Cosmos Cash: A regulatory compliant finance protocol based on the Cosmos SDK

The value of assets secured on Distributed Ledger Technology (DLT) increases at ever upward rates, particularly over recent months. However, pervasiveness in the general economy is still low for a number of reasons that include:

• Understanding the new technology
• Financial literacy in the general public
• Trust and public perception

Regular readers of the Tendermint blog will doubtless believe that DLT is indeed a tool of public good that can change finance for the better for millions of people. However, to make that transition, appropriate regulation is essential, especially as the technology matures.

To date, jurisdictions are adopting three contrasting approaches toward crypto-assets and crypto-related services, namely:

• Proactive approach, adopting regulations addressed to crypto-assets and related services;
• Neutral approach, seeking to promote case-by-case assessments on the relevant circumstances and eventually attempting to re-conduct such assets and activities to existing legislation and regulations (mostly within the payment and investment services spheres);
• Restrictive approach, seeking to introduce outright bans to crypto-assets and related activities.

With 450 million people and 22% of the global economy, the European Union, along with the US and China, is one of the most significant jurisdictions. To date, it has taken the neutral approach but has adopted a new strategy on digital finance for the EU financial sector. One of the most critical parts of this strategy is new legislation called “Regulation of The European Parliament And of The Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937”, more commonly known as “MiCA”.

What is Cosmos Cash?

Cosmos Cash, developed by Tendermint Engineering and funded by Interchain Foundation, is a research project into a Cosmos SDK based, regulatory compliant finance protocol that can host tokens backed by a fiat currency (or a digital representation thereof).

Tendermint, together with Amagis Capital and Martin Worner (Confio), have been looking at MiCA with a particular lens on what it means for tokens as a method of payment, particularly e-money tokens. The result of this research constitutes the foundation of the first proof-of-concept of Cosmos Cash that we have built on top of Cosmos SDK and is secured using a Proof Of Authority consensus algorithm. The goal of the application is to re-define how an electronic money institution works by leveraging both the Cosmos SDK and Tendermint Consensus Algorithm.

You may want to read the report of the research and try out the proof-of-concept application. Any feedback would be greatly appreciated!

Is Cosmos Cash a Stablecoin?

No, it is not.

Under MiCA regulations — and based on our legal partners’ considerations — a Cosmos Cash token would qualify as an E-Money token since it holds the following properties:

• It is a crypto asset.
• It is an electronic surrogate for coins and banknotes and is used for making payments.
• It maintains a stable value by referring to the value of one fiat currency (1:1 pegging).

So is Tendermint launching an E-Money token then?

No, we are not.

We are engineers. The aim of this project is to develop tools for licensed issuers to easily issue their own e-money tokens. The ultimate aim: bring the benefits of Cosmos SDK-powered technology to the general public.

What’s Next?

The immediate next steps are the technical implementation of the protocol.
By 2022, the time when the MiCA framework is expected to come into force, the Cosmos Cash Proof-of-Concept will be in a Minimum Viable Product (MVP) stage that would be already adjusted to reflect the legislation set forth by the MiCA framework.

The project’s ultimate goal is to bring true liquidity to the Cosmos ecosystem through a reliable, regulatory-compliant protocol that guarantees the same guarantees as the traditional banking sector.