Enterprise blockchain is a tough old game.
R3, one of the most prominent startups in the sector, tried unsuccessfully this summer to muscle in on another blockchain consortium, the Utility Settlement Coin (USC) project, which is managed by U.K. technology vendor Clearmatics, CoinDesk has learned.
In early June, R3 proposed to the USC’s bank members that the project be built on the startup’s Corda platform, instead of Clearmatics, which has been building the platform since the project’s inception in 2015, according to four people familiar with the situation.
To entice the banks to make this switch so late in the game, R3 offered to fund the technical development itself and to pay a share of legal fees, the sources said.
However, the idea was unanimously rejected by the now 17 consortium members when put to a vote later that month. This happened close to a pivotal time for USC, as the project moved into “Phase IIIb” at the beginning of August.
Charley Cooper, a managing director at R3, said the company could not discuss individual discussions with prospective partners for confidentiality reasons. But as a general matter, he said, “We believe in open standards for critical parts of blockchain market infrastructure, such as cash and value on ledger, because such standards will benefit the whole industry. Part of our role is to identify opportunities for discussion with potential partners.”
R3’s overture to USC was an attempt to leverage work already done on cash settlement on its Corda platform. In order to execute this goal, R3 asked the USC banks to combine efforts and to bring all previously developed legal and regulatory intellectual property (IP) related to USC to a new proposed project. To this, R3 would contribute its sharable IP from projects done in collaboration with over 50 central banks, regulators, and commercial banks – over 20,000 lines of code and dozens of reports on implementation models.
The startup appears undeterred by the rejection. In late June, it came back with a revised proposal that would keep Clearmatics in the picture as a partner.
At the same time, R3 argued to the USC members that they and Clearmatics were at risk of forgoing an important opportunity to pool resources and create standards in a critical area of future market infrastructure, according to one source familiar with R3’s position. It proposed going forward by way of a collaboration with Clearmatics to demonstrate that the two vendors’ technologies were interoperable.
Bad timing
The USC project began life back in 2015 as an initiative of Swiss banking giant UBS and Clearmatics. It has the audacious goal of applying distributed ledger technology (DLT) to the way central banks move funds around and manage liquidity, and so addresses fundamental questions related to credit risk in the financial industry.
Over the past three years, the project has seen a brace of banks join and it was last publicly reported to comprise 11 financial institutions: Barclays, CIBC, Credit Suisse, HSBC, MUFG, State Street, UBS, BNY Mellon, Deutsche Bank, Santander and NEX.
Since then the consortium membership has grown to 17 banks, according to a banker involved in the project, who characterized R3’s bid to bring USC on to Corda as an “aggressive” move.
“This is a tough business environment and R3 is a business like any other and it probably didn’t cross the line of sharp business practice,” said this source, adding that it highlights the importance of the USC project.
Provided the USC project gets the full go-ahead from central banks and regulators, it could become comparable with SWIFT was 50 years ago or CLS was 20 years ago, said the banker.
As such, it’s understandable that other technology vendors might want to pitch to the project’s members, added the source, and going forward, it would not be surprising to see vendor selections being conducted in a manner that’s common in the financial industry.
However, because the USC project is at such a pivotal stage, this ensured a unanimous vote from the members declining R3’s approach.
“I think the reason for the unanimity was less about the technology and more about the timeline of the process,” said the source, concluding:
“The vote came like literally a week or two before the closing of the legal documents for Phase IIIb and I think pretty much the attitude was, ‘Let’s not allow this approach by R3 to derail going into that phase or delay the project.'”
R3 founder and CEO David Rutter image via CoinDesk archives