8 reasons CDRs are blockchain’s killer app
With the help of technology and experience from Goldman Sachs-backed Circle, Vitalik Buterin-backed Clearmatics, regulators and major global banks, CDRX is introducing a fundamental shift in global financial markets — starting with equities, followed by bonds and derivatives.
At CDRX we have integrated blockchain technology with a product born from more than 100 years of combined banking experience, spanning front, middle and back office, technology, risk, legal and regulatory expertise — the Crypto Depository Receipt (CDR).
As many investors and issuers have experienced, traditional financial markets are impeded by slow settlement times, high transaction/administrative costs, and costly manual errors.
“Crypto is no longer an idea looking for a purpose, CDRs now replace traditional equities, democratising both ownership and execution”
CDRs were designed specifically with the needs of both investor and issuer of all sizes and categories in mind. They combine traditional markets, the blockchain as a common decentralized registry, and smart tokens, to enable the vast majority of corporate actions to be executed directly against the CDR itself — rather than via a cumbersome and error prone, paper based approach. Add to the mix near zero-cost transactions and institutional grade near (or actual) real-time settlement, and we strongly believe there is no credible competition.
Put simply CDRs are the bridge between well-understood, well-governed, but transactionally expensive traditional markets, and transactionally cheap but highly laissez-faire crypto-markets, cherry-picking the best aspects of each to deliver blockchain’s killer app.
How do they work?
Underlying shares are first obtained from the corporate entity or market and placed with a custodian bank or trust. Custodians then issue CDRs in conjunction with CDRX on a blockchain in the form of tokens which contain immutable embedded functionality, including inbuilt mechanisms to ensure regulatory compliance and protect market integrity, the ability to pay dividends, vote and a range of other features geared toward both investor and issuer.
Each CDR is ‘securitised’ or legally backed one-for-one by a share or stock held by the custodian, and clients can deposit and withdraw these securitised assets via digital wallets.
CDRs are the natural precursor to full native issuance. Users of CDRs enjoy the best of both worlds; the regular benefits of conventional stock ownership and the solution to its inefficiencies. Our approach also extends beyond the tokenization of financial markets, offering a proprietary trading platform which provides a myriad of fast, institutional grade, low-cost asset services for both securitised and non-securitised products, largely lacking from other platforms in the same space.
Key Benefits: Crypto Depository Receipts
1. Low Transaction Costs
Execution and administrative fees combine to make transactions in traditional markets costly. The emergence of ‘free’ equity trading in traditional markets is a misnomer and comes with hidden costs — fees are extracted through lost interest on cash deposits, spreads, membership charges and other mechanisms. CDRX lowers all-in transaction costs by a significant margin (even for institutional investors) and can be traded at trivially low cost compared to traditional counterparts.
2. Seamless Dividend Payments
Dividend payments are just one of many examples of asset servicing/corporate actions which are significantly cheaper to administer and execute via CDRs. On-token functionality enables issuers to make dividend payments directly through the CDR, guaranteeing successful delivery, eliminating payment errors and saving millions of dollars in bank fees.
3. Streamlined Corporate Actions
A 2004 study by Oxera on behalf of the DTCC calculated that companies spend around $10bn a year on corporate actions. CDRs eliminate a large number of corporate actions (eg. share splits) and those remaining can be executed significantly more cheaply and easily using on-token functionality.
4. Embedded Voting
Voting can likewise be conducted via the CDR, allowing broad and easy participation from the entire shareholder base. This also aligns with the increasing adoption by listed companies of electronic AGMs, as noted in the “AGM Trends 2017” report published by EY in September 2017.
5. Rapid and Reliable Settlement
The implementation of blockchain consensus validation allows CDRX to achieve settlement speeds that greatly surpass those of traditional equity transactions. Change of ownership is currently recorded within 2–3 days in traditional markets compared with less than two hours using CDRs. Additionally once initiated, distributed ledger transactions cannot be interrupted, reducing a key aspect of settlement risk.
6. Fractional Ownership
CDRs open the market to a myriad of smaller investors, who would otherwise be unable to invest. Imagine a world in which a small investor with $20 can buy 0.00006667 of a Berkshire Hathaway CDR, and receive the same (proportional) benefits due to a traditional shareholder. Increased participation benefits both wealth distribution and stock prices.
7. Reduced Paperwork
While management of transactions and brokerage accounts have, to a large extent, moved online. Nevertheless, manual verification, input and archiving of transactions, reporting and management of client accounts, still require substantial paperwork and manual labour. CDRs remove unnecessary intermediaries and distributed ledger technology eliminates the need for large amounts of paperwork and manual effort.
8. Store of Value
The price of each CDR is the price of the underlying instrument. Regardless of market conditions, the owner of the CDR has full legal rights as the owner of the underlying instrument. These instruments are held by a custodian or trust on behalf of the CDR owner, and exist independently of CDRX.
What About the Regulations?
Regulation have been seen by some as a hindrance to the development of blockchain solutions within financial markets. At CDRX we instead see it as a benefit, particularly given the well documented examples of mismanagement and fraud in the crypto-space. Regulation provides a significant number of protections to investors and ensures the integrity of financial markets. Investors increasingly are looking for reassurance that a business and product is legitimate, and that a market is well supervised —we applaud that.
Our ongoing discussions with regulators have repeatedly found genuine interest in blockchain and a commitment to adoption, particularly where it aligns with a regulatory mandate, and CDRX is committed to working closely with regulators across all jurisdictions.
We are currently in build phase, working to incorporate additional features that contribute to an institutional grade solution, forming partnerships and agreements, and working closely with regulators. We plan to launch our 24/7 trading platform in early 2019, powered by a high-speed matching engine which will support the trading of a variety of tokens including CDRs, and other crypto-based assets. The exact release date of CDRs is subject to approval from regulators — watch this space!
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