The Case for AllianceBlock

Bridging Traditional and Decentralised Finance.

All of the Money.

It’s difficult to accurately quantify the size of the global capital market, but whichever way you look at it, it’s big.

And if you factor in the notional value of derivatives then the numbers become truly mind-boggling, with some estimates stretching over a quadrillion dollars (that’s 10¹⁵ or 1,000,000,000,000,000). According to the Bank for International Settlements the real figure is closer to half that at $558.5 Trillion.

Even discounting the hyper-inflated world of derivatives, tens of trillions of dollars of value are held in public banks, private banks, equities markets, funds, and bonds. Collectively, these regulated entities and products comprise the bulk of the traditional finance (TradFi) sector.

Finance has historically been controlled by an opaque group, the faceless few, from the Medicis to the modern day pseudo-government bodies like the US Federal Reserve.

The world over, governments and lawmakers continue to secure the position of incumbents by reducing competition with high barriers to entry, imposing restrictive regulations, delivering protective bailouts, and by acting as a lender of last resort.

These efforts attempt to safeguard the public, and while many regulations are incredibly important for this very reason, a strong argument exists against overly onerous regulations and their deleterious impact on financial innovation and competition.

The regulated TradFi sector is where the real money and power lies. Trillions upon trillions of dollars are protected by complicated regulations and even more complicated layers of institutional control.

It is this archaic construct that decentralised finance (DeFi) seeks to disrupt.

DeFi to the Rescue.

The scrappy and highly innovative field of DeFi is led by some of the brightest young minds around. This new guard threatens to shift power and money away from the hands of those faceless few and democratise finance by decentralizing the entire industry.

No need for banks with slow and expensive remittances, no need for overpriced insurance premiums, no need for low-yield fixed income assets, no need for centralised exchanges, no need for bureaucratic and inefficient third parties obfuscating a process that could be simplified with a distributed ledger and some innovative thinking.

Is this a realistic ambition? Well, let’s look at the numbers again.

How Big is Big?

After a little more than a decade since Satoshi’s legendary white paper, the entire blockchain industry has grown to an impressive $350 billion in value. Bitcoin is far and away the leader at $200 billion, with Ethereum and approximately 7000 other coins and tokens comprising the other $150 billion.

In just the past several months the DeFi space has exploded from around $550 million in Total Value Locked (TVL) in March, to around $10 billion today.

Driving this exponential growth are yields that dwarf the near zero rates on offer in the legacy TradFi system. Impressive no doubt, even if you do adjust for the price rallies of the underlying assets and accept a more modest figure of around $4 billion.

But all those billions don’t look as shiny when stacked alongside the trillions in TradFi. If blockchain and DeFi are really going to dethrone TradFi, it needs a few more zeros in the balance sheet, and that is only going to happen if significant funds are diverted from TradFi to DeFi.

So what’s stopping this from happening? In short, three things:

1. Security
2. User Experience
3. Compliance

Security.

Security is an obvious one. While blockchain can trace its roots back to W. Scott Stornetta and Stuart Haber’s seminal work in the mid 90s, the first real use case for blockchain, Bitcoin, is little more than 12 years old. This is nothing compared to a centralised finance system that goes back millenia.

Blockchain, and particularly DeFi, is an industry taking its first wobbly steps and is rife with teething problems, including hacks and scams, questionable code, 51% attacks, incredible highs and just as jaw-dropping lows.

The rapid pace of innovation, with new concept and code iterations on an almost daily basis, leaves itself just as vulnerable to criticism and concerns for safety and security as it does to golf claps from the admiring gallery.

‘Magic Internet Money’ has a way to go before it can prove itself safe for mainstream consumption.

User Experience.

Similarly, the user experience leaves a lot to be desired. 65 digit private keys, public keys, MEW, Metamask, Uniswap, hot / cold wallets, block times, confirmations… the whole thing becomes tough to navigate for even the most tech savvy. Try introducing some of these concepts to your parents, let alone ask them to actually make a transaction, and it becomes patently clear that the crypto user experience is not a pleasant or simple one.

