You are at Risk and Blockchain is not necessarily your saviour.
Do you really own it simply because it is on the blockchain? Good question.
The blockchain is a very clever data transfer tool without historical comparison. The ability to transfer value, data and contracts terms immutably and trustlessly is without parallel. We should however be careful in assessing exactly what rights this confers upon us.
In previous articles, I have steered clear of the rights of ownership, largely because the BC community was enamored of its accomplishment … and understandably so. We were bombarded with “BTC is not fiat”; “the transfer is final”; “holding my funds is safe from the government”; “the blockchain constitutes undeniable ownership”. But does it really?
When we started Abacas, we began our analysis and deep-dive by asking a few questions about “assets” since our goal is a decentralized, universal asset exchange.
1. Is this the actual asset for sale [eg digital rights or bitcoin] or is this an asset represented by data [eg gold, art] — i.e. tangible or intangible?
2. Is this asset dematerialized [eg security] or tokenized on-chain?
3. Could this asset be converted to its own chain thereby no longer requiring “tokenization”?
4. Could this asset require custody to ensure its safekeeping?
5. Could this asset be safely stored by the owner or asset purveyor?
6. Could this token be cloned?
7. Who controls the issuance of the security or token?
8. Can a smart contract enhance the control and legal rights of the token holder?
By asking these few questions we derived some core conclusions about architecture, assets, security, safekeeping, management and ownership.
The Idea behind Ownership
The general idea of ownership can be summarized in nine points of law. This is an old English concept derived from the nine writs of ownership granted by the king. Clearly one has an advantage through possession but that in itself did not constitute title and ownership. Rather than merely list the principles, let’s briefly explore the logic of ownership. The rights of ownership encompasses the rights of possession, the rights of legal and/or contractual control, the rights of usage, the rights of economic benefit and the rights of conveyance
This is a very tricky area of law that has been bastardized over the years to undermine the rights of the owner. Let me illustrate — civil asset forfeiture laws bypass the courts — you lose your asset; bank bail-ins punish depositors — you lose your money; segregated accounts have been discovered to be anything but segregated — you lose your securities; rehypothecation (using assets as collateral) puts your assets at risk. I think you understand. The common theme is that your holdings have morphed into finely crafted IOUs (documents acknowledging debt). Read the fine print, people. You are at risk and blockchain is not necessarily your saviour.
Let’s return to the concept of an asset. Assets can be categorized as follows:
1. Tangible [real property] — gold, real estate, art
2. Intangible [digital property]
3. Dematerialized — most securities
4. Tokenized — tokenized assets, digital rights, utility/liquidity/security tokens
Our list above implies that assets can have management layers. For example, I may own a gold bar but I may prefer tokenized or digital gold such that some third party manages the safekeeping. I may “hold” portfolio securities [i.e. funds] in my account, but entrust the management and mix of the assets to some third party. Escrow will endure either via the blockchain or via a trusted third party. Does anyone really think that third party services will cease to exist simply because of the blockchain? Of course not.
When the Abacas team began examining the characteristics of assets, we concluded that our clients would either hold their assets or allow a third party to perform this function for them. No different than the world today. Aunt Martha does not know anything about investments so she must trust a third party. I do not wish to hold physical gold at my house so I must trust a third party in some capacity. The blockchain improves transparency but does not mitigate the risk of misappropriation, theft, fraudulent data or the creation of counterfeits or fakes.
What this meant to Abacas has been nuanced in our architecture. We needed to securely support:
1. physical assets transformed to tokenized assets;
2. dematerialized assets as tokens [and their imminent transition to blockchain];
3. utility & liquidity tokens
That represents three, arguably four types of asset transformation. Only one of these four has full and final value transfer — you guessed it, native cryptocurrency wallet to wallet directly. However, if you do not wish to manage your cryptocurrency portfolio and entrust control to some third party, you are in the “same boat” as everyone else on the planet.
The AbacasXchange has therefore managed the operational framework through separation of:
— control, audit & transparency
— checks & balances supported by the blockchain,
— the transaction history and the holdings in custody.
This means that the token holder has indisputable right of ownership to the asset which is held on his behalf. The custodian has no right to transfer assets without the express consent of the token holder. The Xchange has no right to transfer the tokenized assets or the assets without the express consent of the token holder. This represents fully decentralized control of the token by the token holder. Abacas does, however, use a safety deposit box to protect client keys.
In conjunction with operational controls, we concluded that asset ownership required a “supporting cast” to improve the legal and contractual rights of ownership. As such, we extended our focus to legal and fiduciary control of the assets. We have therefore created a corporate and legal structure to entrench the features of perfected or near-perfected ownership. By supporting the operational controls with legal and fiduciary controls, the AbacasXchange achieves near-perfected ownership.
What this means is that the AbacasXchange token holder has full rights of ownership regardless of the location of the asset. This is not simply a function of the system architecture. It is also a function of the legal structure and the legal precedents that govern real property. It is a function of transparency — system audit, process audit, and third party validation. It is a function of exchange rules and regulation. Our goal is to remove any third party from having dominion or undue infuence over the assets.
Using our “Fulfilled by Abacas” product, assets and tokenized assets are protected legally and operationally. Tokenized assets are controlled exclusively by the token holder. Assets are managed by a fiduciary. The Xchange is the matching engine and has no conflict of interest. No actor exercises exclusive control over the assets or tokenized assets.