-president of blockchain for IBM.

“I hope as we go we’ll have a library of consensus plug-ins,” he said in an interview. “Having different styles of consensus is just going to make this more attractive.” In the end, he said, that flexibility will allow the Hyperledger Project to appeal to other industries beyond finance for blockchain adoption, like land registry, medical record-keeping or sourcing the provenance of diamonds.

R3’s approach to consensus can be seen in the name of its platform, Corda. It’s derived from two sources, Brown said. The first, it sounds like “accord,” he said. The second is from the definition of a chord, which is the shortest straight line between two points on a circle. The circle, in this case, being the banks that make up the R3 network, Brown said.

“We talk about connecting peers,” he said. “We have direct point-to-point connections” that will severely limit the amount of information shared between banks and asset managers, he said. Those banks will begin testing blockchain applications on Corda within the next few weeks, Cooper said.

When Brown joined R3 last year, the goal was to both build a blockchain system while at the same time determine if there was one that already existed that the firm could adopt, he said. He quickly decided that “there really is not one size fits all” model and he vowed to avoid “having a solution in search of a problem.” Corda, which he described as a “hedge” eventually “became extremely important” to R3, he said.

The banks have driven much of the decision making in the area of how to keep confidential information safe, he said. Only “the absolute minimum amount of information that needs to be shared with the collective to ensure I haven’t done the same transaction before” will be sent, he said. “The work has begun.”

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