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Crypto security token management is being a very solvable problem

Posted: 30 August 2018 7:06 pm
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Live solutions such as Swarm Fund's new Market Access Protocol show how quickly the space is developing.

Legal security tokens are one of the newer edges of the cryptocurrency world. These are digital tokens intended to function as perfectly legal securities.

"Security" is a regulatory category which refers more specifically to how and why an asset is sold, rather than what the asset itself actually is, so the tokens themselves might represent almost anything.

For example, some are arguing that XRP is a security, that Ethereum was a security but isn't anymore, and some of the more explicitly security tokens include AspenCoin as shares of a hotel, equity tokens as shares of companies, other types of equity tokens as shares of shares of companies, and an unusual type of physical security token as an investment in McDonalds Big Macs.

Essentially the tokens themselves can be almost anything and do almost anything. What they have in common is a legal status, which comes with certain obligations. A lot of tokens will need to meet the obligations of securities, so it's probably a good thing that work on security token standards is proceeding so well.



The obligations

Securities need to be accompanied with information on who owns it and where it came from, and there are certain restrictions on where they can be bought and sold. Traditionally, these obligations have been met by throwing a lot of time, effort people and paperwork at them.

One of the goals of tokenisation is to step in and automate these kinds of processes to simultaneously make the area much more accessible, safer, cheaper and efficient. In a nutshell, this means finding a way to program suitable transfer restrictions and tracking functions into a security token and the platform it inhabits.

The idea is that a token can be automatically marked as complying with certain standards, and can then be traded on certain platforms without all the unnecessary intermediaries and paperwork. Theoretically this kind of system can then just operate as seamlessly as any other trading platform, without any need for oversight or intermediaries. You simply tick those two boxes; that a token is of a suitable security standard and that it's being traded on a suitable platform, and it's all good.

In practice it almost certainly won't be quite as smooth as that, at least not at first, but it can still eliminate most of the inefficiencies of the current system.

This kind of reliability is only possible with trustless platforms like blockchains.

The token

There are different token standards emerging. Polymath, for example, has developed the ST-20 standard.

One of the core features of this standard is the ability to restrict transfers. So basically, when someone tries to transfer a token, the token can be programmed to automatically ask the network a few questions first such as "Whose wallet am I going to?" "What country does my new owner live in?" "Is my new owner an accredited investor?" "Has my creator allowed me to be transferred this way?" and anything else programmable.

Issuers, or "token authors" as Polymath calls them, can create their own questions for tokens to ask in different situations. For example, to make sure a token can be legally offered in different jurisdictions.

Theoretically, no one except an issuer should be able to acquire a securities token without being legally able to purchase and own that security.

Naturally this kind of digital system also makes it easier to track the movements of tokens as they change hands, saving even more time and effort.

The platform

Like any other smart contract, a token can ask all the questions it wants, but it does no good if it can't trust the answers. This principle is sometimes referred to as the oracle problem. The platform itself needs to be designed in a way that ensures data is accurate. Or failing that, in a way that lets one track down any incorrect information to the lying source.

This is what Swarm Fund's Market Access Protocol (MAP) does.

In simple terms, MAP is a way for people to create Swarm security token wallets. When creating a wallet they provide certain data, such as location, whether one is an accredited investor, other details needed to fulfill KYC/AML obligations and whether this data has been verified and which qualification provider verified the information.

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When someone wants to transfer a Swarm security token on this platform, the token will interrogate the receiving wallet to make sure everything's above board before it jumps over.

One of the great things about this system is that it doesn't necessarily mean storing or distributing sensitive user data. For example, a token doesn't have to ask what someone's name is - it just needs to ask whether the wallet owner has provided a verified name.

MAP automates what used to be a real headache, says Swarm Fund CEO Philipp Pieper.

"Existing whitelisting solutions are highly demanding on investors and infeasible for qualification providers and exchanges to adopt," he said. "With MAP we are releasing an open protocol that enables participants in the security token market to interact based on essential privacy, incentives, and integration efficiencies. MAP will be a catalyst for the next wave of growth in crypto investing."

MAP went live on 29 August, so it might be the cutting edge of the space currently.


Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VET, XLM, BTC, ADA

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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