By Nathan Wells
When we at Symbiont show our platform to people in the finance industry one simple question comes up: “How does cash move through the blockchain?” Here’s a simple answer: it doesn’t. The immediate follow-up question is of course: “How do you expect us to trade securities without cash? Do you really expect us to use Bitcoin?” That requires a little bit more detail and consideration.
The short, and somewhat academic, answer is that we embed a token-based money system inside our smart contract system. A token is a representation of an asset in the “real world” on a system. In order to get these tokens, you’d go to your blockchain-enabled bank, move money into a specially designated blockchain account. Your bank would lock the funds, record a transaction via a smart contract on the blockchain, which deposits the tokens into your account on the blockchain network. These tokens can be redeemed by the bank at any time for money, in the form of a transfer into the account you already have with the bank, or some other transfer mechanism.
A short aside for those already familiar with Bitcoin and blockchain tokens: The way Symbiont has implemented tokens is very different (and, in our opinion, far superior) to the way Bitcoin has with color coins. We’ll explore the differences in a future blog post.
That seems a bit opaque, so let’s illustrate with an example: Let’s tell the story of Bob and Sam.
Bob is an investor with cash. Sam holds shares of private common stock of his startup.
Bob and Sam are old childhood friends who meet up after many years in a bar. Sam tells Bob all about his startup, and Bob asks if he can get in on the action. Sam’s been wanting to take a vacation, so he decides it would be a good idea to get some cash. They flesh out a basic deal:
Here’s the problem, though: Sam’s shares are stored on the blockchain, while Bob’s cash is in a savings account at ABC Bank.
At this point, I’ll ask you to indulge me in pretending that we live only in a consumer banking world. There are analogues in investment banking, of course, but everyone has at least a basic understanding of how consumer banking works.
Luckily ABC Bank is connected to the blockchain network that holds Sam’s shares. Bob gets on a call with his local branch and tries to figure out how to make this work.
The customer support agent on the other end of the line explains that he can get blockchain cash by transferring his money into a special blockchain account. Blockchain cash is what’s referred to as a fiat token. It’s essentially an IOU that Bob can redeem for cash from ABC Bank. If he transfers the tokens to another person that has an account at ABC Bank (or another bank on the same blockchain), they can do the same! In other cases, a wire or ACH transfer can be set up.
Bob creates his blockchain account and has the customer support agent transfer money from his traditional checking account into the blockchain account. ABC bank puts the money into a locked account (acting as a custodian of the money) and issues USD tokens to Bob’s blockchain account.
Once Bob’s confirmed the tokens are in his account, he tells Sam. Sam sets up an account for Bob on the blockchain node that tracks investors of his startup. Once Bob’s on the system, Sam initiates a trade of the shares and Bob confirms the trade. The assets (tokens and shares) are instantly transferred on the blockchain.
Sam now wants to get the cash, so he can buy his plane tickets and make all his plans. He’s got an account at ABC Bank, so he just has to redeem his tokens (which showed up instantly once Bob confirmed), and the funds are deposited into his account.
Well, that was easy!
To review, Bob got tokens in exchange for his USD via his bank, which he exchanged on the blockchain with Sam for stock. Sam was then able to redeem the tokens for cash (and go on vacation).
There are a couple of great things about this: first, the token-based model works for any real-world assets; and secondly, the transaction settled immediately—practically unheard of in traditional exchanges. Another interesting side note: the stock asset itself, and the underlying contract, are stored and executed purely on the blockchain; but that’s a blog post for a different time. See? It’s easy to move money around on the blockchain! If you’d like to see it in action, get in contact with us.