Behind the Market Structure

An Interview with R3 CEO David Rutter

Q2 2022

It will be a while—and take a lot more work—before institutional finance makes the transition to decentralized finance (DeFi), and it certainly won’t be feasible without the regulatory guardrails built by traditional finance (TradFi), believes David Rutter, Founder and CEO of R3. R3 is a global enterprise technology and services firm that is seeking to bridge this gap with its distributed ledger technology (DLT)- and confidential computing-based platforms.

“There are some really interesting DeFi concepts. But we haven’t spent 150 years building a regulatory regime that we’re going to just throw out with the kitchen sink,” says the electronic trading veteran and serial entrepreneur in an interview with Kevin McPartland, Head of Research for the Market Structure and Technology group at Coalition Greenwich.

David Rutter started out as a “board boy” in a money market firm in 1984. He began working in electronic trading in 1994, when his joint-venture firm, Chicago Board Brokerage, launched an e-trading platform for US Treasuries. Later, as CEO of ICAP Electronic Broking, he ran BrokerTec and EBS, the top electronic trading businesses for institutional fixed income and foreign exchange, respectively.

In the early-2010s, he simultaneously founded R3, which he describes as “a massive step toward distributed finance, but within the regulatory environment”, and LiquidityEdge, a US Treasuries electronic marketplace that he later sold to MarketAxess.

DeFi Meets TradFi

“I understand market structure really, really well,” says David Rutter. “That’s why although I was ‘inspired’ by the developments in cryptocurrencies, I could never see Bitcoin being what everyone thought it would be,” he says. “And I've been consistent. I don't see it being useful in payments.”

He decided to deploy blockchain’s cryptographic techniques and distributed ledger to solve problems faced by the markets. “We took a practical approach. That’s what differentiates us,” he says.

So, R3’s DLT-based Corda platform is a private permissioned ledger, meaning its ecosystem’s participants can be identified. “This is important from a KYC [Know Your Customer] and AML [Anti-Money Laundering] perspective,” says David Rutter. Plus, it has built a regulatory node through which data can be pushed to or pulled by the regulator.

David Rutter’s new institutional corporate bond trading platform, LedgerEdge, too, is using Corda to address the pain point of information leakage.

Digital Assets and Tokenization

Will this spur growth in digital bond issuances? “I know it will,” he asserts, pointing to experiments such as the European Investment Bank’s digital bond issuance on a public blockchain.

R3, too, is in conversation with various sovereigns for bond issuances. It even has two platforms where investors can buy tokenized and fractionalized gold. David Rutter expects securities that have been issued the old-fashioned way, such as natural gas futures, to get tokenized. “The future for LedgerEdge is about trading digitized assets, and bonds will be one of them,” he says.

Call for Consumer Protection

Undoubtedly, regulatory clarity on digital assets such as stablecoins has become a hotly debated issue, given the Luna crash.

“I never thought it would take this long to get regulatory infrastructure in place for cryptocurrencies. My main concern is consumer protection,” says David Rutter, who views FTX US Derivatives’ proposals to clear cryptocurrency futures and options using a non-intermediated clearinghouse model as “potentially the biggest market structure change since equities went from fractions to decimals”.

He asserts: “If you look at the exchanges, there's a layer of protection as far as over-collateralization is concerned. I'm worried about having financial products feel too much like a sports gambling app. So, the idea that my mom could go and place a bet on some weird derivative product and get closed out 30 seconds later and wonder what happened, worries me. We can't fight these advances, but we have to make sure there's consumer protection.”

This lack of consumer protection in DeFi is also worrisome. “I’m inhibited by my knowledge of how markets and regulations work. DeFi is not going to work for institutional finance anytime soon,” he declares.

Long Haul

For now, David Rutter is focusing his energy on growing Conclave, R3’s privacy-preserving platform based on confidential computing. He believes R3, which is combining the benefits of distributed ledgers with an ecosystem of governments, banks, FMIs, and corporates, is well positioned to make the transition to DeFi. “What we’re trying to do is very big and difficult. And, it’s going to take some time,” he says.