Too big to fail or too big to work?
Analysis The value of distributed ledgers and blockchain tech to the financial sector has again come under the spotlight following the departure of several entities from prominent blockchain consortium R3: namely Goldman Sachs, Santander, Morgan Stanley and the National Australian Bank.
All four left the consortium this month, and with little public explanation.

R3’s official statement on the departures isn’t particularly revealing either, essentially claiming only that it has always accepted and expected a high churn rate among its members.
Spokespeople offer the line that “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.”
The departed’s capacities and capabilities have not significantly changed however, relative to other R3 members. What has obviously changed for Goldman Sachs (a founding member) Morgan Stanley (a second tranche introduction) and Santander (a third tranche member) is the swollen size of the consortium those businesses were joining.
At least it is described as a consortium. R3 is, more exactly, a limited liability company receiving funding from its financial sector members. While it does not provide a complete members list, R3 is currently believed to have over 70 financiers — including some of the largest investment banks in the world — and it seems to be precisely because of its rapid expansion, up from an initial nine in September 2015, that some of those earlier joiners are leaving.
Martha Bennett, an analyst with Forrester, told The Register that she saw “some quite complex dynamics at work here, given the different strands to R3’s activities, the prolonged discussions around the fund-raising, the decision to open-source Corda, and so on,” all of which could have contributed to the exodus.
Speaking to The Register, Dr Garrick Hileman, of the University of Cambridge’s Centre for Alternative Finance, noted that “while the assembly of so many major banks by R3 was impressive, such a large number of members inevitably leads to organisational challenges.
It has not gone unnoticed that the proofs-of-concept that R3 has produced have had a very limited number of participants.”
As we wrote back in September, the fintech execs seem capable of making the most exciting innovations boring, and their approach to the blockchain has been exemplary, especially when those execs seem to be searching for a commercial advantage through the early adoption of a “disruptive” technology.
“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.”
Considering the number of companies involved in the consortium, there has inevitably been plenty of disagreement on what that “disruptive” technology should be, with few of the proofs-of-concepts offering interoperable, let alone complementary, services.
Hileman told The Register that he thought “it’s important to look at which companies have withdrawn from the consortium.” He noted that 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.”
That member size makes it “difficult for Goldman to control and influence the consortium’s direction,” claimed Hileman. “There is an obvious conflict with such fiercely competitive companies, all seeking to drive forward their own advantage, working together in harmony on democratizing and transparency enhancing technology.”
He added: “R3 employs many of the most talented people in the blockchain industry, so some will see their setbacks as a setback for the overall industry. However, public blockchains, such as Bitcoin and Ethereum, arguably gain from the lack of cohesion at companies like R3.

The most compelling aspect of R3 is its consortium members, not its technology.”
Bennett said: “During the first six months or so of the consortium’s life, it looked like to focus was to identify the most promising use case(s) and then proceed with figuring out how to develop the required processes and software to translate them into blockchain reality.”
She added: “Most importantly, with the participants at the time, it was actually possible to see how they might converge on a set of use cases that would be relevant to most, if not all.

Even then, it would have been a challenge to get all members aligned around the governance principles and common processes, etc, that are a prerequisite of a successful blockchain deployment.”
Bennett continued: “Looking at the sprawling membership R3 has now from quite disparate segments of financial services sector (including insurance and payments), it’s difficult to see how any kind of alignment can be achieved.” ®
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