R3 Developing Open Source Blockchain for Banks, says Head of Research

Bitcoin Magazine
R3 Developing Open Source Blockchain for Banks, says Head of Research

In September Bitcoin Magazine reported that nine global banks were pooling resources to fund R3, a next-generation global financial services company focused on applications of cryptographic technology and distributed ledger-based protocols within global financial markets. Several other top banks joined R3 soon thereafter, and five more banks – ING, BNP Paribas, Wells Fargo, MacQuarie and the Canadian Imperial Bank of Commerce – joined in November.

R3 is a next-generation global financial services company focused on applications of cryptographic technology and distributed ledger-based protocols within global financial markets. Supported by most of the world’s major banks (with notable exceptions in China) and powered by a team of high-profile experts, R3 is well-positioned to find and deploy ways for blockchain technology to be used in the mainstream banking and financial world.

Now, R3 Head of Research Tim Swanson says that the company’s software team in London is developing an open-sourced, generic blockchain for banks, The Sidney Morning Herald reports. “Many banks feel they can reduce, or eliminate altogether, various costs, by adopting some sort of common shared ledger and let that proliferate through the industry,” said Swanson, who is in Sydney this week to address the Sydney Blockchain Workshops supported by the Commonwealth Bank of Australia.

At the same time, Swanson is persuaded that banks and financial operators need to see solid results before committing to a relatively new and unproven technology.

“It is important not to overhype things, although it is too late on that,” Swanson told The Herald. “At Sibos [the global payments conference held in Singapore last month], everyone was talking about blockchain. Now, deliveries have to be shown to the world in the next 12 months, or people will walk away thinking this is a load of bumf.”

Designing the R3 blockchain as open source is a firm decision, but the way in which the new blockchain will operate has not been decided, said Swanson. In particular, it isn’t clear whether the R3 blockchain will be open like the Bitcoin blockchain or a “permissioned” blockchain where only member banks can verify transactions.

Permissioned blockchains would offer the advantages of digital currencies powered by public blockchains – fast and cheap transactions permanently recorded in a shared ledger – without the troublesome openness of the Bitcoin network where anyone can be a node on the network anonymously. Permissioned blockchains for banks and financial operators, supported by Accenture and Digital Asset Holdings CEO Blythe Masters , among others, are being developed by giant Swiss bank UBS , Bitcoin exchange itBit and more.

Swanson said member banks are interested in testing the R3 blockchain for a range of applications, including trade financing, processing syndicated loans, the settlement and clearing of OTC derivatives, and marketplace lending.

“It’s a big umbrella,” he said. But, even if the banks want to use the R3 blockchain, it will have to get approved by the regulators first.

“Just because you build some tech, it does not mean it will be used by financial institutions or will pass the smell test of regulators,” Swanson said. “If neither of those bodies are OK with it, it won’t be used. The best way is to start from scratch, and build in [regulators’] specific needs.

“The regulators I have interacted with in multiple countries have been very open-minded in thinking about how some of this tech might be used,” Swanson said. “Most regulators I have spoken to are ‘cautiously optimistic’; they want to take a rightfully conservative approach to make sure things are delivered. If we do our job right, what this tech can do is allow regulators to have a window into real-time data, which they can read and react to and create policy towards. If regulators have a window into what is going on, they can get a better idea of preventing systemic risks.”

Photo Andrew Hart / Flickr (CC)

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North Carolina Issues Specific Money Transmitter Exemptions for Some Bitcoin Companies

The North Carolina Commissioner of Banks has released a document specifying in plain English what the virtual currency exemptions are according to its Money Transmitters Act (NC MTA): virtual currency miners; Blockchain 2.0 technologies; multi-signature software; and non-hosted, non-custodial wallets are generally not subject to the NC MTA.

The clarification of its position on virtual currency comes at a time when most states have withdrawn from comment nearly altogether, in a wait-and-see-what-everyone-else-is-doing kind of approach. Or, in the case of New York, BitLicense has addressed some cryptocurrency regulatory issues, though some claim the New York regulations make sweeping generalities on other virtual currency regulatory issues, leaving them wide open to arbitrary interpretation by government officials.

However, the North Carolina move toward being more explicit in virtual currency regulation is in part thanks to the efforts of the Chamber of Digital Commerce.

