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R3, Wall Street’s Answer to Bitcoin, is Shaken by a Bank Drain

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New York’s blockchain startup R3 has been hit by the departure of Goldman Sachs, Morgan Stanley, and Banco Santander. Experts begin to doubt that the company, that serves as a blockchain consortium of the world’s biggest banks, will be able to develop a valuable product.

On November 18, the world seemed to be fine for R3. The blockchain consortium, consisting of around 70 of the biggest banks and financial institutions in the world, published a press release titled: “It’s Blockchain, Not Bitcoin, That’s Relevant to Finance.” Only one week later everything seems to have changed. You could say: “It’s Blockchain or Bitcoin, but not R3, That’s Relevant.”

It really was not a good week for the New York-based company that has been seen as Wall Street’s answer to Bitcoin. After nearly every big bank and exchange on this planet joined the company to be part of its promise to create the standard that will finally make the blockchain the next big thing in banking, on November 21 the notion of a bank drain became public.

The Wall Street Journal reported that R3-founding member Goldman Sachs has not renewed its membership and instead aims to focus on its own blockchain projects and startups. As Reuters reports, Banco Santander leaves the consortium too. Like Goldman Sachs, the Spanish bank has its own blockchain project, pursuing an ambitious attempt to transfer fiat money as a token on Ethereum’s blockchain.

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Shortly after the news of the departure of Goldman Sachs and Banco Santander, Morgan Stanley announced they will drop out of the consortium too and it is rumored that the seven banks in total will depart from R3. Likely the bank drain will have an input on the next funding round of the startup. Initially, it aimed to sell stakes in the company for $200 million. Now it reduces its goal to $150 million.

Reuters quotes an insider saying that R3 does not expect that all remaining members of the consortium will join the funding round. According to an expert, Nick Weisfeld, of capital markets consultancy GFT, the drop off of these banks shows, “that there is a real question over the value being generated by R3 and an even bigger question over their ability to commercialize.”

After nearly two years of operation, R3 hired experts like financial cryptographer Ian Grigg, IBM’s Richard Gendal Brown, and ex-Bitcoin-dev Mike Hearn, but failed to provide a working product that lived up to the high expectations the members had.

However, in 2016 the startup presented a number of projects in a fast pace. With Corda, Richard Gendal Brown announced “a distributed ledger platform designed from the ground up to record, manage and synchronize financial agreements between regulated financial institutions” in April. R3 is anticipated to open-source its Corda distributed ledger at the end of November.

In early November, R3 partnered with the Monetary Authority of Singapore (MAS) “to launch its first dedicated distributed ledger technology (DLT) Center of Excellence in Asia,” and on November 10, the International Business Times reported that R3 and ten of its members have “successfully developed a proof-of-concept for a Know Your Customer (KYC) registry.”

Both Corda and the KYC-blockchain can be solutions to problems of the banking industry. But as the recent bank drain indicates, neither of R3’s projects seems to be the big thing everybody has waited for. Maybe the three banks just realized, that real innovation rarely blossoms in the gated community of a consortium of established institutions.