For the Curious But Uncommitted, a Blockchain in a Box
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Goldman Sachs is seeking to create its own cryptocurrency for post-trade settlement, according to a recently released patent filing.December 3
R3 CEV thinks it is better positioned than other blockchain startups to provide products that banks will use. Why? It is pairing with banks up front, focusing on how they approach the trendy technology.November 30
Services are cropping up that help banks analyze bitcoin transactions for signs of criminal behavior such as money laundering. But such services come with their own risks.December 1
Banks' growing curiosity about so-called blockchain technology has spawned a new category of technology: blockchain as a service.
Every major bank either has a blockchain application in process or hopes to have one soon. Generally speaking, they don't want to use the original bitcoin blockchain (the public ledger of all bitcoin transactions), just technology based on the concept — in other words, a shared ledger that can be used to track things like asset sales, payments, loans, and contracts. Such ledgers are seen as a way to make finance more resilient (since distributed systems have no single point of failure), efficient (since they remove duplication of effort), and transparent (since they are auditable in real time).
Those experimenting with blockchain ideas face two challenges: the scarcity of talented developers with blockchain experience who want to work at a bank, and the cost of buying a new software program and teaching people how to use it before having a concrete business case for it.
To meet these concerns, Microsoft, Deloitte, and others are offering packages of software tools and services they call "blockchain as a service," riffing off the "as a service" terminology Salesforce made so popular in the early 2000s.
Rather than pre-built software delivered over the web like Salesforce's, they're talking about development environments in which companies like banks can build their own blockchain software, with help, on an as-needed basis, from a team of developers with blockchain experience. Once the software has been built, it could run on a cloud such as Microsoft's Azure or on a company's or a consortium's private servers.
Microsoft calls it a way to fail fast and fail cheap at blockchain projects, while figuring out the best ways to leverage the technology.
"'Fail fast' means before you figure out how to do something the right way, you're probably going to do it the wrong way ten times," said Marley Gray, director of technology strategy in Microsoft's U.S. financial services group.
With the low-cost, Azure-based offering, "If it blows up in your face, no harm no foul," he said. "We're building a worldwide, distributed lab environment for these large banks and consortia."
On Tuesday, Microsoft added a second partner to its blockchain-as-a-service platform: Ripple. Ripple uses blockchain protocols to handle cross-border payments and has several bank clients. Microsoft's Azure blockchain-as-a-service is currently operating a Ripple validating node for Ripple's bank users.
Deloitte calls its version, Rubix, a test bed for blockchain applications, designed to let financial institutions and startups quickly evaluate and implement blockchain solutions.
"Part of our raison d'etre is we've been inundated with requests from companies looking at this space and trying to figure out what is it, what do we do with it, how do we get started?" said Iliana Oris Valiente, a co-founder of the Rubix project. Some clients come with the general question, "What is this blockchain thing? I read about it in the newspaper." Others have already come up with potential use cases that they want the consulting firm to vet.
The idea for Microsoft's blockchain-as-a-service offering emerged out of ConsenSys, a software development studio with 60 developers who build blockchain technology based on Ethereum, a cryptocurrency protocol. (ConsenSys was founded by Joseph Lubin, a co-founder of the Ethereum project.)
"We created this because the large financial institutions — like Bank of America, Tier 1 investment banks — are looking for an environment in which to develop these applications, so instead of having to wait 15 seconds for the Ethereum blockchain to reconcile, you can do it in this closed environment, immediately," said Andrew Keys, director of enterprise business development at ConsenSys.
Keys cold-called Gray at Microsoft, who was already playing with the software, and they collaborated on the service: software that can run on Microsoft's Azure cloud and be quickly tailored to meet a client's needs.
"Since then, we've spoken with over 30 major financial institutions and all of the big-four accounting firms," Keys said.
The Microsoft/ConsenSys software and team can create a private or semi-private general ledger for a company or a single bank or a consortium such as R3 CEV or the new commodities consortium led by Kynetix.
