10 Law Firms Walk Into A Room…(R3 Legal Center of Excellence + Thomson Reuters Practical Law collaboration)
The initial ten law firms of the R3 Legal Center of Excellence came together around a roundtable to discuss various points related to the structuring of a cash issuer utilizing R3’s blockchain software, “Corda.” Focusing on fully collateralized tokens, the discussion resulted in this Q&A with the law firms (published alongside Thomson Reuters Practical Law), which is meant to provide general context around business and legal considerations when structuring a cash issuer.
Blockchain and Atomic Settlement
One of the key benefits of blockchain technology is to facilitate the delivery of assets and payment in cash (or another asset) with mutual conditionality. Either all legs of the transaction succeed or none do. This is called “atomic settlement,” because the transaction cannot be broken down into smaller, independently executed transactions. The aim of atomic settlement is to ensure there is no gap in time when digital assets are exchanged by two or more parties. This helps facilitate settlement finality, and parties relying on this exchange can act immediately based on this settled trade. The inevitable consequence of atomic settlement is the increased speed and efficiency of trading digital assets, and is an important market innovation because it reduces settlement risk, time, and cost.
Types of Tokens
There are generally three types of tokens that can be used to effectuate the payment portion of atomic settlement. These are: (1) fully collateralized; (2) a token with liabilities against issuer but no collateral; and (3) non-collateralized (with no liability on behalf of the issuer).
The fully collateralized token is commonly referred to as a “stablecoin.” The most “stable” of the stable coin options is where the token is backed 1 to 1 by cash or other known assets in a collateral account. Similar to a depository receipt, the bearer of the stablecoin token has the legal right to claim ownership over the cash in the account.
A token which represents a liability against the issuer, but no specific collateral, is less “stable” than the “stablecoin.” The value of this token is related to the credit worthiness of the issuer. A change in the position of the issuer can have direct effects on the value of the token and, as a consequence, on the liquidity of the token and therefore its utility as a settlement asset.
A non-collateralized token is the least “stable” of the tokens. The non-collateralized token derives its value from the supply and demand of the market, and can see its value drastically shift based on a variety of factors.
Benefits of Corda
Corda allows developers to build top of stack applications that facilitate the transaction of any type of digital asset, and can support the development of any one of the three types of tokens. In addition, the smart contract capabilities of Corda, and inextricable link between contract code and legal prose, ensures that atomic settlement is effectuated in a legally compliant manner.
There is more work to be done — but hopefully, this Q&A can act as a solid foundation for future cash issuers.