Why Did Standard Bank Join The R3 Blockchain Consortium After Others Quit?
Johannesburg-based Standard Bank is the latest financial services provider to join the R3 consortium after some global heavyweights pulled out of the network, which represents a collaboration of 75-plus banks exploring blockchain as a solution for digital payments.
At least four global banking heavyweights have pulled out of the consortium, The Register reported on Nov. 29. These include Goldman Sachs, Santander, Morgan Stanley and the National Australian Bank.
Their departure raises questions of how much distributed ledger and blockchain technology are worth to the financial sector.
Collaboration is critical to unlocking the value of blockchain technology, said Peter Schlebusch, Standard Bank’s CEO for personal and business banking in a prepared statement.
Standard Bank is Africa’s largest bank by assets.
“We want to be actively involved in exploring and testing how technology like blockchain can be adopted by financial institutions,” he said. “Being a partner member of the R3 network will provide us with an excellent opportunity to accelerate and enhance our adoption of this new technology.”
Based in New York City, R3 describes itself as a financial innovation firm that partners with banks to design and deliver advanced distributed ledger technology to the global financial markets. R3 has a team of financial industry veterans and blockchain and cryptocurrency experts who collaborate with consortium members on research, design, engineering and experimentation to help advance the technology to meet banking requirements. They work on identity, privacy, security, scalability, interoperability and integration with legacy systems.
Distributed ledger technology has the potential to change financial services profoundly and banks are looking to develop a permissioned blockchain system that requires a level of clearance to join and can be linked to legal tender.
South Africa is a key market for R3 as it expands its footprint in Africa, said David Rutter, CEO of R3.
In July, South Africa-based Absa, a subsidiary of Barclays Africa, became the first bank in Africa to join the R3 blockchain consortium
The plan was for Absa to collaborate with other South African banks to develop the continent’s first distributed ledger-based banking solution, Banking Tech reported. All participating banks would share intellectual property.
Rutter said it was a significant milestone for R3.
Disruptive innovation will “become more mainstream as industry alliances such as R3 and regulatory acceptance grows,” said Andrew Baker, a spokesman for corporate and investment banking at Barclays Africa. He said he believed widespread adoption will “happen quickly.”
Barclays Africa has been experimenting with blockchain for some time. In mid-2015 it launched an Africa-wide blockchain supply chain challenge through its Rise open innovation platform, Baker said
Barclays Africa has piloted more than 10 blockchain-based experiments and research initiatives.
Goldman Sachs, one of the first nine to join R3 in 2015, decided to exit the group after failing to agree on terms of a prospective fundraising deal, Fortune reported. Banco Santander also withdrew, Reuters reported.
Santander’s reasons for leaving aren’t clear, but both Santander and Goldman are investors in Digital Asset Holdings, a rival blockchain startup headed by headed by Blythe Masters, a former J.P. Morgan top executive, Fortune reported:
The shakeup indicates that the field is maturing rather than waning. Distributed ledger technologies — which underpin cryptocurrencies such as Bitcoin — are gearing up to replace the aging back office software and databases that keep Wall Street humming. As these blockchain solutions come closer to reality, the companies backing their production are beginning to pick sides.
R3 said that it has always expected a high churn rate among its members, The Register reported. It said in a statement to Fortune that this type of technology requires significant resources, and R3’s diverse pool of members all have different capabilities which change over time.
R3 is a limited liability company that gets funding from its financial sector members including some of the largest investment banks in the world. Membership costs $100,000, according to Fortune. R3 grew from nine members in September 2015 to 50 members by July 2016, to more than 75 today.
This list includes some of the banks and financial institutions that were members of R3 in July 2016:
Barclays, BBVA, Commonwealth Bank of Australia, Credit Suisse, Goldman Sachs, J.P. Morgan, Royal Bank of Scotland, State Street, UBS, Bank of America, BNY Mellon, Citi, Commerzbank, Deutsche Bank, HSBC, Mitsubishi UFJ Financial Group, Morgan Stanley, National Australia Bank, Royal Bank of Canada, Skandinaviska Enskilda Banken, Société Générale, Toronto-Dominion Bank, Mizuho Bank, Nordea, UniCredit, BNP Paribas, Wells Fargo, ING, Macquarie Group, Canadian Imperial Bank of Commerce, BMO Financial Group, Danske Bank, Intesa Sanpaolo, Natixis, Nomura, Northern Trust, OP Financial Group, Banco Santander, Scotiabank, Sumitomo Mitsui Banking Corporation, U.S. Bancorp, Westpac Banking Corporation, SBI Holdings of Japan, Hana Financial of South Korea, and Bank Itau of Brazil. Toyota Financial Services joined June 23, 2016. Credicorp becomes the first Spanish-speaking Latin American member of R3 on Dec. 14, 2016.
Read more at AFKInsider.com.
The fundraising dispute that caused an exit from R3 centered on control, Fortune reported in November. In May, R3 began seeking to raise a $200 million round that would have granted 90 percent of the firm’s equity to its member banks with 10 percent retained by R3:
The consortium’s 42 original member companies had equal rights under contract to participate in such a Series A deal, a source said. In addition, 31 other members of R3’s development lab would have the opportunity to contribute.
That opening bid was renegotiated to a $150 million raise from its member banks—with potential support from outside investors—that would give 60 percent ownership to the investors and 40 percent to R3. This deal framework—still a pending option—had been proposed in early fall, a source told Fortune.
Goldman sought more leverage in the deal, which could have included a board seat or some other element of additional control, sources said. When R3’s member financial firms moved to cap the raise at $150 million, Goldman decided to “exit the conversation and focus elsewhere,” said a source close to the matter.
A person familiar with Goldman’s internal thinking said that the bank did not expect R3 to mushroom to 70-plus members when it initially joined. The number of participants and competing interests made negotiations more difficult.
While so many major banks joining R3 was impressive, such a large number of members inevitably leads to organisational challenges, said Garrick Hileman, a professor at the University of Cambridge Centre for Alternative Finance.
“What’s happening at R3 may be indicative of the distributed ledger space in general,” Hileman told The Register. “Many executives over the last year were seduced by the blockchain buzz, but now six to 12 months on, I expect we’ll see a blockchain shakeout in 2017. Some previously hyped blockchain use cases are likely to be tabled or shelved, while others in less regulated areas than capital markets are more likely to be deployed.”
It’s important to look at which companies have withdrawn from the consortium, Hileman said. Goldman Sachs, “arguably the top investment bank in the world, may have had a hard time seeing how it could obtain an edge within such a large group.”