Towards an Integrated Financial Market
April 10, 2021
The EURxb protocol has a grand vision, here we unpack the many components and moving parts that make up the audacious whole!
We are inspired, and excited, by the many great projects aiming to bridge the off-chain and blockchain worlds - particularly those that promise to connect the traditional securities market and the rapidly evolving decentralised finance world.
Achieving this vision is not a “one-man” job however, and we believe that different teams will play different - but critical - roles in realising this shared vision of an integrated financial market of the future. Currently we are delighted to see so much effort being committed to the integration of a blockchain (an undisputed ledger) with the traditional finance markets’ version of the same - the Central Securities Depository (CSD).
Encouragingly, many mechanisms are available to blockchains to achieve this connection - from existing digital trading platforms integrated with CSDs, through to cutting edge interfaces that allow the CSD to act as an Oracle to the blockchain.
It could be unwise to approach this opportunity without caution however, as the regulatory landscape around these ideas has not quite settled. That means that even the most forward thinking CSDs are still subject to further input from regulators, and cannot quite yet be counted on to make the long lasting and material commitments in this space that deterministic and immutable blockchains rely on as foundation to work from.
A lucrative short term alternative would be to accept the centralisation risk of the current industry and have an existing authorised traditional market participant stand in as the beneficiary on behalf of tokenholders - but the current regulatory system does not provide a mechanism for tokenholders to claim ownership of an unregistered security as they would not be the bearer under any legal definition, and in the case of a registered security the intermediary would have to be the registered legal beneficiary.
This however would leave insufficient legal recourse for tokenholders if promises are not kept, and it is unlikely that tokenholders would want to sacrifice a key benefit of public networks and give up their anonymity to become the registered beneficiaries themselves in order to enforce their rights.
This leaves an interim period of uncertainty, where the tokenisation industry invariably has to make some assumptions to design and build on, in the hopes that we’ve correctly interpreted the limited signals so far offered by regulators around the world as they carefully consider the implications of tokenisation on their securities markets and respective monetary systems.
The EURxb.finance MVP
As our MvP for bridging traditional and tokenised securities markets, we are launching the EURxb protocol. As a model, it provides the means to tokenise an existing security and use its proceeds as a reserve for the protocol - resulting in:
- The protocol being independent of (while being respectful of security trading regulations) the CSD interfacing with it - because all the protocol needs is sufficient confirmation that all the proceeds (being both the notional/principal and applicable interests) of the security is pledged as the protocol’s reserves, and in the event of a default, ensure the regulated market enforces it.
- The creation of synthetic blockchain instruments against protocol reserves, that allows us to operate independently - in an open and transparent (censorship resistant and anonymous) way.
These points deserve some further clarification, as they provide the framework within which we can create a reliable tokenisation model while preserving and protecting the rights of participants in both traditional and decentralised finance:
- Independently Respecting the CSD:
Because the protocol never trades in the actual security, it does not have to influence the CSD’s process, and is not dependent on whether the CSD provides the protocol access to the instrument. All that is needed is for the security’s issuer and holders to both contract that neither of them can participate in the trading of the security without first releasing it from the protocol reserves. As a further fail-safe, we ensure that secondary market trading of the assigned security at the exchange level is not available. These are both simple processes, and only require that the liabilities created in the protocol against the bondholder are settled before the security is released as a reserve. This ensures that the protocol has a guarantee of fulfilment - either the bondholder will settle their liabilities prior to maturity of the security in order to release the pledge of all the proceeds of the security, or at maturity the issuer will ensure that the bondholder’s liabilities towards the protocol are settled before paying the bondholder the remainder.
- Tokenised OTC trading of Simple Crypto Synthetic Derivatives of Protocol Reserves:
The EURxb protocol relies on a simple (not a future, or an option, or a swap), crypto (tokenised on a public blockchain), synthetic derivatives (the EURxb is engineered to follow a fractionalisation of the principal and interest of the security) of protocol reserve (being the pledge of all the proceeds of a regulated security - held at the CSD - assigned to the protocol per point 1 above).