Compliance.

Most importantly, is the issue of regulatory compliance. If the rewards are significant enough, regulated financial entities will battle through the complexities of the user experience and build in risk mitigation strategies to safeguard their security.

But what they wont do is break the law.

Over recent years, international regulators have been scrambling to keep up with crypto — the SEC & OCC in the US, FCA in the UK, ASIC in Australia, BaFin in Germany, and almost every regulatory body around the world has made inroads, however, there are still many restrictions and grey areas preventing TradFi from diving into the crypto pool.

In the absence of clear and unequivocal regulations, traditional finance entities prefer to adopt a risk averse ‘wait and see’ approach to ensure they do not run afoul of the law and potentially expose themselves to massive fines, loss of licenses, reputation damage, and even jail.

And herein the problem lies:

Potentially trillions of dollars are waiting to be deployed into digital assets if not for the regulatory obstacles blocking the way.

Enter AllianceBlock.

To help overcome this problem, AllianceBlock is building a bridge between traditional and decentralized finance with a next generation capital market infrastructure. It is essentially making digital assets bankable and all of crypto accessible to regulated financial entities such as global banks, private banks, wealth managers, and funds.

AllianceBlock achieves this through the creation of a decentralized, blockchain-agnostic layer 2 protocol that automates the process of converting any digital asset, or crypto product, into a bankable asset with an internationally recognized Individual Securities Identification Number (ISIN).

An ISIN (or CUSIP in the US) is used to track holdings of institutional investors in a format that is consistent across markets worldwide and can be assigned to most forms of securities including equity shares, debt instruments, derivatives, commodities and currencies.

By assigning an ISIN to digital and/or crypto assets and wrapping them in a note or certificate, regulated institutions and their clients will be able to simply, safely and legally trade any crypto product.

Let that sink in for a moment…

Compliant derivative products can quickly and easily be created out of almost any utility token, security token, cryptocurrency, synthetic, crypto portfolio, or DeFi solution.

Structured crypto products, including Credit Linked Notes (CLNs), trackers / synthetics, derivatives, discretionary portfolios, static investments, and structured loans can now be created in a compliant manner.

All digital assets will be investable, bankable, fungible, and accessible to the entire regulated finance industry.

This is a game changer for DeFi and has the potential to facilitate enormous inflows of capital into this nascent industry.

Time to turn those ‘B’s into ‘T’s.

More than a Protocol. An Ecosystem.

Beyond the obvious benefits of making all of crypto bankable and accessible to TradFi, AllianceBlock has plans to go further by building a decentralised ecosystem that will lay the framework for the future of investment banking.

AllianceBlock seeks to vastly improve process efficiencies, drive material cost reductions, save significant time, and unlock innovative new structured products as TradFi expands into the digital asset market.

These fundamental process enhancements will help drive a paradigm shift in TradFi operations and apply decentralisation to everything from automated back office document production to a Proof of Authority consensus model that shifts power away from single entities while still keeping them involved.

AllianceBlock is creating an ecosystem of stakeholders across the full spectrum of traditional and decentralised finance with a vision to create a fully decentralised and globally compliant capital market that will disrupt:

• Trade Facilitation and Execution
• Clearing, Custody and Settlement
• Securities Services
• Data and Information Management
• Technology Infrastructure
• Regulation & Compliance

Industry stakeholders and service providers in each of the above categories can become a ‘node’ in the AllianceBlock ecosystem and propose their services while being compliant with multi-jurisdictional regulations and also seamlessly plugging into legacy TradFi systems.

These stakeholders can include every type of entity including private banks, insurance companies, regulators, cloud storage providers, wealth managers, law firms, Identity / KYC verifiers, decentralised oracles, crypto exchanges, P2P lenders, and even your favourite yield-farmed vegetable.

This new generation of capital market infrastructure will simultaneously reduce operating costs for participating service providers while unlocking new markets and revenue streams. This will drive stakeholder profitability, reduced fees, and ultimately enhanced client outcomes. A win-win-win.

