TLDR#
Blockchains are a substantial technology improvement over the siloed data stores and complex clearing & settlement processes used today by clearing houses and transfer agents. Vulcan Forge adds missing links.When we say regulated assets we refer to any asset that requires at least some minimal oversight and/or visibility from one or mutliple local or federal authorities.Before discussing aspects pertaining to onchain regulated assets we want to cover where do we see Vulcan Forge sitting within the life cycle of a trade.Onchain Back Office#
Vulcan Forge aims to provide the best in class middleware back office software on blockchains.Front office vs Back office#
It is important to make the distinction between these 2 high-level stages in the life cycle of a trade:front office - price discovery and trade execution (i.e. finding a buyer and a seller and matching them through a binding contract)
back office - once a matched trade is produced -> clearing, settlement and finalization/booking of who owns what in a single source-of-truth record of ownership, need to occur
Areas ripe for improvement#
Inefficiences that can be addressed:1.
The shortest settlement cycles are still meassured in most hours if not days (T+1 is still the gold standard in TradFi clearing/settlement).
2.
Batching and net clearing (i.e. grouping trades together and netting movements of assets and funds across buys/sells involving the same counterparties) are the norm. Gross settlement is too expensive and too slow with traditional technologies & systems.
3.
Clearing houses are centralized entities with siloed systems and products coverage. Complex cross margining arangements and data exchange interfaces are needed to support portfolios comprised of products cleared & settled through different entities.
A very large spreadsheet#
At the most basic level, we view Solana as a very large ledger used to track the ownership of assets in an irrefutable, precise, accurate and transparent fashion. All at speed & low costs and for a large spectrum of products and in support of a variety of market participants.Sofware is needed on top of this spreadsheet to provide these functions:1.
Setup and manage the different onchain entities involved in the trading lifecycle: financial instruments, wallets, oracles to provide market data, keypairs authorities which govern and/or faciliate the execution of processing flows, etc.
2.
Effect/settle atomically movements of assets and funds immediately (within seconds) after trade execution occurs - no netting / no batching.
3.
Allow the use of assets as pledges to borrow against or lend out and earn a yield on. In a manner that makes the process faster, safer and more transparent/fair for both borrrowers and lenders. Reduce the risks of wrongful rehypothecation - the root of many troubles in financial markets. 4.
High-fidelity and flexible data distribution and reporting of all activities mentioned above - to satisfy the needs of all market participants: investors, financial intermediaries and regulators.
its very short block times, extensible blockchain accounts structure, flexible programming model
its network of RPC and block ordering/bundling providers which help with both submitting transactions and fast data dissemination of network events
its extensive ecosystem of protocols builders who add to and enhance the network's base functionality
Compliance#
Compliance? Really? That was not part of the core ethos when bitcoin and the first blockchains launched.Permissionless Capital Markets#
Of course we would also like to have the ability as individuals to trade assets fully permissionessly with anyone in the world, at any time. No interference and restrictions from governments and authorities.But that is not the reality of the world we live in. With countries across the globe burdened with large fiscal budgets deficits, government authorities have to raise the revenues to plug these holes. And as long as income taxes on capital gains remain one of the main sources of revenue, accurate reporting and visibility into capital movements and investors' P/L will remain a requirement sought for by taxing authorities and enacted through laws. In addition many investors are not equiped with the tools or know-how to produce their financial transactions and capital gains reporting in a compliant manner - financial intermerdiaries will remain an important source for providing such services.At the same time we think the visibility and transparency goes both ways. Investors also need more control and understanding about what goes on with their assets once they place them in the trust of a financial institution.We are not here to take a political stance. We built Vulcan Forge to make it easier for its users to run their business in a lawful and compliant manner and to improve the investors experience, keeping in mind the realities on the ground.As such, to operate in these markets and use Solana as the settlement layer we need to be cognizant of the aspects covered below.Wallets Taxonomy#
We found it useful to categorize the blockchain entities that can hold instruments of a financial value (i.e. wallets) into the following groups:Currencies Wallets#
Wallets that hold funds that can be used for paying for acquiring assets. In a blockchain context, this most often means stablecoins (USDC, PUYSD, Tether, etc.). And in the case of Solana, SOL itself could also be considered a currency as well. Aside from SOL, be think of all other crypto tokens as assets and not currencies.Currencies are often governed by a different regulatory environment vs what applies to financial assets. Seggrating them into dedicated wallets allows the application of different/more specific software rules to transaction flows.Another good example of a token that falls into this category: ALUSD - a token used by Alphaledger entities to represent temporary value onchain for fiat USD sitting in a bank account, waiting for an imminent settlement of a TradeFi transaction (e.g. USD about to go out as a Fed wire to an investor after a redemption request or USD waiting to be invested as a result of a new fund subscription).Assets Wallets#