If the promise is "fail fast, fail cheap," a natural question is, what will this cost? None of the companies I spoke with were willing to reveal pricing yet.
Microsoft says its basic blockchain services are included with a regular subscription to Azure at no additional cost. Partners may charge additional licensing or usage fees.
Keys said ConsenSys will have three levels of pricing based on service level: a do-it-yourself testing experimentation version, a mid-level service with some quality assurance provided, and a premium, full production environment with 24/7 white-glove customer support.
Two weeks ago, Microsoft released a live, running use case for blockchain technology — a total return swap. This "cryptoswap" could be used for the exchange of bonds, derivatives, options, or any other financial instrument.
"It's a real-world swap scenario," Gray said. "It helps people get their head around what the possibilities are, and not just being a simple blockchain app you see out there."
In a demo, a bank with little blockchain experience was able to quickly install a blockchain environment in Azure. Within about 20 minutes, following a script, it wrote its first smart contract application, according to Gray. (Smart contracts are computer programs that can automatically execute the terms of a contract.)
Securities settlement is a good use for blockchain technology, according to Gray.
"Certain derivatives have T15 settlement, which is ridiculous," he said, referring to trades that take 15 days to settle. "Even T3 is crazy. That's where you'll see lot of the investment occur initially."
One customer has built cryptobonds to simplify the process of issuing bonds. "As you move forward, as the adoption and tech and tools get better, it will trickle down to 'every financial instrument can be expressed using this technology,'" Gray said.
Cross-border payments are another solid use case, in his view.
Under the Hood
Microsoft has not developed any blockchain-specific software. However, its Azure public cloud comes with services suited to the blockchain, Gray said, such as encrypted data storage, Active Directory for authentication, and Cortana Analytics for gleaning insights, predicting markets and optimizing transactions.
Azure is available in 24 regions around the world, "so that anyone anywhere can spin up a private blockchain and set up two nodes in North America, two in Europe, two in Japan, and two in India, and it will work," Gray said. And a bank or consortium could turn those nodes into a permissioned blockchain linked in a private virtual network.
"We have the ability to group the blockchain nodes into what we call a resource group, then we tighten the screws all around those and in between them, we have the lowest level packet encryption," he said. "There's no time when data is not encrypted. This is on top of the cryptography that's already baked into the blockchain."
At Deloitte, Rubix is the name of both a software platform and a team of about 20 people, mostly developers. It's intended to combine a startup mentality with seasoned Deloitte consultants.
"We originally started in the fall of 2014, when this wasn't a popular subject in the traditional corporate world," Valiente said. "Since then we've received a tremendous amount of interest and we've been scaling our expertise."
The Rubix platform is based on the Ethereum protocol, although Valiente said the team could work on any core blockchain technology, including the bitcoin blockchain. (Developers gravitate toward Ethereum because it's considered a complete virtual machine, with many blockchain elements like networking, the cryptographic token, and consensus protocols figured out and baked in.)
Rubix could be used to create a private blockchain for a client, with Deloitte handling maintenance and running the network with permissioned access. Or the Rubix team could create an architecture and prototype and hand it over to the bank, which would take it from there.
The team can build a basic proof of concept in two months after a use case has been determined, Valiente said. "We've created a developers' toolbox with a set of tools that simplify the development of smart contracts and applications that allow our clients to get a leg up in building something that's customized and tailored to them." The team has done some work on blockchain applications for loyalty rewards programs, for instance.
Microsoft could work with other software studios and ConsenSys could work with other cloud providers; both are certain to spread their wings and others are certain to join this space.
"Banks don't want to crown a winner, nor do we," Gray said. "We want the community as a whole to settle these standards as they become de facto standards."
Blockchain technology is becoming an ever more crowded field. IBM, R3, and Blythe Masters' Digital Asset Holdings are among the other high-profile companies creating products for banks in this space. But while others are still creating a product, these blockchain-as-a-service products seem to be ready to go and worth a close look.
Penny Crosman isAmerican Banker's editor at large. She welcomes feedback on her column at firstname.lastname@example.org.