The need for onchain cash

Onchain cash is crucial for realizing the full potential of blockchain technology in financial markets. When cash is represented on the blockchain alongside tokenized financial products, it enables on-chain settlement, which means that both sides of a transaction—the financial product and the payment—can be executed and settled simultaneously within the same infrastructure. This on-chain settlement accelerates transactions, making them almost instantaneous, as the blockchain can handle the transfer of assets and the corresponding payment in a single, atomic operation.

Moreover, having cash on-chain automates the work of intermediaries, which are typically involved in traditional financial transactions. By minimizing the role of intermediaries, on-chain cash representation enhances the efficiency and cost-effectiveness of transactions. It also improves transparency and security, as the blockchain provides a transparent and immutable record of all transactions, reducing the risk of fraud or errors.

Without onchain cash, onchain transactions become slower and more complex. The cash leg of the transaction must be processed through traditional financial systems, which can take days to settle. This introduces delays and requires data reconciliation between the blockchain ledgers and traditional systems, adding layers of complexity and potential points of failure. Therefore, to streamline financial operations and fully leverage the advantages of blockchain technology, it is essential to have cash represented on-chain.

Permissionless Cash Tokens

Permissionless cash tokens are digital assets that can be freely transferred without the need for permission from a central authority. These tokens typically leverage standards like ERC-20 on the EVM blockchain networks, which allows for easy integration and widespread use. In a permissionless system, anyone can hold, transfer, and interact with the tokens without restrictions.

Minting and Burning: The Know Your Customer (KYC) process can be implemented at the minting (creation) and burning (destruction) of tokens. This ensures that the initial issuance and redemption of tokens comply with regulatory requirements.
Transfers: Once minted, permissionless tokens can be freely transferred between users without any control over the identity of the participants. This means that there is no verification of the sender or recipient during the transfer process.
Freedom of Use: The lack of control over transfers allows for greater flexibility and freedom of use, but it also introduces risks related to compliance with Anti-Money Laundering (AML) and KYC regulations.

Due to the absence of controls, some jurisdictions have begun to prohibit permissionless cash tokens. For instance, Switzerland has already started to forbid them: FINMA guidance

Permissioned Cash Tokens

Permissioned cash tokens, on the other hand, incorporate additional controls to ensure that only eligible parties can hold and transfer the tokens. These tokens are designed to be "smarter" by including mechanisms that verify the eligibility of recipients during each transfer. Usually, the ERC-3643 token standard is used for this type of compliant tokens.

Transfer Control: Every transfer of a permissioned token is subject to an automatic verification. The token's smart contract checks the eligibility of the recipient before allowing the transfer to proceed. This ensures that only approved users can receive and hold the tokens.
Ownership Tracking: By controlling every transfer, permissioned tokens enable a more robust tracking of ownership, leveraging onchain identities. This is crucial for compliance with AML and KYC regulations, as it allows the issuer to maintain full control over the token's distribution and use.
Compliance: Permissioned tokens are particularly useful for enabling AML and KYC compliance even on a permissionless blockchain. By incorporating these controls, issuers can ensure that their tokens are used in a manner that adheres to regulatory requirements.

Stablecoins

Stablecoins are a type of cryptocurrency designed to maintain a stable value, typically pegged to a reserve asset like the US dollar, other fiat currencies, or a basket of assets. The primary goal of stablecoins is to minimize price volatility, making them suitable for everyday transactions and as a store of value. Stablecoins achieve stability through various mechanisms, such as collateralization (backing the stablecoin with reserves), algorithmic stabilization (using smart contracts to adjust supply), or a combination of both. Examples of stablecoins include Tether (USDT), USD Coin (USDC), and EURC. Stablecoins are widely used in decentralized finance (DeFi) applications, cross-border payments, and as a hedge against the volatility of other cryptocurrencies.

Deposit tokens

Deposit tokens represent claims on assets held in custody by a trusted entity, such as a bank or a financial institution. These tokens are issued on a blockchain and can be used to facilitate on-chain transactions. Each deposit token represents a specific amount of the underlying asset, which could be fiat currency, precious metals, or other financial instruments. The value of deposit tokens is directly linked to the value of the underlying assets held in custody. To ensure the stability and security of deposit tokens, the issuing entity must maintain a one-to-one reserve of the underlying assets. Deposit tokens enable the benefits of blockchain technology, such as fast settlement and reduced intermediaries, while still being backed by traditional assets. Deposit tokens can be used internally, such as among clients of a specific bank, or they can be made available to external users as well.

Settlement tokens

Settlement tokens are digital assets specifically designed for settling financial transactions on a blockchain. They are used to facilitate the transfer of value between parties in a secure, efficient, and transparent manner. Settlement tokens can represent various forms of value, including fiat currency, commodities, or other financial instruments.

Unlike stablecoins, which are primarily focused on maintaining a stable value, settlement tokens prioritize the efficient and secure settlement of transactions. They are often used in institutional settings, such as in capital markets, for the settlement of securities, derivatives, and other financial products. Settlement tokens aim to reduce counterparty risk, enhance liquidity, and streamline the settlement process by leveraging the advantages of blockchain technology.

Each of these types of on-chain cash serves a specific purpose and addresses different needs within the blockchain ecosystem, contributing to the overall efficiency and functionality of on-chain financial transactions.