New Tools for a New Asset Class

January 31, 2023
Silhouette of person with computer code projected on them
Membrane Team

Cryptocurrencies are here to stay, in one form or another. Especially in times of strife and uncertainty, we need tools for insight and risk evaluation. Traditional assets have had decades to build out a financial framework, working through both technical and regulatory challenges. New financial assets that are digitally native need new financial structures to be safely integrated into the existing financial ecosystem.

Crypto presents a unique challenge where communication between the protocol itself can carry an inherent financial value. Finality and pseudo anonymity compound challenges when trying to stay in line with regulation that was made for a different financial ecosystem. Universal ability to send and receive funds can taint networks that offer potential yields for tradfi, but regulation prevents them from engaging.

KYC challenges faced by large institutions are normally forgotten about in the development of defi protocols. These defi protocols are being built for crypto natives, while large institutional engagement is slower, despite interest. Back office systems can’t be in compliance since they rely on a fundamentally different basis, one where you definitively know who your counterparty is at any given time. You have a prior existing banking relationship with your counterparty, and you know the KYC status of your counterparty.

None of this is present natively with cryptocurrency frameworks. New tools, not protocols, need to be built from the ground up to handle the transition of traditional risk systems in tradfi to handle cryptocurrency transactions without losing the benefits of why blockchains were created.

Wallet addresses passed via traditional messaging layers, whether that is Telegram or Bloomberg, are at significant risk of transcription error. In tradfi, this wouldn’t be a very significant event; frustrating perhaps, time consuming on correction, but a solvable issue with your counterparty. But in crypto, these transcription errors could cost tens of millions in unrecoverable funds.

Simply drop-copying trade details from a chat is an inefficient way to close a trade and API access to exchanges creates a reliance on these exchanges, something we have seen to be higher risk than expected. Traditional booking systems, spreadsheets and data providers are all built with traditional infrastructure needs in mind and are looking to append a cryptocurrency solution.

Membrane is built from the ground up as a digitally native settlement system to bridge tradfi and blockchain protocols, and something we know to be better than any current options available.

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