The Future of Capital Markets: The Cornerstone of Digital Bank

Innovation
October 29, 2020

The Future of Capital Markets: The Cornerstone of Digital Bank

01. Introduction


Increase in purchasing power, internet penetration, and new and simple to use technologies are leading to a significant rise in digital transactions powered by Peer-to-peer economies, digital assets and marketplaces. Globally, online banking usage rates increased on average by 13 percentage points from 2013 to 2018, and there is room for further growth across all geographies, particularly as consumers’ willingness to transact over digital channels exceeds actual digital usage by more than 30 percentage points in many markets. [1] And as fintech and bank collaboration becomes a necessity, 79% of leading banks have partnered with a fintech and banks need to renew their focus on risk management, especially the new risks of an increasingly digital world. [2] Increase in digital transactions result in increased fraudulent transactions and an increase in operational costs for traditional institutions. Research shows that for every dollar of fraud loss financial services now incur $3.25 in costs. Efficient digital solutions not only reduce operational costs but also help avoid fraudulent transactions and its overheads.


As digital assets enter the mainstream, to meet the booming smart contract market and to enable companies and individuals to protect and use their digital assets freely there is a need for new and efficient digital asset custody services.


Key advantages of digital asset custody:

1. Automate the settlement and management of transactions & clients accounts - resulting in faster settlement of transactions at fractional cost and reduced manual labour. In addition, even the transaction can be assessed and restricted in real-time, with limited manual involvement, through whitelist solutions.

2. Automated and fully compliant reporting such as status of assets, tax compliance and other compliance reports - Reduced fraud through tracking of assets and reconciliation over tamper proof blockchain based ledger and overall reduction in costs.

3. Support the needs and requirements of digital assets and future of new asset classes and emerging markets.

02. S.A’s Digital Custody


The peer to peer economy models and sharing economy models are disrupting the retail industry. [3] Given the ease, convenience, speed and flexibility of peer to peer transactions today most activities and transactions ranging from Hospitality (Airbnb, Couchsurfing) to transportation (Uber), Insurance (Lemonade) to financial services are evolving toward digital peer to peer models. Such transactions also have an increased risk of privacy, authenticity and frauds. [4] There’s a big wave of fraud and disputes on the horizon. Because most of these services currently offer no dispute-resolution process or consumer protections. This means people risk losing their money if something goes wrong — such as someone not receiving the promised good or service or a payment mistakenly being sent to the wrong address. In these situations, they have no simple recourse — no straightforward way to request their money back.


2. P2P utilizing Conventional Custody Service


Some financial institutions reduce the risk of frauds and disputes by employing a traditional custodian/ Escrow agent. But traditional custodian services are slow and expensive as they have to constantly perform verification and validation on the transactions. Given the nature of manual work involved with the traditional custodian players, facilitation of a single financial transaction can cost as high as 30$+ additional overheads and yet the transaction may take a couple of days to complete.[5] Such limitations continue to affect the increasing demand of peer to peer transactions and create high entry barriers for startups, small and medium scale fintech organizations and retail businesses. Furthermore, traditional custodian services will not be able to meet the requirements of digital assets.


3. S.A’s Digital Custody


A blockchain powered digital custody can provide ease, convenience, speed and flexibility required by peer to peer transaction while maintaining trust between the end parties and reducing fraud. [6] Digital custody has multiple additional benefits such as

1. Immediate redemptions and transactions: Now the custodian can automate a transaction as soon as the transaction conditions are met allowing the investors and users to take advantage of time-sensitive opportunities.

2. Facilitate Delegated controls and strong authentication by allowing each party involved in the custody process to digitally authenticate, if required, recording all the responses and triggering event based transactions in compliances with legal requirements of digital asset custody.

3. Privacy by transparency, Only the custodian will have sole knowledge of the true end users, creating complete privacy while the authenticity of every transaction can be verified publicly on the blockchain network without revealing the end user information.

4. Allows for operation flexibility by enabling multiple parties to be assigned or reassigned to a custodial account to approve the redemption requests, with complete transparency and compliance.

5. Immediate satisfaction of regulatory requirements, Instead of relying on trust, digital custody allows any party to cryptographically verify that the digital assets truly exist in the custodial account. All communications over the Shareable assets custody are signed by the sending and receiving parties. These digital signatures are stored as a permanent record on the Network, enabling completely transparent regulatory interaction and corporate governance.

6. Extensive Support; Given the nature of the service and system, Shareable assets digital custody would be able to support any digital asset in any country with ease, efficiency and at low cost.

03. S.A’s Architecture


At Shareable assets, our platform gives users both secure and easy access to digital assets. We have built a trusted execution environment for digital asset transactions.


Key Components of S.A’s Architecture


S.A Management: SA Management presents an end-to-end asset management dashboard, allowing to manage investors, fundraisings, assets and to load all the required transaction history of investments.


Investor Management: As part of customer relation management, SA allows to track all the customer’s activities from bank transactions to investments and provides audit trails for compliance.


Key Management: In case of key loss, SA system provides several options to recover their assets as part of asset custody service. Users can recover their private key by using recovery mnemonic phrases or delegate SA service to migrate their assets under secure and strict recovery procedure.


External Interface: External Interface is an enterprise application integration component to integrate a set of enterprise computer applications such as KYC / AML screening, Government ID verification and other third party services.


Blockchain Middleware: Blockchain Middleware makes SA architecture to business oriented system by abstraction of blockchain layer but also allows system flexible to adopt heterogeneous blockchain. In addition to blockchain abstraction, it monitors and logs blockchain transactions, managing all the smart contracts.


User Verification & KYC/AML

Simplify KYC and AML process for onboarding and on-going business relationships significantly reduce the cost of compliance.

