Strength in Numbers: Consortium Blockchain Projects Make Headway

The consortium approach to financial blockchain business opportunities is gaining further validation as groups in the banking and insurance industries take their respective projects forward.

Utility Settlement Coin (USC), after four years in research and development that began with UBS, emerged in June as Fnality International, with UBS and 13 other founding shareholders. Led by CEO Rhomaios Ram, a former global head of product management for transaction banking at Deutsche Bank, the financial market infrastructure developer announced three key appointments on August 19: Gary Chu (formerly of UBS) as general counsel, Adam Clarke (start-up and large-corporate project experience) as chief technology officer, and Daniel Heller (International Monetary Fund, BIS Committee on Payments and Market Infrastructures, Swiss National Bank) as adviser heading regulatory affairs.

“Our aim is to have the first USC live and connected to use cases in one currency in the second half of 2020,” said Ram, who began leading the project in 2017 with Fnality's technology partner Clearmatics.

Also making significant strides after years of preparatory work is the insurance and reinsurance industry's B3i Services, which on July 31 announced the release of version 1.0 of its Property Catastrophe Excess of Loss Reinsurance (Cat XoL v1.0). The underlying distributed ledger technology (DLT) is Corda, which came out of R3, itself a pioneering enterprise blockchain consortium, now four years old and with more than 300 participants in its ecosystem.

“Insurance is an industry which relies on processing and sharing data and information and undertaking transactions,” explained B3i chief marketing officer Ken Marke. “The sharing and communication of data has often created delays in completing contracts and led to human error requiring reconciliation.” The consortium, founded three years ago, set out to improve contract certainty and reliability, and reduce friction and operational risk, across the value chain.

B3i has 18 shareholders: Achmea, Aegon, Ageas, Allianz, AXA, China Pacific Insurance Co. (new as of August 22), Deutsche RÜck, Generali, Hannover Re, Liberty Mutual, Mapfre Re, Munich Re, SBI Group, SCOR, Swiss Re, Tokio Marine, VIG Re and Zurich Insurance Group.

Consortium Rationale

Consortiums reign in blockchain because many of the projects involve shared or cooperative infrastructure, as in post-trade securities and derivatives processing. They must manage a high degree of complexity, and can capitalize on network effects and economies of scale.

Facebook's Libra digital currency has a consortium and open-source element: the Geneva, Switzerland-based Libra Association. It lists Coinbase, Mastercard, PayPal and Visa among the founding members and has outlined in its white paper “plans for a new decentralized blockchain, a low-volatility cryptocurrency, and a smart contract platform that together aim to create a new opportunity for responsible financial services innovation.”

R3 embraced the consortium model and was well funded by its largely financial institution membership. Digital Asset, which was formed around the same time with a concentration on financial market infrastructure, is not per se a consortium, but relationships with 15 strategic investors are important to business development. One of Digital Asset's high-profile, long-term projects is the replacement of the CHESS post-trade platform of Australia's ASX, which has invested in the New York-based DLT company. ASX has formed a DLT solutions team to explore additional ways to leverage the technology, The Trade News reported.

Another Digital Asset strategic shareholder is Depository Trust & Clearing Corp., the premier, industry-owned clearing and settlement utility. The two organizations announced completion of a proof-of-concept for repo transactions in February 2017.

Separately, DTCC designated IBM its lead partner, and R3 its solution adviser, in an ambitious program to “re-platform” its Trade Information Warehouse, with software company Axoni also on board. (See DTCC Puts Derivatives Infrastructure on Blockchain Path) DTCC announced last November that it had advanced to where “15 of the world's largest global banks are conducting end-to-end, structured user acceptance tests, leveraging simulated use cases and test data and validating the interaction between systems, firms and other key market infrastructure providers, including MarkitSERV and its new platform for credit, TradeServ.”

Multi-Sector Acceptance

R3 is looking to grow revenue outside of its financial services core. Corda is already “being utilized for everything from supply chain transparency to managing property sales,” R3 chief executive David Rutter said in July when announcing the appointment of enterprise software veteran Cathy Minter as chief revenue officer.

IBM, one of the most active blockchain technology players, is closely identified with the Hyperledger open-source community (Accenture, Digital Asset, DTCC, Deutsche Bank, and JPMorgan Chase & Co. are among its other premier members). IBM's work extends well beyond financial services, an example being TradeLens, a supply chain ecosystem jointly developed with Maersk.

“Massive new efficiencies in global trade are now possible, and we're seeing similar effects across the food industry, mining, trade finance, banking and other industries where the value of blockchain is more apparent than ever before,” Bridget van Kralingen, IBM senior vice president, global industries, clients, platforms and blockchain, said in July, when Hapag-Lloyd and Ocean Network Express joined the TradeLens platform.

Northern Trust Corp. worked with IBM and the Hyperledger Fabric in deploying blockchain for private equity fund administration, a first in that asset class. Northern Trust changed course this year, transferring the DLT platform to Broadridge Financial Solutions.

“For the benefit of our clients and the industry as a whole, it's now time to hand over the reins to a technology provider with deep fintech expertise, Peter Cherecwich, president of asset servicing, said in the June announcement. “Broadridge's administrator-agnostic position, coupled with its DLT leadership and global footprint, make them an ideal firm to open up this innovative technology to the marketplace, paving the way for the digitization of the asset class.”

Other Broadridge blockchain initiatives have included proxy voting, with Northern Trust and others, and bilateral repo.

From Testing to Product Development

B3i said after a successful pilot of a Catastrophe Excess of Loss reinsurance contract in 2018 that 38 companies tested the blockchain application with positive results. It announced the v1.0 release following the July launch of the first Corda 4.0 node.

B3i switched to Corda last year after initially using Hyperledger Fabric.

“B3i focused on the critical success factors of data privacy, scalability, interoperability and developer productivity and concluded that the Corda platform offered the best solution available to meet B3i's needs going forward, because it provides a solid foundation to efficiently deliver business value to its clients,” said chief marketing officer Ken Marke.

He added in an interview, “Blockchain technology facilitates many of the requirements for insurance, including security, contract certainty, smart contracts and immutable data. Importantly, it enables transactions to be completed with greater efficiency, removing many of the obstacles presented by siloed software and the need for reconciliation across parties and software.”

The insurance consortium is eyeing additional product development. Next year, the focus will be on one for the commercial insurance sector, as well as variants for reinsurance, Marke said, adding, “The underlying platform will also be made available for third parties to create other applications in partnership with B3i. This partnership strategy will enable B3i to offer a wider variety of solutions to its customers alongside its own products.”

“B3i is shipping its first application, and this is our first opportunity to share with the wider market not only the Cat XoL application, but also the wider infrastructure we have built to date,” noted B3i chief product officer Sylvain De Crom.

John Carolin, CEO since June after serving as interim CEO and, from March 2018 to March 2019, chief financial officer, said the release marks a “pivotal moment” and milestone “which paves the way as we continue to enhance the already rich functionality of our offering. In addition, B3i will be accelerating our partnership strategy to bring a broad array of solutions to customers.”

“A Quantum Leap”

While major banks, individually and in groups, have been exploring if not actively pursuing blockchain-based alternatives for digitized and cross-border payment and settlement, “the financial institutions that have invested in Fnality know liquidity management and settlement processes must take a quantum leap to rein in the current inefficiencies, market fragmentation and counterparty risks,” regulatory affairs head Daniel Heller has written. “These banks accept the need for change and are exploring the potential of technology, by holding tokenized assets on a blockchain to trade and settle with near-instant finality.

“Decentralized, peer-to-peer platforms can bring multiple benefits to the post-crisis financial markets, for example freeing up liquidity in the fixed-income markets. There is much greater potential to be explored - with the important caveat that regulatory priorities must be accommodated.”

Fnality says it has been “tasked with creating a regulated settlement network of distributed financial market infrastructures (dFMIs) with an associated digital settlement asset Utility Settlement Coin for each addressed currency, to settle the tokenized value transactions with legal finality using a peer-to-peer exchange, and will provide the means of payment-on-chain for tomorrow's financial markets.”

The London company said in June that it completed a £50 million Series A equity funding round. The founding shareholders are Banco Santander, BNY Mellon, Barclays, CIBC, Commerzbank, Credit Suisse, ING, KBC Group, Lloyds Banking Group, MUFG Bank, Nasdaq, Sumitomo Mitsui Banking Corp., State Street Corp. and UBS, and Clearmatics continues in its role as technology partner.

“We are delighted to launch Fnality, the commercial realization of the USC project,” CEO Ram said then. “Working with our founding shareholders, we will start the regulatory approval process right away and look forward to connecting to the first business applications as soon as possible. USC will be an enabler for tokenized markets and also offers a significant opportunity to simplify liquidity management using one cash asset for as many settlement needs as possible.”

Five currencies are said to be initially “in scope”: Canadian dollar, euro, pound, yen and U.S. dollar.

“USC has the potential to transform clearing and settlement processes; enabling delivery vs. payment (DvP) in tokenized securities markets and, in the secured funding market, enabling instant settlement on a payment vs. payment (PvP) basis,” Fnality's June statement said. “USC envisages being 100% backed by fiat currency held at the respective central bank, with convertibility into fiat currency at par guaranteed at all times. In each jurisdiction, the Fnality solution will ensure that settlement is achieved under the local settlement finality laws and regulations.”