Mastering Financial Services: R3’s New Distributed Ledger Tech

Seeking to spur the adoption of distributed ledger technologies in financial systems, R3 and Microsoft start a strategic partnership.

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Mastering Financial Services: R3’s New Distributed Ledger Tech

Seeking to spur the adoption of distributed ledger technologies in financial systems, R3 and Microsoft start a strategic partnership.

We live in the era of digital transformation, when technologies are being introduced to various spheres of our lives, with the main goal being to radically improve our experiences. Aspiring to tame the digital transformation process which brings new challenges along with new opportunities, our primary goal is to develop and introduce new approaches to utilize this process to the  maximum.

Blockchain technology: Bringing the world of finance into the modern world

Sometimes, it’s not only about the technology itself, but also about the navigating the changing digital landscape.

To succeed in the process of digital transformation, partners are called on to build a trusted and collaborative network. This especially concerns highly regulated industries with big money and sensitive information at stake.

The way the software behind Bitcoin verifies and logs transactions is one of the key aspects that sparked interest in the use of blockchains by banking and financial institutions.

Every transaction is recorded in a public ledger, which is maintained by a network of computers around the world. Transactions are then verified by a cryptographic software ensuring the integrity and sustainability of history records.

What is there for banking and financial institutions?

Banks want their blockchains to store not only transaction history of cryptocurrency, but other kinds of records, including transactions in conventional financial assets, such as currencies, bonds, or derivatives.

Besides, banks are seeking to explore the concept of “smart contracts”, in which updates to a blockchain can be added by simple computer programs, which for instance make possible to automatically payout when a particular transaction occurs.

Banks also want to be sure that all data is stored safely, and the whole system is characterized by the highest level of reliability and privacy.  Instead of relying on Bitcoin’s blockchain, which is public and maintained by a community of strangers, banks are interested and motivated to develop and run a software to contribute to system’s maintenance and upkeep.

Introducing Corda

While exploring the possibilities of blockchain technologies in financial sectors engineers at R3 have developed a distributed ledger, which can even be considered an alternative to Bitcoin’s blockchain and is especially tailored for financial and banking institutions.

While it is largely inspired by the captures and benefits of blockchain systems, it includes design choices that make it more appropriate for executing financial scenarios. Unlike blockchain design, the starting point for development of Corda is making individual agreements between firms, implying that not all information is distributed among participants, but only the part they decide necessary to share.

Developers of Corda focus on the reality of managing financial agreements and intend to make it easier to write business logic and integrate it with existing codes, ensuring the support of choreography between firms as they build up their agreements.

Partnership with Microsoft

Seeing Corda as a powerful tool, developers acknowledge that it may be less well suited for others. That is why the company constantly engages with partners who are working on complementary platforms in this space.

Pursuing similar goals in building next-generation technologies, R3 has recently built a partnership with Microsoft.  Before approaching Microsoft the company explored using other platforms, including IBM Cloud and Amazon AWS. However, R3 decided that Microsoft’s capabilities best suited the company’s needs in serving its financial institution members.

Peggy Johnson, Executive Vice President, Business Development, says:

“We’re proud that organizations like R3 trust Microsoft as a partner to build the financial technology systems of the future; we’re committed to continue earning the trust of business leaders and their customers around the world.”

Peggy Johnson, Microsoft Executive Vice President, Business Development

Microsoft has a long history of working with financial institutions to build software solutions, and is now developing blockchain as a service. Microsoft’s initial step into the adaptation of blockchain technologies was last year with an offering on the Ethereum Platform with ConsenSys, which resulted in the packaged Azure Blockchain as a Service (BaaS) offerings in the Azure marketplace. Later, Microsoft collaborated with Ripple, a cryptographic ledger software vendor, and a group of 11 banks including UBS and Credit Suisse around development of blockchain technology.

More recently, Microsoft released a preview of a special lab environment in Azure’s DevTest Labs to allow blockchain-related services and partners to decouple the technology from virtual machines.

What’s the benefit?

As believed by partners, working in close co-operation would allow the overcoming of mismatch between banks’ ambitions and the embryonic state of blockchain technologies, and distributed ledger systems. Chris Larsen, CEO of Ripple, sees the role of Microsoft as not only bringing the infrastructure, tools and staff to accelerate the experimentation, but also adding more credibility as to where the industry is going.

Financial terms of the partnership are not disclosed, but it is clear that Microsoft does not take an equity stake in R3, and the partnership will operate just like any other partnership Microsoft has established on Azure.

For its part, Microsoft will provide Azure’s online services, and dedicated tech support, project managers, and lab assistance at company’s technology centers.

David Rutter, R3 chief executive officer, says:

“Microsoft has spent a lot of time and money thinking about what types of tools to develop — on their own and in collaboration with us — to meet the exacting standards and requirements of large global financial situations as it relates to scalability, privacy and audibility and the like.”

The partnership’s goal is to test and build products that utilize the blockchain in order to develop a secure and transparent way to digitally track the ownership of assets. The eventual goal of collaboration is to revolutionize the way financial institutions conduct transactions. It will be achieved through modernizing legacy financial processes, significantly reducing the time of finalizing transactions, enabling a more direct transfer of ownership, cutting transaction costs and reducing the risk of fraud.

The partnership is to expand the thinking process over blockchain development and speed up the time it takes to develop and release products that are build on this or similar logic.

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