Preliminary notes:

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The future of blockchains

Paul Vigna, WSJ - Moderator

Balaji Srinivasan, 21 Inc.

David Rutter, R3

PV: Everyone has been asking me to stir you guys up. We have 25 minutes. I don't want to waste time. Which one of you is building betamax?

BS: Bitcoin and blockchain database technology are complementary. I think last year I was much more bearish on private blockchain database technology. As I was talking with David earlier, .... I think there was a case made for private blockchain database technology which took it from something vague to something interesting. Permissioned ledger, okay it might make sense.

DR: Okay so the throw down... from our perspective, we are focused on soutions for our members and our members are large global financial institutions. From the start, R3 has had a very specific focus. We have been working with the world's largest banks regarding what they need for our business. One of the key components going into the deal with the banks is that we do believe these technologies can be really disruptive. What exists in globa finance today? Maybe we are looking ati t more incrementally but not as creatively as bitcoin. We are exicted about shared ledgers and distributed ledgers for our future.

PV: Do you think, and look, you have a lot of big banks, you have a lot of people on board, a lot of excitement. You have a lot of hurdles like legal, regulatory, technical. By the time you build something, will it be so worn down to the hub that a private blockchain database technology, what you want to build is not much of an improvement over what the banks already have?

DR: I hope not. That would be a pretty dire view. Balaji and I were talking, and I mentioned that we have all these big banks and custodian banks, payment banks, clearing and so on.... we have said from the start we're not looking to protect anyone's business, but we're thinking about creating a future where innovation might be at the app level can be done more efficiently so that all the smart guys out there can build applications to roll those out. So you need a platform, and ytou need requirements, like regulatory requirements and hte legal side of it. A lot of our resources have been talking to regulators and really trying to understand what the banks need. I think Corda, which we announced 2 weeks ago, is an interesting piece of technology. We think it's interesting. It wont be the only solution but we think it's an important step for global financial.

BS: I actually think that no matter what is, .... in the senes that... at minimum, it's an excuse for banks to actually go and use modern technology on 40 year old infrastructure. Take all these really old pieces of infrastructure, and upgrade it. I would say that we are going to see substantial improvements.

PV: What you are doing, David, results in the banks saving some money but not really passing on benefits, nad throwing people out of work. Does that mean the promise of blockchain database technology is something that, I know you are interested in also, what are you doing? What are you doing for society, David and R3, if ultimately are you are doing is making a little bit of money for the banks? ((applause))

DR: I am chair of the trust, first, on a personal note. As far as we look at this, the bank model is very challenged at the moment. Not only do we live in this low interest rate environment that impacts their carry, but we have lots of capital requirements, ike bozzle requirements being rolled out. It was a confluence of things that created an opportunity for us. It was inspired by bitcoin itself. It was the advancement of artificial intelligence cloud computing. The big banks started to think about the possibilities of transaction processing if they could push their work to the cloud. I think this is real fundamental change. I think the sector is going to shrink and become more efficient, but those efficiencies are passed on to the consumer. And if not, the banks are going to be replaced over time, and that's the reality of the situation. I think this is a positive outlook.

PV: Balaji, this is a blockchain database technology conference. But you introduced a bitcoin product.

BS: I don't think that bitcoin is going to get replaced. .... There might be basically like five things that have traction in the years going forward, so, bitcoin, ethereum, zcash which is basically the most anonymous coins, I think profit blockchain for enterprise, and eventually blockchain database technology for enterprise. Bitcoin is one of those things that people wrote off for all the wrong reasons. ... I think it's... it's bitcoin.

PV: This hwole industry is changing so fast. Both of you are buiding products that you wnat to have a long shelf life. The industry seems to pivot every few months. You announced a piece of hardware, then a computer, now you are announcing software. How do you guys anticipate what the next pivot is? How do you stay ahead of that? Do you worry about that?

BS: Internet time is different. Sometimes technology... I would also say it's not a matter of predicting, it's a matter of .... facebook getting on to mobile, let's get this into where we are, and the large banks that give a lot of credit to them... doing something with their sense of context. Some people said, oh R3 has pivoted. But that doesn't matter, especially early in this space, ... and to try to... you have to be flexible.

DR: It's interesting. I didn't know R3 was pivoting. We're constantly evolving. As far as time factor is concerned, let's face it, things move slower in the finance sector. If you buy a security, and if you're sending grandma money and you want to make sure it actually shows up. These systems are very antiquated. I ran a large exchange. Those components had 17 year od technology, but guess what it did 100s of billions per day without fail day after day. One of the problems we face on Wall Street which bitcoin has brought so much attention to, it's that the risk-reward on change like payment systems and clearing and settlement systems isn't that great. So if you are making that decision on the technology, we're talking about a tectonic shift from how we've done business in the past, these decisions are going to be made at the board level because the guy who runs the payment system is not going to stick his neck out and take risk. Having started a lot of trading systems and businesses, I've never run across anything that needs an ecosystem from the start. Using blockchain database technology in isolation or even in corner of the market doesn't nearly get the efficiencies of a big move and a quick level of acceptance which is one of the things we are excited about our 46 bank partners. They are moving beyond the bank sector now, we want to be incusive. One application is that, to drive change, ....

PV: How much time do you have to produce a commercially viable product? Do you think about that? Tell us your deepest darkest fears. Do you have like one year left? Six months? Do you think about timeframes?

