Part IV of our Strategy Series with Ethos Chief Global Strategist, Stephen Corliss

The concept of a decentralized digital asset based system in global capital markets and financial services has unsurprisingly caused major concerns amongst global lawmakers, regulators, central banks and financial industry participants. Some of this concern is driven by the Crypto and Blockchain Industry itself by continuous and often imprudent appeals for the immediate removal of trusted parties across all industries. However, it appears most of the current concerns stem from a lack of understanding by industry leaders of how these capabilities can be carefully applied to existing market infrastructures. In order to dispel the rumors and misinformation, this continues a series of articles that will provide context on how companies like Ethos are applying Distributed Ledger Technology & Cryptocurrency solutions across global finance and capital markets in a compliant and prudent manner, while also preserving the many benefits to consumers afforded by them.

We begin by first describing how Ethos applies this concept of a “decentralized digital asset based system” on a dynamic platform to create the first hybrid asset financial ecosystem. The Ethos Platform will be an open ecosystem, powered by the ETHOS Utility Token, where dynamic financial products and services involving both traditional and crypto assets are offered and delivered directly to consumer balance sheets in a hybrid self-custodied model. What this means is Ethos delivers a new multi-sided barter protocol, or utility, that enables economic actors, Households, Firms (or Developers) and Governments, to transact in a p2p / p2b / b2b manner. Notice I specifically refer to “consumer balance sheets” as consumers will truly be reaping the rewards of owning and holding an asset.

In this model, rather than relinquishing control of personal assets to financial stewards as part of the current intermediated system, Households maintain control, or rights with regards to traditional assets, over their personal or household balance sheets in a hybrid self-custodied model, allowing asset owners to maximize their own utility. The Ethos platform will enable users to either exchange goods (tangible property) directly with one another via the ETHOS token or exchange goods (tokens or other representational assets) for products and services (intangible property) directly with Producers (or Firms), in both a trustless or trusted manner. This blends the best of both traditional and crypto frameworks into an all-inclusive hybrid solution that can fit every participant’s needs.

Although this may appear complex at first glance, this new paradigm in global finance and capital market structures consists of one central difference, which involves the shift of asset stewardship from financial firms to households. This basic shift is powerful for consumers and society at large, as it maximizes asset owners’ ability to increase their economic utility, recognizable not only from satisfaction associated with consumption of products and services driven by form, time, place and possession – but rather a broad sense of well being stemming from less recognizable “social benefits incidental to financial asset-ownership”.

We will return to this concept of “social benefits incidental to financial asset ownership” in a later more in-depth article, but before moving on it is important to understand some of the motivations for why many consumers, households, or investors desire the ability to have self-custody their own assets. Whether as a result of unintended consequences from the 1960’s Paperwork Crisis, regulation, new products, or competitive forces, it is indisputable that the over-intermediation of the financial industry has acted as a transfer mechanism where most benefits of asset ownership, aside from dividends and price appreciation or depreciation, have shifted from the consumer to financial industry participants. The Securities Financing Market is a basic yet significant example of how financial intermediaries derive value from customers assets held on their balance sheet where intermediaries borrow or lend cash or securities associated with customer accounts (i.e. cash deposits, retail margin accounts, ETF’s & Mutual Funds etc.) in a collateralized transaction. This market has experienced pronounced revenue and volume growth over the last several decades, however, most retail customers receive no direct financial benefits whatsoever from these activities.

More importantly, however, consumers and investors have also unknowingly lost valuable rights associated with share ownership as a result of the tremendous growth of Mutual Funds and Exchange Traded Funds that began in the 1970’s. These new commingled fund structures by virtue of their design caused the transfer of shareholder influence away from individual consumers to financial intermediaries. As a result of these fund structures, individual shareholder voices have been muted and replaced by financial intermediaries who now act as societies social barometer when assuming the role of gatekeeper over proxy voting, corporate board governance and behavior. It is important to educate the individual and encourage every participant to exercise their rights as this is an extremely effective avenue for large scale, sweeping, corporate change.

Whether intended or not, the transformation of the financial industry over the last several decades has resulted in a pronounced shift away from the industry’s primary roles of facilitating the efficient allocation of capital and provision of accessible financial products and services across the world, to a more convoluted, cost-inefficient model involving countless activities unrelated to delivering financial or investment services to the public. This fact pattern cannot be overlooked as it is one of several potential drivers that has caused many consumers to grow disenchanted with the global financial industry, forcing consumers to begin searching for new alternatives.

When we begin to understand why consumers are feeling as they do, it should become easier for all of us to understand why and how the Crypto and Blockchain Industry has caught the imagination and support of many citizens across the globe. We at Ethos have been listening to this global community of citizens desiring a new way forward, and believe that cryptocurrency and distributed ledger technology offers the financial industry a significant opportunity to reimagine how to more efficiently allocate capital and provide essential financial products and services to all of society, rather than just those with means.

With much of the above as our backdrop, it was immediately apparent to us that a Hybrid Multi-Sided Investment Platform could only be viable if it was operated in a safe and sound manner and considered the needs and demands of all constituents on the platform, including consumers, financial intermediaries and other stakeholders. From a consumer perspective, all of our product and service designs begin and end with a few critical themes including consumer protection, privacy, transparency and security. This is essential for many reasons, especially when involving financial related digital products and services.

With regards to financial intermediaries, we also understood that there were many business, legal and regulatory risks we would have to tackle in order to ensure vibrant support and engagement by global financial service providers. To begin solving these complex issues we knew we would have to ensure several critical intermediaries within the standard financial stack could operate in a controlled and compliant manner, including Custodians, Clearers, Investment Advisors & Managers, Investment Companies, Broker Dealers, Exchanges and Central Counterparties (CCP’s). With this list in hand, we immediately began to detail how each of the models associated with a particular intermediary operates today and how it would need to operate on the Ethos Platform. It is important to recognize that traditional financial intermediaries will not be “put out of business” by distributed ledger technology as some may lead you to believe. These financial intermediaries will evolve, through the assistance of progressive crypto firms like Ethos, to better serve the needs of the financial industry as well as the individual investor.

In order for the industry to understand our vision and solutions, we have embarked on this multi-part series of informational articles that we believe will help our industry peers across Financial Services, DLT and Crypto better understand how they can operate and apply this transformative technology in a safe and regulatory compliant manner. Although we are introducing the concept of a hybrid self-custody model that bridges both digital and traditional assets, this series will primarily focus on financial industry applications of blockchain technology, including the concept of a self-custodied first model for cryptocurrencies. In our next article we will focus exclusively on Custody before moving on to Investment Advisory and Investment Company Services.

Thank you,

Stephen Corliss
Chief Global Strategist