“North Carolina has taken a leadership role in state-level virtual currency debates and is setting an example to other states to take a more thoughtful and deliberate approach to regulating this nascent industry,” said Perianne Boring, president of the Chamber of Digital Commerce (CDC), in a statement.

The CDC sought to improve understanding on the emerging digital currency technologies and does not want overregulation to drive out innovation by the grass-roots innovators that often bootstrap their technology on modest budgets.

In a prepared statement, the CDC offered its opinion on the proposed regulations:

The North Carolina legislature is considering a bill, at the request of the Commissioner of Banks, that would update the state’s existing Money Transmitter Act to expressly include virtual currency businesses. The Chamber has been actively involved in this process, expressing concern over the proposed legislation’s broad language that could potentially be interpreted to capture certain virtual currency business models that are clearly not engaged in money transmission and should not be regulated as such. The Chamber believes that taking a broad interpretation of money transmission would subject small businesses, start-ups, and technology companies to onerous reporting requirements and hundreds of thousands of dollars in fees and bonding requirements.

The exemptions expressed in the NC MTA offer some of the most unequivocal regulation on how miners, Blockchain 2.0 technology and how other cryptocurrency technology will be regulated in North Carolina. Under the NC MTA, North Carolina miners are not regulated as per the NC MTA FAQ section:

. . . the NC MTA regulates the transmission of virtual currency. It does not regulate the use of virtual currency. A “user” is someone who uses virtual currency to buy or sell goods and services. A merchant who accepts virtual currency as payment for goods or services is a user and does not require a license. A “miner” is someone who receives virtual currency as payment for verifying transactions, typically by providing computer resources to process data. Once the miner has completed its work, the miner generally becomes a “user” of virtual currency.

In contrast, the New York BitLicense does not expressly exempt New York miners from regulation, with one particularly broad statement citing any one of the following activities of “controlling, administering, or issuing a Virtual Currency” as falling under New York regulation.

Under this reading, it not only potentially leaves New York miners in limbo, but also Bitcoin 2.0 technologies wishing to be implemented in New York that involve asset or currency issuing technology, such as colored coins and multi-signature technology that involves partial control over virtual currency.

The NC MTA offers a more direct approach to these issues by expressly generally exempting Bitcoin 2.0 technology and exempting multi-signature software. The NC MTA FAQ section states:

… Blockchain 2.0 technologies refer to the use of the blockchain (or other similar virtual distributed ledger system) to verify ownership or authenticity in a digital capacity. This technology includes such software innovations as colored coins (i.e. coins that are marked specifically to represent a non-fiat-money asset), smart contracts (i.e. agreements implemented on a virtual distributed ledger), and smart property (i.e. property that is titled using a virtual distributed ledger). These uses of the blockchain generally do not involve the use of virtual currency as a medium of exchange. As a result, these software innovations are not regulated by the NC MTA.

… Multi-signature software allows a virtual currency user to distribute authority over his or her virtual currency among multiple different actors. This software requires multiple actors to authorize a virtual currency transaction before the transaction can be consummated. Specifically, a multi-signature provider holds one of two or more private keys needed to authorize transactions. Because the multi-signature provider cannot authorize a transaction alone, this provider is not holding virtual currency on behalf of another, and does not engage in virtual currency transmission by signing transactions on behalf of the user.

Also, the NC MTA explicitly states that it will generally regulate wallet providers:

… A hosted, custodial wallet provider is in the business of storing a user’s virtual currency on a remote computer until such time as the user desires to spend or exchange the user’s virtual currency. The hosted wallet provider typically agrees to safeguard the user’s private keys and make them available at some later date. This custodial function is regulated under the NC MTA.

In contrast, a non-hosted, non-custodial wallet is typically outside the scope of the NC MTA. A non-hosted wallet is a piece of software deployed on the user’s own computer or device that makes the user’s private keys easier to use by the user. In a non-hosted, non-custodial model, the software provider never gains access to the user’s private keys and does not agree to transmit the user’s virtual currency at a later time.

For many, the NC MTA serves not only to provide guidance to the virtual currency industry in North Carolina, but also to the greater virtual currency ecosystem in the United States.

Photo Jayron32 / Creative Commons

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