The benefit of the OTC market utilised is that it is a public blockchain using a series of smart contracts, NFTs and other tokens to overcome the (counter-party) risks normally associated with OTC trades - resulting in a safe and reliable market for participants. It also allows holders to enjoy the benefits of the public blockchain and participate in other functions, such as decentralised finance products that accept the EURxb token as an input of value, and can return profits from lending, arbitrage, liquidity provision, and other functions.
This separation of concern - fully respecting the regulatory requirements of the CSD, while simultaneously creating a truly native decentralised finance primitive without restrictions - is a catch-all backstop approach that allows interfacing with any regulated market irrespective of regulations or traditional sector sentiment towards tokenisation. All that is required is the willing and contractual compliance of the security issuer and the purchaser, as the entire protocol depends on these two actors’ existing rights within the regulatory regime.
The Two Paths of Regulatory Integration
Even though we designed a model to cater for the uncertainties of the status quo, we are optimistic about advances by regulators and CSDs around the world that lead us to believe that a simpler and tighter integration between these markets is on the horizon, if not already being pioneered in Lichtenstein, Canada, Switzerland, Germany and others.
In this new world that we see becoming the future norm, we anticipate one of two outcomes emerging:
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The regulator and CSD will openly accept the viability of tokenisation and provide clear and regulatory protected interfaces to the CSD for the blockchain (think of it as the CSD contracting to provide a “super-oracle” to a specific blockchain), or
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The regulator (and the CSD) accept that a security can be issued solely on the blockchain and provides regulatory protocols for issuing a natively tokenised security.
Our vision for this world is nothing short of a fundamental leap forward for securities, where any instrument in a participating CSD or regulatory regime would have clearly defined and dependable tokenised functions that could be relied upon by tokenholders to be enforced by the regulator.
This in turn would provide any of the participating securities markets, their issuers and investors with several immediate benefits:
- Access to decentralised capital,
- Increase in secondary market liquidity,
- New liquidity options on the issued value of previously Illiquid instruments,
- Low to no material risk based yield enhancement / cost-of-capital mitigation programs
However, while the implementation of these models make sense on paper, their advantages are yet to be seen in practice. This is the core motivator behind the EURx protocol’s conservative approach - enabling the implementation of a working model from which practical evidence can be drawn - to support the shared vision of the industry.
Our Strategic Approach
Regulators and Innovators in this sector around the world have tirelessly worked towards solving the “next-step” in terms of integration in the hopes that once achieved, the benefits would be immediately apparent. However, as we’ve mentioned earlier, the majority of incumbents and investors are more interested in seeing the benefits first-hand before committing to participate in the critical programs that will move the integration journey forward. This means that global progress towards regulated tokenisation of securities (in terms of options A or B set out above) has not progressed rapidly, but we are optimistic that 2021 will see clarity on a preferred direction emerge from major markets.
The EURxb.finance protocol therefore needed to prepare for this future, by allowing for the evolution of our key protocol pillars, being:
- The protocol’s “Security Asset Token” (ESAT NFT721) and,
- The protocol’s “Bond Token” (EBND NFT721).
We intend to evolve the use of the ESAT NFT’s ability so that it may represent equities in future - potentially facilitating the swap between an EBND NFT and an ESAT NFT at bond maturity (hence their unique 1:1 link of one to another at creation), and potentially the introduction of a whole range of additional Bond and Debt NFT Types to deal with new securities models that will evolve (or partner) the EURxb.finance’s functions towards an even more open participation protocol for independent traditional securities issuers and holders in future.
These likely include tools that tokenise a medium risk security with an insufficient investment grade for stablecoin reserves into a number of different risk instruments, some of which extract the higher risk and also a higher reward from the security, thereby increasing the dependability of the remaining instruments so they could act as future stablecoin reserves.
We also envision new fractionalised synthetic derivatives to augment the role the EURxb ERC20 plays, from instruments that capitalise the interest of a debt security at creation into an annualised profit (to comply with Islamic Finance markets and address potential future regulatory restrictions around interest bearing tokens in specific markets), as well as providing instruments denominated in other major global currencies such as USD, KWN, and YUAN to name a few. This area specifically presents a rich environment for additional product development for us, especially in the trading and exchange of these synthetic instruments.