Wallets that hold tradeable instruments and can be further split into sub groups depending on rules that are common for a transaction processing flow and regulatory regime.Defi Settlement Wallets#
While the first 2 wallets can often be made available for import into an investor's preferred wallet management software, we use defi settlement wallets primarily as a passthrough to facilitate the onchain transaction flows and bridge integrations with various protocols: primary market issuance, secondary trading markets, lending markets, etc.The defi wallets can hold both currencies and assets financial instruments.Financial Instruments Taxonomy#
In order to match the wallets taxonomy, we found it also useful to categorize the financial instruments setup through Vulcan Forge into:When a Vulcan Forge tenant onboards a token onto the platform a decision has to be made as to what category the token belongs to. Often the decision is simple - most new tokens are created as Asset tokens.While the system forces and API client to choose between a Currency Token vs an Asset Token at the time a financial instrument is onboarded, the categorization of wallets suggested above is optional. A generic WALLET blockchain entity type is provided as well, if a tenant does not find our wallet taxonomy applicable/useful to its business.The wallets and financial instruments taxonomy is expressed as part of the first set of offchain references types, further discussed in Mapping & Labelling.Verifications of position movements#
In order to generate proper reporting, regulated financial intermediaries that facilate settlement of financial transactions onchain need to have ways to verify that movements of assets (or currencies) meet certain processing rules/criteria and if needed, prevent the execution of these movements.Movements types#
By movements we mean the following operations that can occur in a wallet:a swap of a financial instrument for another
Verifications Examples#
Examples of processing rules which can require verifications:1.
source and destination wallets are associated with/owned by KYCed/KYBed or whitelisted entities
2.
the details for the transfers of value are well specified and understood - example rules which help with understanding the tax treatment of the transaction:is this a secondary market transaction with an exchange of in-kind value?
is this a transfer between wallets that are associated with/owned by the same entity?
will this result in a short-term or a long-term capital gain/loss?
3.
involved quantities are within the allowed limits
Unfreeze and Freeze#
The main mechanism that can be employed currently through Vulcan Forge to allow the deployment of these verfications is through the use of a Frozen Authority and the Default Account State extension on Tokens that require them.Newly created positions on Tokens, with this extension turned on, are frozen. To perform any movements against these positions an unfreeze and a freeze instruction is required on the Solana transaction containing these movements. This allows then the token issuer (or other necessary intermediaries) to execute the necessary verifications before the transaction can be signed (w/ the freeze authority keypair) and submitted to the network.See the unfreeze and freeze request body fields applicable to all endpoints under the Position Movements/Trades folders. They allow a client to include unfreeze (before) and freeze (after) position movements transaction instructions. Thus unfreeze(s) and freeze(s) can be included atomically for all positions that need it, in the same transaction that includes instructions that result in balance changes. An example of such a transaction generated through Vulcan Forge can be found here.1.
What is the value for an investor to hold inside their wallets such tokens that always require the verifications of a financial intermerdiary?
2.
And what software wallets support this type of functionality?
Other verfications options#
We are on the lookout to provide additional mechanisms to perform these verifications. Some possible options we have analyzed:1.
The RWA Token Program used as a transfer hook Token 2022 extension to verify that the destination on a token is part of a whitelist of approved destinations. This approach is used by Apollo's ACRED and Blackrock's BUIDL Solana tokens. 2.
A more novel and efficient approach to verify source/destination wallets against whitelists and blakclists is under development under Solana Foundation's stewardship. This would allow for persmissionless freeze and unfreeze operations w/o taking the penalty of consuming Compute Units required by the execution of a transfer hook program, every time a token movement occurs. 3.
We have developed a mobile wallet prototype that uses Blockdaemon's Builder Vault to host a keyshare in a user's wallet and use it together with keyshares provided by backend intermediaries to co-sign transactions in an MPC session. This could be another possibility to inject the necessary verifications to effect movement of regulated assets.
Conclusion#
The spectrum of rules and regulations applying to all RWAs that could be settled on onchain is very wide. While we aim for Vulcan Forge to provide the integrations needed to support some of the most stringent requirements, the system is flexible as it can also support Solana interactions involving assets that have more permissive transaction flows.Our goal is: If you have a matched trade - you can use Vulcan Forge to help you settle it onchain.Modified at 2025-12-07 09:39:58
