Timing is everything. In the dog days of summer, R3 released a report by the Digital Asset Working Group, more affectionately known as the DAWG. This followed the hotly anticipated release of the Corda Token SDK.
Now, it turns out that dog days have nothing to do with dogs or digital assets; dog days are the time of year when Sirius rises before the sun, foreshadowing heat and disaster(!).¹ We tried to use the heat and help the industry avoid disaster with an active and productive working group on digital assets and the market requirements for their adoption in real institutional scale.²
Could the same enterprise-ready focus that lead to the design and capabilities of Corda also extend to the ‘wild west’ of the token world? In others words: we may be on the cusp of the emergence of properly regulated (and useful!) Corda-powered tokens that are fit for the enterprise user.
We argued that enterprise tokens will require a high level of performance, privacy, and regulatory compliance. But what else is required for real adoption? We took a page out of the R3 book and convened the most important players in the space in a digital asset working group.
The DAWG included about 50 firms and over 103 individual participants from the buy-side, sell-side, and everyone in between.
We set up the DAWG to understand how institutional investors — and everyone in the capital markets value chain — is thinking about digital assets. We wanted to know what the market requires in order to adopt digital assets with real volume. Of course, we also wanted to help the participants prioritize the most important services in the new digital asset ecosystem.
We were lucky to have the inimitable Colin Platt, who brought his trademark objectivity to the affair. He has spent a lot of time working on decentralized finance and the re-design of capital markets value chains using DLT. Check out his excellent work on all of these subjects here.
The group looked at the implication of two major improvements that digital assets bring to the capital markets value chain: smart contracts and private, synchonized, peer to peer interaction. The stated purposes of the working group were to:
- Understand the impact of digital assets in the capital markets value chain.
- Understand how existing services throughout the value chain will be provided in a tokenized market.
- Understand how new services in the digital asset value chain will be provided.
- Understand the market requirements for digital assets to be adopted and used in real volumes by institutions — technical, business, and regulatory.
We started with data. We surveyed the participants to understand their thinking on the impact of digital assets (both positive and negative), as well as the timeline for adoption.
After we had been in the detail for a few months, we ran a second survey to understand the specific issues and opportunities posed by digital assets. This included the opportunity to provide direct custody, see the provenance of an asset, put more (and more certain) data into the asset itself, and settle with atomic DvP transactions.
So, what is required for adoption?
- The first step in using and adopting innovation is knowing how to think about the opportunity. We proposed and discussed a value chain breakdown that is now getting a lot of validation in the market. We broke the digital asset value chain into the most important steps: Issuance, Registration, Exchange, Settlement, Management.
- Next, we need a common understanding of digital assets and how they are represented as contracts or states. Before you roll your eyes at the suggestion of yet another taxonomy of digital assets, know that we proposed, discussed, and used the excellent token taxonomies already in the market. This includes the GDF Token Taxonomy, which was more or less the baseline, as well as the technology-agnostic Token Taxonomy Initiative.
- Additionally, we need an understanding of the regulatory treatment of digital assets. This is where the firepower of the legal participants came to bear. Special thanks to Stuart Davis at Latham & Watkins, who led the Legal & Reg group. The breakdown of key regulatory considerations for tokenized assets in the EU and UK can be found on page 19 of the report. The R3 Legal Center of Excellence is hosting more collaboration on topics like this all the time.
- Finally, we need an understanding of the governance and economics of digital asset networks. Digital asset networks are new structures with new opportunities and challenges for governance and incentives. Mark Radcliffe led the group through a number of considerations when setting up digital asset systems.
We ran this with a focus on the US, UK, and Europe, but this is a global market! So, we also ran a DAWG Day in Singapore in June to share findings and get input from the most important market participants in APAC. We gave the team a challenge to fill the room (didn’t say what size room, mind you), and we had over 300 sign up! Check out the recap from the our favorite hype man.⁴
Are the DAWG days over? No! The DAWG will continue with quarterly updates and meetings to review developments in the digital asset space and tee up collaboration between participants. Please reach out if you’re interested in joining us, and get started with the newly released Corda Token SDK.