MADRID, SPAIN — Fintech startup R3CEV raised $US107 million from a consortium of the world’s top banks last month, one of the largest funding rounds for a startup working with distributed ledger technology.
The company was founded in 2014 by Wall Street veteran David Rutter to try and bring the technology behind bitcoin — blockchain, a.k.a. distributed ledger technology — to high finance.
It initially formed a consortium of the world’s leading banks and 40 of them, including Bank of America Merrill Lynch and HSBC, invested in May’s round.
Business Insider sat down with Rutter at the MoneyConf conference in Madrid this week to hear about what R3CEV plans to do with its war chest. He told BI that his company is trying to build the “operating system for finance,” comparing it to a platform like Apple’s App Store.
“You should really think about us being the operating system, the platform, the app store, a bit of the distributed ledger technology, the foundational pieces that allow you to utilise all of the infrastructures and really build an application that means something to you and your business and to you and your customers,” Rutter told BI.
What is blockchain and why are banks excited?
Banks around the world have been talking about the potential of blockchain to transform finance for almost two years now. Blockchain is a form of shared database originally developed to underpin the digital currency bitcoin. It enables all parties on a network to see the same version of a database and uses complex cryptography and group authentication to police the editing of it.
The inbuilt security and trust checks allow banks to potentially cut out middlemen in processes like settlement and clearing and deal directly with each other. This, in turn, cuts down costs. Santander estimated in a 2015 report that the technology could save banks as much as $US20 billion per annum collectively.
“What we have today is all these companies that have either bespoke software or third party software and it doesn’t communicate easily,” Rutter says of the problems blockchain could address. “You have tens of billions spent each year on writing APIs between your trading systems and your order management systems and your trading systems and the like.”
R3CEV works closely big banks to understand what they want about the technology. As well as counting 40 major banks as investors, a further 50 are members of R3CEV’s consortium — a kind of club for global banks to get together to discuss the technology.
Rutter says there are several “themes” that banks are interested in when it comes to deploying distributed ledger tech: trade finance, “because it’s massive, it’s very paper-based, and it’s not so automated,”; global digital identification, to help banks cut down on the cost of identity and anti-money laundering checks; post-trade processing; and payments.
‘We view it as the operating system for finance’
R3CEV itself doesn’t actually build software to tackle these problems. Rather, it builds a platform for these solutions to be built on.
“We view it as the operating system for finance,” Rutter says. Just as Microsoft makes the Windows operating system, which runs programmes like Word or Excel, R3CEV has developed Corda, a blockchain-based platform that can be used by developers to build apps for banks.
Rutter says: “Corda is a completely open system that is going to empower entrepreneurs to be able to build Corda apps, roll them out, and actually have them be adopted because they will work with the current financial rails, in a way that is cognisant of and compliant with the regulatory regime”
R3CEV publically announced Corda in April 2016 and open sourced the technology. Rutter says there are some projects running on Corda today but most of R3CEV’s revenues still come from membership fees. The company charges banks to join its consortium, allowing them to participate in lab experiments using its technology and shape its development.
But Rutter says: “The revenue mix will go from lab membership fees and services to enterprise software licensing fees being the massive portion of our revenues five years from now.”
Developing the Corda platform is one of the main things that R3CEV will spend its $US107 million on, as well as encouraging entrepreneurs to start building on the platform through training videos and hackathons.
‘R3 has just been legitimised’
But Rutter says the chunky investment is more than just money. “The big step forward with this funding is Corda and R3 has just been legitimised by not just a $US107 million investment, but we’re now majority owned by the world’s largest financial institutions. There’s no safer bet in the world.”
This endorsement will help R3CEV, which has offices in New York and London, attract developers onto its platform, he believes.
“One point I try to get across when I meet these new entrepreneurs with a great idea is that if you are a JPMorgan or a Goldman Sachs or a Wells Fargo or HSBC, you can see an amazing presentation by a company that has five, ten, 20 employees and $US10 million in the bank,” Rutter says. “You CANNOT go to your boss and say I want to move this mission critical function to this thinly capitalised 20 man shop.
“It’s why the IBMs of the world, the Accentures of the world, the KPMGs of the world get so much business providing these services. It’s because they’re reliable and they’re going to be around for a long time.”
Rutter hopes the endorsement and funding from top banks will put R3CEV into these ranks.
But not all banks are so hot on the project. JPMorgan, Goldman Sachs, Santander, and State Street all joined R3CEV’s consortium at the start before leaving and have not invested. JPMorgan is also one of the founding members of the Ethereum Enterprise Alliance, a rival consortium looking at how Ethereum, a rival blockchain platform, can be used in business.
Rutter is bullish. “Those guys [banks who left R3], I’m sure they will work with R3 in the future, especially as we become the standard. As you know, the network part of this is very important. There’s been a lot of people that have talked about this as being a team sport. You could talk to the 90 members of R3 and they would increase the confidence that we’re on the right track with the right sponsorship. They will come back. They were there at the beginning, they will come back.”
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