DR: Of course. We are commercially driven. We are a fintech innovation company. I don't want to hold roundtables and do research for our members. But also I've experienced this rolling out new trading systems and new post-trade systems and they take longer. The banks and our members and they are our customers... they are not easy to please. We feel pressure to do big things. We had a project genesis announcement where we had 40 blocks on 5 different blockchain database technologies, issue and redeem commercial paper on different cloud providers. That was a big deal. Well the banks at each monthly meeting ask me what have I done since then? R3 is not going to solve the owrld's problems. Perhaps it will make ti easier for the people in this room to solve these problems.

PV: Balaji, there was an article about the election, there was a line about how what kills democracy is too much democracy. It becomes overwhelming when everyone has a voice.

Balaji: ... (inaudible)

PV: Right, but that's for the afterparty. Bitcoin has a governance problem right now. Bitcoin got to a certain point, got a lot of attention, that trajectory has leveled off. We have developers spending time talking about an issue while the rest of the world has moved on. You have tied your company's future to bitcoin. Do you worry about this?

BS: .. zcash or what have you... The worst case scenario, we have other trajectories. With that said, if you are familiar with the Gartner hype cycle, there's this time when people get super excited about something, then it crashes, then it recovers and what happens is that old problems get solved. It was the same with dot com hype. Amazon is a multiple billion dollar company now. But in 2001-2002, listening to people, they thought it was just a fad or something and they would never make any money. It's easy to be a leader in the good times, but it's the trial during the dark times that matters.

PV: How much time do you have to wait that out?

BS: A lot of time.

PV: You have a lot of money.

BS: I do.

PV: I would be interested to hear both of you talk about the defecits of the public blockchain. I want you to make the other case for the other one, that's what I want you to do. What are hte problems with private blockchain database technology? No, I want you to make the case against him.

BS: Problems with private blockchain database technology... I would say that once you get outside a certain trust zone, like taking the Alibaba profile, that's two incompatible or mostly incompatible banking systems, the Chinese and American banking systems. Even though they are trusted within each nation state, there's genuine distrust between the two because they don't use the same accounting between each other. There's this huge variable rate and entity. So that kind of situation is where you can only explain private blockchain database technology so much until you get to banks in Iran, Russia or some region that isn't really trusted. In that case, you need some sort of way to generate trust in the absence of social trust, and that's technical trust. That's what bitcoin does. That's where public blockchain database technology shines.

DR: From my perspective, first if it wasn't for bitcoin, this whole hype cycle and discovery and other methodology from blockchain database technology, would not have evolved. It's been an incredibe innovation in how you look at it. From what we're trying to solve for, and what the institutions are trying to solve for, it's global financial institutions, there's this embedded trust. It's embedded in legal documentation, it's embedded in regulation. So for us, the idea of the trustless solution, is not necessary. I see applications for bitcoin. Balaji spoke earlier about this. If I was in a hyperinflation country and someone was crazy enough to sell me bitcoin, yeah I would buy some. Yeah I own bitcoin, but only because if someone ever asks me.... but I don't know where my private key. For me to use Bitcoin, doesn't make any sense, and ... I'm a markets guy, I have been looking at price. I want to ask Balaji. There's this constant supply of bitcoin. What I haven't seen when I go to my local store is I haven't seen a sign saying bitcoin accepted. I'm interested in... the price appears relatively stable, I don't watch it, what's the demand drive for bitcoin? What's your perspective?

BS: Have either of you used...

PV: Not knowingy.

BS: I usually ask tha tquestion, and people say they don't use linux. Do you use android? They say yes. But do you use linux? And they say they don't know. Bitcoin I think in the present time is like linux in the sense that it solves developers' problems. If you are an engineer and want to build programs that use money, bitcoin is your only option. It's good for that. It's for very automated systems that can't use traditional wires. That's the complete end of the opposite spectrum, which is massive amounts of commercial paper moving between banks. To continue this analogy, one thing I think is true, now I will actually, this might be the... prepare yourself... one thing that, if you take the inux analogy.... Linux in the early 90s had its zealots. I say this with all due respect, I used to write Micro$oft with a dollar symbol. They were the evil capitalist pigs and such... I was one of them at the time. For many years, their request was to take down Micro$oft. The result was that... but linux found its place in the cloud and server-side and in your pocket on android. By 2005, .... then something interesting happened, which was that the next desktop was.. and so now, if you also include OS X, something like 98% of the NeXT desktops... it's actually raised, ... so, in kind of the same way, that's how I think about bitcoin. A lot of people into bitcoin are because they want to try it. Just like the linux guys were into operating systems. That drives them, even if it was not economically rational in the beginning to look into bitcoin. This is a community bootstrapping itself and figuring out what it's about. When people talk about linux, or bitcoin rather, I don't think it's going to be useful for -- you can got Zimbabwe, India, Nigeria... the U.S. dollar is recognized everywhere. Massive capital investment in making sure your visual cortex recognizes that as valuable. I think what happens is that bitcoin over the next 5-10 years is that it becomes the currency of the internet. Over the next 20 years I think it becomes the currency of the next world. I think that's what's happening.

PV: And you have raised enough money to wait that out?

BS: I would try to make a profit before then.

PV: David, I want to ask you before I let you go, everyone in finance is trying to build a product on this. How do you view this competition?

DR: I don't think we have a lot of competition. We are not venture backed. We don't have a lot of time pressure. We are building products for them and their customers. We think we are in a good position. We talk regularly with itbit and ripple and symbiont and a lot of the players in the market. I think that we're unique from the perspective that we have a large network of very powerful banks. We have time. We have a very nice balance between old financial guys like myself and some really angry guys ike Mike Hearn. I hate to say R3 is a standard but I see the recognizaiton for the need for a massive expansion of standards in the word of blockchain database technology ledgers... Hoepfully we will accelerate that in our network, but we're not going to replace ISDA or anything. I am very pleased and grateful for where R3 stands.