Multiple points of friction between cryptocurrencies and the legacy financial system are limiting their practical use and integration with conventional markets and regulation. Although regulatory oversight of the young industry is gaining traction, several hurdles remain that are hindering the transition towards a more open financial system.
Regulatory barriers, outdated IT infrastructure, and the complex system dependency of the financial system largely preclude institutions from interacting with cryptocurrencies or offering financial services that involve digital assets. In an effort to circumvent such barriers to connecting digital assets to legacy finance, a growing movement towards open finance via open protocols is on the rise.
Credit instruments on platforms like MakerDAO and Dharma provide market-specific platforms for broader access to credit using digital assets on blockchains, but they do not address the missing bridge between financial institutions, markets, and services. For a comprehensive open financial environment to develop, the infrastructure that bridges digital assets with existing financial tools and entities – such as banks – is required.
Precluding banks and existing third-party financial providers from the trend towards open finance will only serve to create more friction as digital assets look to become ingratiated with the financial world. Mt Pelerin addresses this problem head-on by building an inclusive and modular open-source framework for third-party financial entities, consumers, and tokenized assets to foment within the confines of an on-chain bank in Geneva, Switzerland.
The entire balance sheet of the bank will be on-chain, and the Mt Pelerin team is targeting a model where legacy banking system processes can be assimilated into a marketplace of blockchain-based digital assets and financial service providers.
Lack of Interoperability In the Banking System
The growth of digital tokens running on blockchains has compelling potential to redefine the interoperability of the traditional IT infrastructure used in banking. Historically, the lack of standardization across banking IT systems has led to a convoluted model of proprietary systems that have failed to adequately evolve with the digital era.
Token standards on Ethereum – like ERC-20 – present an opportunity for projects to capitalize on a much more flexible and efficient vehicle for integrated marketplaces. However, the high costs of banks transitioning to blockchain-based frameworks that are open and decentralized are extremely costly and unlikely to happen on their own volition. Further, many of the open protocol solutions available today seek to bypass traditional structures instead of bridging the gap between traditional financial services and the capabilities of digital assets.
Mt Pelerin aspires to build the ‘plug and regulate’ architecture where institutions can provide services on top of a platform supporting Ethereum and other Solidity-based blockchains. Standardized smart contracts would offer viable means to launch and host regulatory-compliant digital assets such as tokenized equity and other security tokens, and the ERC-20 token standard would provide a layer for enabling the tokenization of any asset or liability. Such assets could be traded in multiple marketplaces with significantly reduced friction, costs, and better liquidity.
Currencies and bonds could be reflected with tokens and immediately available for trading on marketplaces. Similar interoperability between digital assets is already possible with tokens such as Wrapped Bitcoin on Ethereum that represent Bitcoin as an ERC-20 token. However, Mt Pelerin is looking to expand this functionality to connect legacy assets with blockchains rather than strictly limiting it to cross-blockchain interoperability.
Since assets would exist on Ethereum, full transparency of trades, deposits, and regulatory templates would reduce the significant overhead costs associated with administrative processes and complex accounting. As a Swiss-based bank, Mt Pelerin would also be able to offer the necessary privacy and connection to SIX and the Swiss Interbank Clearing system that open protocols circumventing traditional financial structures cannot access.
Ultimately, it would create a correspondent bank for the crypto world. In other words, a gateway that any other bank would use to interact with cryptocurrencies, just as they do today with the correspondent bank of each fiat currency.
Building an Open On-chain Banking System
The core design of Mt Pelerin is to systematize the tokenization of any asset or liability and make them highly liquid trading vehicles. The platform is not just an IT solution either, but rather an ecosystem of marketplaces for credit services, deposits/savings, currency spot exchanges, SME products, and more.
The modular design of the platform consists of the ground layer where the Ethereum blockchain and smart contracts provide the foundation that applications and financial services are built on top of. Legacy systems such as ACH Bank transfers and SWIFT can support service marketplaces like loan markets and derivatives exchanges.
Rather than excluding existing third-party service providers, they would be able to plug into the network and tap into competing or complementary micro-service blocks. The barriers to accessing the marketplaces in the system are drastically reduced, and service providers can connect via an API.
For example, fiat loan service providers (e.g., Lending Club) could collateralize loans directly in cryptocurrencies or other tokenized digital assets by providing their products to the marketplace via API calls. The tangential advantage for cryptocurrencies is that they become much more practical investment tools. Instead of being strictly limited to P2P currencies, they can function as the underlying collateral for loan services and other products.
Similarly, small and medium enterprises (SMEs) who typically experiences challenges accessing commercial banking services can leverage Mt Pelerin to issues regulatory-compliant securities directly on-chain to raise funds via debt or equity. The strong focus on compliance of the platform’s design would allow companies across various jurisdictions to tailor their security token launches based on their country’s regulations.
Finally, Mt Pelerin will be completely transparent as an on-chain bank. Bank accounts would retain access to legacy systems for fiat transfers using a multi-IBAN account model. However, users would be able to store fiat currencies and digital assets in their accounts without being subject to fractional-reserve policies of banks where deposited funds are re-invested. Deposits on Mt Pelerin will be fully transparent and kept 100 percent in reserve, verifiable through the blockchain.
The growing transition towards a more open and decentralized financial system is underway. Although many innovative projects and platforms offer market-specific services with digital assets such as credit instruments, Mt Pelerin is taking a more comprehensive approach. Focusing on a more inclusive environment of traditional institutions and tokenized assets in the form of a bank, Mt Pelerin is poised to fuel the growth of an open financial framework.