That is why our approach includes the formation of a Decentralised Finance market that immediately benefits issuers and investors, and grows with both the traditional and decentralised market, as we believe that the critical component we can contribute towards the ecosystem is the area of demonstrating benefits that will provide clear incentive for participation by traditional and decentralised actors.
In other words, we are ensuring that once a tokenised security is provided as reserve to the EURxb protocol, the holder will immediately gain benefits that do not exist within the traditional financial system, such as simple fractionalised liquidity in the form of the EURxb - and a simple mechanism for yield enhancement on an investor / holder’s position through either our Institutional or Community Vaults that deploy this liquidity into earning strategies. This goes hand in hand with the benefits that holding the protocol’s governance token (XBE) bestows, to offer an incentive to the decentralised community to participate as well.
Furthermore, the protocol offers all decentralised users the ability to benefit from the same utility provided to traditional investors, simply by holding the EURxb themselves. Therefore, the trade of EURxb against any other ERC20 instrument through the current AMM pools is a primary protocol feature, with an ongoing commitment to improve efficiency and increase liquidity to create even greater access.
Completing this inclusive approach of the protocol’s feature set is the focus on achieving multi-chain interoperability as soon as possible - offering holders the freedom to transport their liquidity anywhere they choose.
EURxb.finance MVP Roadmap
Achieving the goals that’s been set is a matter of consistent learning, development and deployment. Our primary goal is to deploy the core product that we envision as the EURxb.finance MVP. A simplified summary of what this entails is listed below - but please note that the team reserves the right to adjust the roadmap without notice at their sole discretion:
- Tokenisation of off-chain assets pledged as collateral to a regulated senior secured bonds issue (ESAT NFT721),
- Tokenisation of the CSD Bond Subscription and pledged rights to all associated proceeds as protocol reserves (EBND NFT721),
- Creation of the EURxb ERC20 as the protocol’s first crypto synthetic derivative token that tracks a fractionalisation of the protocol’s reserves,
- Creation of the XBE ERC20 as the governance token that provides holders the ability to vote on all protocol functions,
- Launch the first issuance of 100m EURxb ERC20 tokens, and provision of a base liquidity pool for trade with any other ERC20 token type (with on-going improvement on token liquidity and efficiency),
- Creation of a Decentralised EURxb Community through on-going investment in our socials, the app platform, and the distribution of the XBE ERC20 token through a series of liquidity events,
- Launch of the XBE Governance Staking Contracts and Forums as well as the listing and voting on of the protocol’s “foundational proposals”, including the parameters for the distribution of protocol fees to XBE tokenholders.
- Launch of the XBE Institutional Vault and Core Earning Strategy, by which the 53m EURO of bondholder mandated EURxb’s can be deployed to DeFi.
- Launch of the Community Vault, with uncapped access to Earning Strategies for Community Holders.
- Future Protocol extensions with layer 2 solution and multi-chain (including permissioned network) interoperability, support to tokenise more complex securities, open issuing protocol, and Bitfair Markets.
In parallel to the above process the founding team remains committed to expanding the institutional investor uptake of the EURxb through working with our launch partner towards their next issuances, engagement on the future on-boarding of new partners, and also evolving the protocol technically through multi-chain interoperability and collaborations to an even more open and inclusive framework for the tokenisation of securities.
Where to next?
We find ourselves now only at the foot of the mountain, and there is still much to do and at DeFi’s intoxicating pace it is easy to feel like there is just not enough time to do all of it.
This is why we are working on key partnerships to help us leap forward as we continue to work hard towards adding to the composability of DeFi.
We are encouraged to see the protocol has attracted the interest and investment of a diverse community, and while we continue building, auditing and deploying the tools of our original vision - we are guided by the remarkable innovations that come out of this community, and DeFi. As both grow, we are impressed with the depth of debate and the considered ideas being shared to keep the protocol evolving into what the collective believes it could be.
Herein lies the key, this protocol belongs to a community that believes in a common vision:
An integrated future of finance where TradFi and DeFi partner to profit together, in such a way that the one maintains regulatory compliances and the other maintains their freedoms - and both maintain their rights and respective convictions.
With all our best laid plans, we still know that sometimes things must change overnight - building in DeFi brings the most interesting opportunities and challenges with little to zero warning. It’s what makes this the most exciting industry in the world, and we are delighted to undertake this climb with you.