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Rob Verillo

LiCuido – Welcome to a world of new opportunity

Updated: Sep 5, 2023

Digital money will certainly feature as a future medium of exchange, and many companies will want to be seen as “next-gen” and forward looking- as well as reaping the rewards from the many benefits that digitisation can bring … and that poses many problems for how money has traditionally moved around the global system.


How to adopt and benefit from DLT (Distributed Ledger Technology) whilst not alienating existing market function and infrastructure?

The existing financial system, with all its rules, regulations, inherent bureaucracy and safeguards has evolved, and constantly evolves, over decades. One could argue that the system could have crashed and failed in 2007/09 during GFC (Global Financial Crisis), and almost did, but the fact remains that it did not fall over – despite the unprecedented and unforeseen pressure put on the system, it did not break. Since the GFC, regulation and the intolerance toward its non-compliance has been well documented. Central Banks, Governments, Regulators, and all purveyors of “mainstream” are unlikely to allow decentralisation of financial transactions to occur on their watch without proper controls. Regulators have a duty of care to the public, with stated aims of protecting investors and preventing disorderly markets which is difficult when you have no oversight or control over a decentralised blockchain.

Tokenisation Digital Tokens offer many of the same advantages as cryptocurrencies, but as their name suggests, they are “linked” to an underlying book of assets – this can be anything from FIAT (Government issued) currency or bonds, commodities or pegged to a cryptocurrency (or other) basket of securities. They can be defined as a digital representation of value or rights which mirrors a specific underlying asset, or pool/basket of assets. Importantly, token offerings combine the best of blockchain-based digital assets with the peace of mind gained from investing in a regulated vehicle. Digital Tokens are one area where embedded supervision works in practice, whether for purposes of market integrity, customer and investor protection, or prudential supervision. Direct automated provision of data as a licensing or registration requirement for digital payment systems and markets, provide an important opportunity to better use technology to achieve regulatory and supervisory objectives as well as reduce costs for market participants. While many Blockchain companies have not necessarily focused on this joining of technology, regulation and supervision, this could well be the path to universal acceptance and widespread use for financial markets.


Embedded supervision in a digital token, using smart-contract technology, is a framework that provides for compliance to be automatically monitored by reading the ledger of a DLT-based market. These ledgers contain information which is relevant to supervisory bodies and can provide automated, verifiable and directly relevant data to them. Tokens, if designed correctly, could adopt this approach at outset by enabling supervisors’ direct oversight of transactions and users of a tokenised “asset” with real-world relevance – think of a tokenised pool of government debt as an example. The digitisation process could include all the benefits of blockchain technology including immediacy (settlement), real-time exposures for risk, oversight and streamlining of data and reporting to supervisory bodies, digital KYC/AML policies, easy adoption for large or small businesses and individuals, low transaction costs, security and robustness. It will be imperative for Tokens to include this embedded supervision as this will validate and verify the full asset-backing of the digital token, whilst being “underpinned” by supervising institutions and legal systems. This “authentication” will go some way to providing potential investors with the comfort they need to help propagate the product. The ability to “tokenise” assets via DLT has the potential to revolutionise many financial assets. A smart-contract has ability to embed guarantees and can ensure that underlying assets comply with strict investment standards and criteria. For example, environmentally friendly, energy efficient, socially responsible benchmarks and then couple them with governance, regulation, increased liquidity through immediacy and strict KYC/AML pre-conditions.


Where can CBDC (Central Bank Digital Coins) begin to make sense

CBDC’s have potential, 80% of the world’s central banks (according to BIS Bank for International settlements) are investigating CBDC as an electronic form of central bank money. Of these, 50% have progressed from a conceptual stage to pilot projects. CBDCs would enjoy the backing of the central bank and would not be subject to the same conflicts of interest around the asset backing and stabilisation mechanism. Their value could be fixed by design to the currency they reference thus eliminating fluctuations in value. There are clear benefits to digitising your currency. Currently there are two streams of thought on whether you would do this on a wholesale (interbank payments/digital settlement) or retail (general-digital cash open to all) basis.

  • Clear benefits of a wholly digital currency include centralisation of supervision, huge curtailment of black market/criminal activity, efficiency, diversity and safety of payments, transparency, cross-border efficiency, tax collection, etc

  • Consideration must be given to the possible disintermediation of financial institutions, concentration of risk and excessive government control of credit. CBDC transparency might work for the Governments and Central Banks concerned, but there is very real disquiet as to what this might mean for individual freedom.

Most Banks are developing private blockchains to improve operations and upgrade security. Financial institutions are investing in digitised solutions and structures, including crypto-currency and DLT. Integration of digital assets in particular, stablecoins and tokenised assets-into this infrastructure will almost certainly be enabled very soon. Daily, announcements are made from financial institutions declaring progress. Central Banks and governments are examining ways to integrate this technology by way of CBDC or other applications into their processes. This digitisation process, whether as a medium of exchange or just the technology that delivers it, has the ability to be revolutionary – the landscape as we know it is changing and this progress and change is inevitable.Current incumbents risk losing control to revolutionary technology that has the power to disenfranchise whole industries and eco-systems. As digital currencies and their associated technology mature, in their various forms, the current status-quo and modus-operandi will either develop and embrace, OR risk becoming redundant, and superceeded.


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LiCuido



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