One of founders of AbacasXchange, Mark, went to Crypto Investor Show in London. Here is what he learned from it.
As I was walked through the Crypto Investor Show in London last week, I found myself wondering if many of these startups and initiatives had something “of substance”. There were certainly a lot of creative thinkers, but I wanted to know how many firms had a business model that was sustainable. Naturally, I asked a lot of questions and listened to a great many stories and pontifications.
The results weren’t surprising and suggest that the blockchain world continues to believe that the blockchain is the panacea to our problems. As I am sure you would agree, a solution to the Byzantine General’s Problem [Trustless Transfer] is one of the greatest financial breakthroughs of the last three or four hundred years. However, let’s be clear; not every problem will be solved by blockchain. Some require good old fashioned legal, regulatory, compliance and audit frameworks.
When we began Abacas, we did so by wearing “the hat of the investor”. We asked ourselves, “what would an investor want?”, “how would an investor feel?”, “what would an investor need in a blockchain-based exchange environment?”.
We distilled the needs to the following list:
Ø Proof of Asset aka Proof of Existence
Ø Asset Protection & Security
Ø Proof of Identity aka Proof of Actor
Ø Fraud Mitigation from the Asset Purveyors
Ø Fraud Mitigation from the Operators
Ø A Level Playing Field
Ø No Conflicts of Interest
Ø Expected Features of a Fully Functional Exchange
Our first port of call was the asset and “proof of asset”. By defining “proof of asset” with a standard, we are able to weed out and prevent bad actors from participating in the AbacasXchange.
Part 1: Tell me where the gold is hidden?
I stopped at a booth and politely heard one young lady pitch her product. Her team was building a “gold coin”. I listened attentively and asked the 8.7 trillion dollar question. Who controls the gold and where is the company based? Her reply, “Moscow”. My face did not conceal my shock and consternation. She knew the pitch was over. No sale.
Lesson #1
Data is on the blockchain, gold is not. If you have no viable legal claim to the physical asset, your tokenized asset is nothing but data, while the actual value-bearing asset may be exposed to and in the control of bad actors. Who am I going to sue in Russia if the gold disappears? I am not saying that their initiative is not legitimate, but there are far safer alternatives to Moscow.
Abacas Solution: We can always show you where your asset is!
Third Party Custody — You will be pleased to know that your assets are held beyond the reach of anyone but you, the token holder. The assets are however held in an accredited institution that has a history and pedigree of storing assets. Your token is your legal right of claim to the asset it represents. A legal instrument preserves your legal rights.
Part 2: Audit and Tracking are more important than ever!
Next I proceeded to a talk in the large hall. There I listened to a woman who claimed that her team’s coin would do away with financial institutions. Tall order — one coin, no more financial institutions. I concede that financial institutions will transform the way they do business but I am hardly sounding the “death knell” for the financial industry. We will still need “safe-keeping” or custody — who will you trust?; we will still need to give over assets to allow third party management, whether physical, dematerialized or tokenized. Who will manage my Aunt Martha’s portfolio — who will she trust? And what happens when Martha loses her private keys — do you think for a second that the government will allow this? Sorry Martha but you have lost your life savings.
Lesson #2
Third Party Service Providers will continue to provide services. Asset managers will continue to manage assets. Audit and Tracking will remain the most important function to fraud prevention.
Abacas Solution: We set a standard that custodians and partners follow!
The “Fulfilled by” model makes transparency and audit key operations in ensuring proof of asset for asset purveyors and asset managers participating in the platform. Abacas uses three points of reference for audit — the assets held by the custodian, the assets recorded on the blockchain and the AbacasXchange Book of Record. There is no single point of failure. No firm can create tokens out of thin air.
Part 3 — Am I a clone or the real thing?
Finally I worked my way around to the Fleming Room and came across another very interesting offering. I liked this product. It created a “credit bureau” for a wallet. It did not work for every cryptocurrency but it was the basis for identifying bad actors by wallet. Something I am sure that we will use in the future. It did however open the door to a conversation about cloning. We began discussing the challenge of cloning tokens and the reasons why Abacas was reticent to open the exchange to any token creator. The ease of cloning and the difficulty of preventing spoofing is a substantial risk. With cloning one can create a replica token in a matter of seconds. At first glance, this appears very risky, but it is an important requirement for expanding the capital stock of any legitimate enterprise as well. The problem is that a bad actor can create and sell a replica to your token or can create and sell a worthless token — buyer beware. Cloning will continue to be a normal practice and it will be the responsibility of the purveyors and platforms to mitigate fraud.
Lesson #3
The AbacasXchange hardwires assets to tokens and does not permit anything other than a square book. Any new tokens are immediately exposed to the community and can be audited against the assets held in custody.
Abacas Solution: We audit every transaction and every token creation, ensuring that assets and tokens are always in equilibrium!
AbacasXchange posts all activity to the blockchain and operates a square-book. A square book means there is an asset in “safe-keeping” for each token that is trading within the exchange. This is auditable and transparent. This ensures that only approved assets can be created in the AbacasXchange. New tokens cannot be created out of “thin air”. A new token must be wired to the asset which has been committed to our partner.
Summary
The AbacasXchange “Fulfilled by” model provides three important objectives in its protocol:
