R3, Ripple and the race for SWIFT — who’s winning?

SWIFT, the global messaging system to settle cross border payments, will trial Corda, R3’s blockchain solution at a proof-of-concept stage. The trial will connect SWIFT’s GPI cross-border payments gateway with R3’s Corda Settler platform to enable the constant control and monitoring of payments.

One of the most compelling use cases for blockchain is the disruption of global payment systems. In the global financial industry, most international payments are facilitated by SWIFT, which provides payment services to 11,000 financial institutions across 200 countries. The SWIFT infrastructure was built decades ago and can require the linking of multiple participants to process payments which can take several business days. 

Belgian based SWIFT have long recognised the need to move to faster payment options and they’re exploring a number of solutions, including DLT platforms. SWIFT partnerships with blockchain companies are eagerly watched by the crypto community which is why last week’s announcement of the SWIFT partnership with R3 is big news. 

An early contender

Tipped as early leaders in the race to provide DLT solutions to the financial sector, New York based R3 was founded by CEO David Rutter in 2014. R3’s goal is to build a network that uses its Corda payments solution to connect all participating banks and be interoperable between different institutions. Corda is an open-source DLT platform that aims to remove payment friction and delay by enabling institutions to transact directly.

In 2015, Rutter formed a blockchain banking consortium made up of leading investment banks including Barclays, Credit Suisse and J.P Morgan to experiment with the use of Corda to test and validate distributed ledger protocols. The consortium soon grew to 70 members.

R3 was a private company at launch, but in 2016 it instigated a $200 million Series A funding round, seeking venture capital from consortium members in exchange for equity. The consortium’s then 42 members were invited to participate with confirmed investments coming from CLS, Intel, HSBC, Barclays PLC, Wells Fargo, Bank of America Merrill Lynch and others.

Banks that chose not to invest were able to remain members of the consortium and continue to participate in the research program. Some blue chip names including Goldman Sachs decided to leave the consortium, citing the large number of other participants that made the arrangement less attractive, while others such as JP Morgan left to pursue their own blockchain projects.

In June 2018, R3 went into damage control when two former employees predicted the company would soon run out of funds. The ex-employees made a number of allegations; they claimed the firm misrepresented the amounts it raised during its funding rounds, that the firm was not bringing in as much revenue as it had hoped to, and that top salaries and expenditures were excessive. Using the terms, "10X short" and "laughably off", the duo predicted the firm would not survive beyond the first quarter of 2019.

CEO David Rutter disputed the claims and told Forbes, "We were saddened that any of our previous employees saw fit to spread false, malicious rumours about the company. R3 is in a very strong financial position." He added that the company has raised over $120 million from more than 45 financial institutions and recorded over $20 million in revenues, with average operating expenses per employee having declined every year since launch.

R3 and Ripple – coopetition troubles

Adding intrigue to R3’s position is the complex relationship between R3, Ripple and XRP. Alongside R3, Ripple has long been touted as a front runner to partner with SWIFT, and the announcement of the SWIFT trial with R3 appears to be a blow to Ripple.

While Ripple and R3 can be seen as competitors, the two companies also work together. In 2016, R3 entered into an agreement to promote Ripple to its banking consortium. In return, the agreement included an option to allow R3 to buy up to 5 billion XRP tokens at a price of $0.0085 at any time before September 2019.

In September 2017, however, Ripple and R3 became embroiled in a legal dispute with R3 filing a lawsuit claiming that Ripple had violated the purchase agreement for XRP tokens. Ripple counterclaimed, accusing R3 of breaching a number of commitments in the agreement. 

In 2018, Ripple and R3 reached a confidential settlement of the dispute. The companies released a statement stating, "both sides look forward to putting these disputes behind them."

It seems the two companies were able to agree on a way forward as in December last year, R3 announced a Universal Settler application to facilitate global payments on Corda with Ripple’s XRP token as the first settlement mechanism. XRP is the first cryptocurrency supported by the settler, and it would seem to further align the Corda and XRP ecosystems. While the settlement was confidential, the fact that R3 enabled settlement using XRP suggests R3 received XRP in return.

While Ripple’s XRP is the first cryptocurrency supported by the Corda Settler, in the future it’s likely that R3 will make settlement in other cryptocurrencies possible. However, now that R3 has begun integrations with SWIFT, in the short term, banks will prefer to settle Corda payments in fiat currency, and not XRP.

This makes sense as the legal status of XRP and other cryptocurrencies remains unclear due to the current uncertain regulatory environment. Risk averse financial institutions are unlikely to adopt cryptocurrencies until regulations become clearer.

Now that we’re in the first quarter of 2019, despite a predicted demise by disgruntled ex-employees, R3 is moving forward. The company has just completed an internal reorganization with Coindesk reporting the departure of a managing director, Brian McNulty, and chief administrative officer Lauren Carroll.

CEO David Rutter led an internal town hall meeting where he announced a number of new teams including a production team dedicated to supporting the deployment of R3’s technology at client companies. In a statement confirming the reorganization, R3 says it plans an "expansive hiring programme for 2019".

What’s the bottom line? R3 look to have started 2019 in a strong position. In January, the company partnered with SBI Holdings (an investor in R3 and Ripple) in a new venture to accelerate the adoption of Corda in Japan and East Asia. R3 said, "Through the partnership, R3 and SBI will jointly continue their advocacy for enterprise blockchain and increase the focus on the commercial adoption of Corda."

The Corda platform itself is regarded as having a strong development team and is seen as one of the top 3 enterprise DLT platforms (alongside Hyperledger Fabric and Ethereum). The advantages of the Corda platform are its privacy features, its relative maturity and its interoperability.

And despite that alarmist prediction from ex-employees, R3 is unlikely to run out of funds this quarter. R3 have not released new information on its financials but it has resolved its lawsuits with Ripple, and secured a trial with SWIFT, a feat that Ripple is yet to achieve. Whether that moves beyond the proof of concept stage is something the crypto industry will watch with interest. 

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