Integration with MyInfo enhances users’ control on data sharing, brings greater users’ convenience with pre-filled information and waives relevant documents for KYC verifications.

One registry for clients using multiple products and services, hence remove laborious duplications in KYC verifications and AML screenings.

Mitigate impersonation frauds with the latest technology, such as liveness test, optical character recognition.

Implemented security such as multi-factor authentication, data encryption, public key infrastructure standard protects clients’ data.

Meet the industry standards needed to comply to AML regulations, Privacy and Data Protection laws.


Wallet Creation/Management

Generate user’s own unique Ethereum wallet private key and receive a public address.

Recover the user's private key with unique mnemonic phrases that are only available to the owner of the wallet, not save in the centralized database.

Migrate on behalf of the user, in case of private key loss with strict measure.


Digital Asset Creation/Management

Security Token (Issuance Process):

Asset Owners can raise capital in a more efficient and transparent way using the Platform by selecting any of the pre-set options on the Platform (e.g. either equity-based or debt-based). Steps will be taken to ascertain the credibility of all Asset Owners seeking to list their projects. Once the Asset Owners have been approved, the asset verification and assessment process will be carried out. Asset Owners will need to submit information about the underlying asset. The certificate of titles and evidence of ownership will need to be submitted to the Platform for verification. Third party government approved valuers will review and assess the asset and the deal before the project can be listed on the Platform. Depending on the relevant jurisdiction of the asset, third party valuers from different jurisdictions may be enlisted to provide such services. On agreeing to the final asset value and meeting all of the requisite requirements and complying with the necessary regulations, Asset Owners are then able to commence the tokenization process.


First the relevant documentation will be submitted to third party custodians and/or escrow agents for safekeeping. Then the asset owner will need to connect their existing blockchain wallet( or create a new one, if they don’t have one). The asset owner provides any additional information required about the asset such as project symbol, token price etc., and submits for project listing. A smart contract is created based on the project rules and the project is listed on the platform. On deploying the smart contract The security tokens are generated and issued in the asset owner wallet.


Internal Global Currency System:

For the ease of transfer and real-time fulfilment of transfers, the platform maintains an internal value chain/ token system pegged to the currency. Every time an investor transfers money an equivalent amount of currency tokens are created and transactions are reflected in the user account. This allows the investors and the platform to track the real-time account balances. Now once an investor chooses to invest in a project and places a purchase the smart contract will immediately execute the bid by transferring the token to the investor and the currency pegged tokens to the asset owner simultaneously. When the asset owner decides to withdraw the funds, the asset owner transfers the tokens to the platform. The platform then instructs the custodian to make the fiat transfer and burns the currency backed tokens. This allows for better real time transactions and easy bookkeeping.


Ongoing Monitoring of Digital Wallet and Compliance

SA maintains a register of verified users on a whitelist. Every time a successfully KYC verified user wallet is created, a record is created in the whitelist. Investors who are deemed risky are flagged for enhanced due diligence. When the users initiate a transaction the smart contract first verifies if the to and from address exist in the whitelist. If not the transactions are terminated by the smart contract. If these addresses are related to a flagged user additional checks and validations are performed. Otherwise the transaction is processed and the tokens are transferred.

This whitelist register is real time and can constantly be shared across multiple platforms and financial institutions freely while maintaining the authenticity and protecting the identity of the end user. This can facilitate a real-time transaction and verification in real time.


04. Security Token Ecosystem and Its Core Component, Digital Asset Custody


Digital Asset Custody can be a hub to connect Security Token Industry with Conventional Financial Industry



The current SA architecture constitutes two main components i.e., Security token issuance platform (Licensed under MAS) and digital custody solution. While our security token issuance platform has the potential to expand to other forms of security issuance of startup, equities, gold, commodities and bonds, our digital custody solution can unlock other opportunities.


As custodian services are common intermediaries to most financial transactions today, Digital custody is the core of present and future digital asset transactions. Further, digital custody would be a key requirement for security token exchanges. [7] As other financial institutions, asset management firms and Institutional investors aim to move towards a digital first solution, digital custody will facilitate the smooth transition and continued operations of these financial institutions. Digital custodians will continue to facilitate low cost, automated or semi automated transactions in real time. In addition, an efficient, instantaneous and borderless digital custody solution could be a founding block of trusted cross border digital asset transactions and of digital banks.

05. Potential Collaboration Opportunities


1. Joint Venture

Both Shareable Assets (SA) and partner can collaborate to build a digital custodian solution to meet the global financial and digital asset market needs. Shareable assets will bring in the product expertise and; framework and models to support the global landscape. Partner will support their vast knowledge and understanding of real time global financial requirements and support with initial capital requirements to make the solution market ready.


2. White Labelled Solution

Given partner has specific needs and requirements in the digital asset landscape solely for the use of this solution within partner group and services, Shareable assets can assist in providing a white labelled solution depending on the requirements.


Will you be interested in a collaboration with Shareable Assets? Please contact us at support@shareableasset.com for more information on this.



Source
[1] McKinsey & Company, Global Banking Annual Review 2019: The last pit stop? Time for late-cycle moves, p. 10.
[2] McKinsey & Company, Global Banking Annual Review 2019: The last pit stop? Time for late-cycle moves, p. 4, p.33.
[3] Bain & Company, As Retail Banks Leak Value, Here's How They Can Stop It
[4] Deloitte, The evolution of a core financial service - Custodian & Depositary Banks, p. 26.
[5] Deloitte, The evolution of a core financial service - Custodian & Depositary Banks, p. 43.
[6] PWC, Financial Services Technology 2020 and Beyond: Embracing disruption, p. 13.
[7] McKinsey & Company, A calm surface belies transformation in securities services, p. 3.

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