JPMorgan defection underscores tough blockchain choices
The news that JPMorgan Chase left the R3 blockchain consortium speaks to the challenges ahead for any group that aims to get thousands of financial institutions to agree on a shared set of technologies and principles.
“This just shows the experimental stage blockchain and distributed ledger technology is at right now,” observed Chris Skinner, chairman of the Financial Services Club, a networking group for senior executives in Europe. “There may well be multiple distributed ledger systems in financial services over the next decade. Then we will be working on interoperability and standards between ledgers. It reminds me of the old discussions of standards. ‘Sure, we got standards. Which one do you want?’”
The original blockchain was created to track the movement of bitcoin, a digital currency, without the need to trust a centralized third party. The basic concept – a set of shared data that multiple connected parties agree on as valid – has been enthusiastically embraced by the financial services industry. Many bankers and technologists say it will help them handle things like securities trades, payments and contracts in a faster, simpler, more efficient and cheaper way than they do today.
But agreement as to exactly what that distributed ledger should look like does not yet exist.
Several models have attracted adherents: the IBM-led Linux Foundation Hyperledger Project, which is building a blockchain built on the open-source Hyperledger Fabric, has 122 members, including Wells Fargo, BBVA, JPMorgan Chase, the Bank of England, the Federal Reserve Bank of Boston, and American Express. The Enterprise Ethereum Alliance, which is building a blockchain based on the Ethereum protocol, has more than 30 financial services and technology members including JPMorgan Chase and Intel. R3, which is creating a “blockchain-inspired” distributed ledger called Corda, has 84 members, including Barclays, BBVA, Commonwealth Bank of Australia, Credit Suisse, Royal Bank of Scotland, State Street, and UBS.
JPMorgan’s departure from R3 follows on the heels of defections last year by Goldman Sachs, Banco Santander, Morgan Stanley and National Australian Bank. The banks’ reasons for leaving varied.
While still a member of the Hyperledger and Ethereum consortia, JPMorgan is also going it alone with a distributed ledger it’s building in-house called Quorum. Quorum is based on the Go Ethereum client, a software program that supports the Ethereum network. In a white paper, the bank outlines how its blockchain will handle data and contract privacy and consensus mechanisms (the process by which different computers agree on the order and legitimacy of transactions on the network).
The bank’s decision to use Ethereum was at odds with R3’s decision not to use that system.
“Ethereum was a platform we looked at and decided was not fit for purpose,” said Charley Cooper, managing director of R3. Objections among the membership included issues around privacy controls, scalability, immutability of transactions, and consensus mechanisms for validating transactions, Cooper said.
R3 originally hoped to use an existing blockchain model like Ethereum, he explained.
“When we first launched the company, we were in an ‘adapt or build’ mentality,” Cooper said. “Our thinking was, it would be easier if there was solution fit for purpose, if something out there was close we could adapt it to our needs, but meanwhile we’re going to build something in parallel, a platform fit for purpose for financial services. Ethereum was not deemed by R3’s experts and our members to be appropriate for the financial services industry.”
By press time, JPMorgan had not responded to a request for an interview.
Other banks have left R3 because they balked at the money it wanted them to pay to help fund the development of Corda, industry sources said. Last May, the group reportedly sought to raise $200 million from members (it later was said to cut the target to $150 million).
“That was not the direction expected when these firms were already paying substantial amounts just to be a member of the consortia,” Skinner said. (Dues are in the six figures, according to market sources and published reports.) “It was this, in my view, that caused some of the founders to question where R3 were going.”
Yet R3 is still in a strong position, he noted, with many banks still involved in Corda.