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Goldman Sachs and Banco Santander announced that they will no longer cooperate with the R3 Consortium to explore the potential of blockchain.
Goldman Sachs, Santander, R3, BlockChain
Apparently, the competition in the Blockchain business industry is heating up. Goldman Sachs, one of the original members of R3 Consortium, and Banco Santander announced that they will no longer continue exploring the potential of Blockchain technology as members of the consortium.
Reasons for the firm’s decision to discontinue their connections with R3 Consortium remain unclear, as well as whether these decisions are somehow connected.
Kristian Gårder, a representative from Nordic R3 member SEB, says:
“Members will obviously worry if some R3 members seek patents that we have discussed together. Now we are beginning to see alliances form. The risk is that Corda is not used by all the banks. If that happens its benefit will be severely limited. It is a huge challenge to get 65 banks to cooperate.”
Seeking to save money by making financial operations faster, more efficient and transparent, banks and financial institutions set on a race to develop innovative products using the distributed ledger technology. Earlier this year, R3 Consortium announced that it was working on a platform developed specifically for financial institutions. R3’s technology, called Corda, is hoped to become the industry standard, allowing firms to build products on top of it.
“We want other banks and other parties to innovate with products that sit on top of the platform, but we don’t want everyone to create their own platform because we’ll end up with lots of islands that can’t talk to each other,” says James Carlyle, R3’s chief engineer.
However, that is exactly what happened. As the R3 applied for a patent for Corda, Morgan Stanley and Goldman Sachs have turned in another direction and applied for their own Blockchain patents. It became a contentious issue within the consortium.
Goldman’s broken relationship with R3 does not mean that the firm is no longer interested in Blockchain. On the contrary, it will continue to work with and develop its own distributed ledger technology.
“It will play a transformative role in the way financial institutions transact globally,” says Paul Walker, global co-head of technology at Goldman, as he shares his enthusiasm about the potential of Blockchain technology to revolutionize the industry.
Santander has also been working on its own Blockchain projects. The financial giants, along with Ripple and a number of other large banks - including UniCredit, Standard Chartered, Westpac and Royal Bank of Canada - co-founded an interbank group for global payments based on Blockchain. Earlier this year it tested a mobile app using distributed ledger technology for international payments.
It remains unclear why Goldman Sachs chose not to continue with R3. “I have no reason to believe it is about patents. There possibly is a lot at play,” commented Marc Kaufman, partner at Reed Smith.
Another reason could possibly lay in the pursuit for control inside the consortium. In May this year, R3 began a fundraising campaign seeking to raise $200 mln, that would have granted 90 percent of the firm’s equity to its member banks, with 10 percent retained by R3.
The consortium’s original member companies would have equal rights to participate in the deal, while other members would have the opportunity to contribute. The opening bid was set at $150 mln, an amount raised by its member banks - with potential support from outside investors, which would redistribute ownership to 60:40 between investors and R3.
Apparently, Goldman Sachs sought more leverage, which would have given them more powerful tools for control. Therefore it refused to chip in for a $150 mln Series A funding round.
When it initially joined the consortium, the firm did not expect to see such a huge amount of members. Apparently, the growing number of participants with competing interests made negotiations more difficult and the firm decided to focus elsewhere.
Whether Santander, which joined the R3 in December last year, withdrew from the consortium for similar reasons remains unclear. Notably, both Goldman Sachs and Santander are investors in Digital Asset Holdings, a rival Blockchain startup headed by Blythe Masters.
Who would have thought that the very idea of network would endanger its future.
The industry is indeed maturing and the competition is rising. The potential of distributed ledger technology to replace aging software used for managing handling financial transactions is becoming more apparent, and as the industry comes closer to the wider application of Blockchain solutions, companies are starting to reconsider their positions and pick sides.
“Developing technology like this requires dedication and significant resources, and our diverse pool of members all have different capacities and capabilities which naturally change over time,” commented an R3 spokesperson.
“Investing millions of dollars in small, disparate technology projects is not appropriate for banks at a time when budgets are stretched,” says David Rutter, R3’s chief executive.
“The risk of backing the wrong horse could far outweigh the potential gains. Given that the power of this technology lies in its network effect, the consortium model is the ideal method to get it off the drawing board and into the wholesale financial markets.”
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