Layer upon Layer.

These are bold claims, so you would be within your rights to ask “How does AllianceBlock propose to do all of this?”

For a deeper understanding of how this all works it would be best to dive into the 81-page white paper. For the sake of brevity, here is a simple top line.

While being a layer 2 blockchain agnostic protocol that sits on top of and unites most major layer 1 blockchains through Quant’s Overledger, the AllianceBlock Protocol features three layers within itself:

• Cross Border Regulatory Compliance

Dynamic smart contract logic that integrates with existing legal structures and provides regulatory oversight, legal recourse, and upgradeability.

• Data Governance and Privacy

All data collected, processed, and disseminated is compliant with GDPR and MiFID II to simultaneously ensure user privacy and transparency of transactions.

• Transactions and Workflow

Fully automated back-office processing, document production (inc. automated prospecti), regulatory submissions, and transactions.

Again in just a little more detail…

Cross Border Regulatory Compliance.

In simple terms the Cross Border Regulatory Compliance layer writes all of the different international jurisdictions’ regulations into machine logic within the smart contract. This is dynamic, which means that as each country changes its rules, the smart contract code will reflect this change and ensure that all operations within the network are compliant at all times. These changes are confirmed by the aforementioned Proof of Authority nodes, in this case participating centralised and decentralised oracles.

No matter where you are, where your legal entity is based, and what kind of crypto transaction is being undertaken, it will be automatically pre-authorised to ensure 100% compliance.

Say goodbye to time consuming and expensive lawyers.

Data Governance and Privacy.

Given the sensitivity of user and transactional data in compliant settings, this layer ensures that all data is handled in accordance with applicable global privacy laws, including GDPR and MiFID II. Role Based Access Controls (RBAC) and zero knowledge proofs ensure that users retain full control over their own data at all times and can approve or decline access to the various ecosystem participants. There are multiple benefits from this model, not the least of which is one-time KYC that can provide single sign on pre-approval for users engaging with any ecosystem participant.

Transactions and Workflow.

Much of the inefficiencies of the current TradFi sector relate to the labor intensive nature of many processes. From opening accounts and preparing a prospectus to submitting applications for regulatory approval, the whole process can be quite tedious. The Transaction and Workflow layer seeks to automate many of these processes and unlock vastly improved workflow patterns. This layer will even provide for the automation of prospectus production by capturing key information and producing fully compliant documents in a fraction of the time and cost of the current process.

The Token.

At the heart of the AllianceBlock Ecosystem and Protocol is the ALBT token.

The ALBT token serves as a multi-purpose tool to be utilized as the primary medium of exchange, means of reward for ecosystem participants, and network fee payment mechanism. In addition the ALBT token will act as the currency reserve of the ecosystem reserve pool and as a governance token for voting and power delegation.

By design, the ALBT token fulfils a number of critical functions that ensure ecosystem growth is correlated with token demand. Token utility and scarcity is further achieved via a number of deflationary features including node staking, liquidity pooling, quarterly revenue-based token burns, and quarterly activity-based token burns.

Based on forecast revenue and system usage it is estimated that approximately 20% the total ALBT token supply will be burned over the next 5 years. Furthermore, it is anticipated that 15% of the total token supply will forever remain within the node staking intrasystem and never enter general circulation.

And in Closing.

There is no doubt that AllianceBlock is an ambitious project seeking to make a material difference to TradFi and DeFi. By building a compliant bridge between these two sectors, AllianceBlock has the potential to facilitate significant capital flows into DeFi and provide an enormous boost to blockchain as a whole.

AllianceBlock is led by a qualified and committed team with an extensive network in both TradFi and DeFi. The building blocks are rapidly being placed into position and the necessary steps are being taken to realise this grand vision.

It is an exciting road ahead as AllianceBlock sets out to build the world’s first globally compliant decentralised capital market.

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Luke Lombe is a Strategic Advisor for AllianceBlock and holds ALBT tokens.