The term “standardisation” for security tokens is necessary. It means the use of a baseline protocol standard for tokens and various “good practices” followed by everyone where the foundation are Identification and Permission.
It is a set of smart contracts that govern basic transaction rules. Most of the wallets are ERC-20 compatible. Meaning, if you want to maximize your reach, it’s good start. (Now let’s complexify the model) On top of this, you need to use an Identity management to set of rules know as ERC-725/735. This family of smart contract allows “humans, groups, objects and machines” to sign transactions/documents/access and claims some rights. It’s also useful for any Proof of Authority where you stake your Identity in order to participate in a transaction on the blockchain. You also have the ERC-820 specifically designed to maintain the registry. Recently, was made public the ERC-1400 (family) basically merge all of the previous functionalities to simplify the issuance of “Tokenized Securities” (therefore, the compliance protocols are missing…) and add new libraries of functions such as ERC-1594 which splits out the core functionalities for the security tokens, the ERC-1643 for document management (for the countries not allowing yet the registration on a distributed ledger) and ERC-1644 which give enforceable capabilities in case of any problem.
Unfortunately, the ERC-1400 is still based on ERC-777 (which do not derive from ERC-20) and therefore limits the interoperability.
The objective of this new standard is to replicate on the Tezos blockchain the entire financial infrastructure of issuance, purchase and exchange of securities as it exists today, in order to streamline, accelerate and secure transactions.
The Nyx standard will leverage the Tezos blockchain to automatically secure and execute over 160 predefined business rules, thereby reducing transaction costs and avoiding a great number of administrative errors, specifically on compliance topics.
Smart contracts will communicate with each other and form a new kind of standard that has an unprecedented level of granularity. The Nyx may allow the holders of equity securities to hold their general meeting, vote and exercise their rights (such as dividend rights) in a completely dematerialised manner handling on-chain lifecycle management of the securities.
The standard should be unveiled to the general public in early 2020, after being deployed in a first use case on the Equisafe platform.
The latter will offer a very easy-to-use interface for issuers of financial instruments who will only have to enter directly the necessary information to create their smart contract. Each contract will be customisable according to the local compliance rules.
The Nyx standard will be available in open source (MIT license), to allow all developers to access and improve it if they wish by incorporating additional features, maximising the interoperability that is expected by financial infrastructure.
Nomadic Labs, a R&D lab working on the Tezos protocol, will ensure its good implementation on the blockchain.
Far from some standardisation endeavor done from the open source community, we can deep dive in what we think are basic components to push the industry forward.
In terms of philosophical approach regarding the standardisation, the library/”protocol” should be a set of compliance oriented smart contracts in order not to fall in some classical collateralisation and to have a real on-chain governance (that is why we preach for decentralised exchange rather than classical centralised one). This would open up the reach of the offering set from a particular jurisdiction to many others, taking into account reporting obligations, trade restrictions, KYC/AML restrictions, and support to investors during the whole lifecycle of the securities. (This is why co-customisation is key, we have to bring to the table lawyers, tax advisers, auditors, regulators and every other counterpart in the value chain)
The set of smart contracts should be of course modular enough to be flexible to the issuers needs, adaptable to regulatory rules and updates, and accessible to the right investors (specifically in the case of private placements where issuers may impose limits on the number of investors, country of residence, to the typology of investors (individual, professional, accredited)…). Thus, unlocking Interoperability is key for the promise of Liquidity. If everyone creates its own closed ecosystem there will be no liquidity, and it will be the failure of Security Tokens. So, we’re not a big fans of “end to end” platforms nor we’re big fans of utility token to access an ecosystem, first, it’s not needed, two, it creates only more friction in the market (it’s not going to help adoption, neither deployment of such technology).
Each investor has his Identity validated by a KYC/AML provider which assign a unique Hash ID associated with a wallet address or wallet addresses On-Chain (which count as one beneficial owner for the providers) which will rule how the investor interact with the custodian and the issuers. All of those, have specific smart-contracts that will mimic the old-fashioned way. Those smart contracts will rule the way they interact together, and a transaction will be validated once some permissioning modules are checked.
Also, any security standard should incorporate various recovery options in the case of the loss of the private key or if a court decision has to be enforced on tokens in circulation, as well as “sub-authorities” in order to control the level of a third party actors who might be dealing with your tokens/assets for you like an asset manager for example. As a reminder, the token is a new medium for containing information. Since the Mesopotamian era, we have gone from stone to paper. Today, we are moving towards the “Token”, a medium that can contain much more information than paper, this information can be transverse to everything that is related to the securities and can be moreover historised thanks to the timestamp provided by the blockchain and opposable to third parties thanks to the legal value of the timestamp. In short, we are moving from radio to HDTV all of a sudden.
Moreover, we’ve mentioned “Modularity” in order to be adaptable to the issuer’s constraints. For example, in the US, you can fill a “Red D” form, which force 12 months holding period for US-based citizen. Therefore, you don’t want to have them trading their tokens until the locking period is not finished, whatever the marketplace that is used. Traditionally, they didn’t have the titles in the first place so they couldn’t, but with blockchain giving back the value in the end of the investor you need to encode in the smart contracts those specific rules. “Modular” also, depending on the rights you want to give to the holder, dividends and/or voting rights and/or others. Adaptable, as the same protocol can be used to issue securities from more than 70 jurisdictions.