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Security Token Standards

Security Tokens: one-size-fits-all?

Security Tokens are a new tool for financial transformation, improving the inefficiencies of the traditional system while ensuring the security of the investments.

Security Tokens

Although retail banking is mainly digital by now, traditional capital markets remain partly analog. However, the financial industry is slowly turning towards digital assets. FinTech leaders around the world are building the path to transform both the primary and secondary markets.  


Thanks to Distributed Ledger Technology (DLT) there is now a way to digitize assets. Nevertheless, the decentralized system on which it operates is not always sufficient to avoid the investment risks that are not present in the mainstream capital markets. That is why Security Tokens represent a legally secure and controlled instrument, able to be used as a credible digital asset. 


Security Tokens are opening the doors to new investors and new markets. Important financial players are starting their growth strategy using a Security Token as their access point. Yet, not all the standards behind a Security Token fit all the needs. 


Since Security Tokens are subject to strict regulatory requirements, standards related to them have to offer some functionalities that make them able to comply with these requirements in the future.


There are plenty of offers on the market but not all of them stand after the same principles. Understanding the difference between the diversity of Smart Contracts that can back-up a Security Token is key, not only to choose the right one but also to identify a competitive partner working with the best standards. 


Given the amount of Smart Contracts on which a Security Token can be based, we will focus on the most prominent ones. After the ICO-Boom, the Ethereum blockchain became the most popular one. It has a large ecosystem and a sufficient offer of standardized protocols while leaving space for the customization of Smart Contracts. 


The most known example of those standardized protocols is the ERC20, with six mandatory functions defined. ERC stands for “Ethereum Request for Comments” and defines a set of rules in a template form. These “templates” define the guidelines to create tokens with a standard set of rules, ensuring the compatibility of these tokens with the several wallets and crypto exchanges as well as with other smart contracts.


The tokens that are compliant with a standard like ERC20 are supported, being able to interact with each other, capable of being instantly monetizable and tradeable. However, some of the ERCs are not able to comply with all the regulatory requirements Security Tokens are subject to. 


That is why, even the most used standard on the market (ERC20), does not fit all needs and usually lacks plenty of the functionalities necessary to have a fully compliant Security Token


Security Tokens working with the ERC20 have to implement only six mandatory functions, failing to offer the various potentially needed functionalities. For example, it does not offer a mechanism to restrict transfer. Hence, all ERC20 tokens are freely traded on the secondary market without any constraint. This is usually not the desired outcome for issuers that want their Security Tokens to only be tradable by their KYC-ed investors.  


Due to all the shortcomings  of the popular ERC20, several other promising standards are thriving, most of which are still in draft state. These standards aim to serve a special use case, improve the ERC20 standard or extend the functionalities to fulfill the requirements of Security Tokens.


We have already done market research analyzing the different alternatives and comparing their functionalities. 


micobo is committed to offering excellent products and services capable of empowering all financial players, so we have studied all the alternatives in order to choose the most competitive standards capable of complying with all the functionalities a Security Token needs. 


That is why, when we use the Ethereum blockchain, we have opted for a standard that was specifically designed for Security Tokens, the ERC1400. We added this standard to our portfolio in order to deliver the best products to our clients, ensuring the compliance that the financial industry requires. 


The ERC1400 is more complex and has the potential to fulfill all requirements of Security Tokens over possibly every jurisdiction. It allows, among others, restricted transfers, to add transfer information, off-chain validation, partitioning of tokens,  document library management and forced transfers. It does so by combining various ERC standards, each of them fulfilling one of the potential functions needed for Security Tokens. Thus, the ERC1400 has a wide range of functionalities, enabling a completely legal deployment of Security Tokens. 


However, we know that usually one size does not fit all. That is why we have diversified our offer of standards. We understand that every client has its specific needs and we adapt to every one of them. 


Hence, we not only offer Ethereum standards but also standards from the Corda blockchain, in order to deliver the most compliant, up-to-date, state-of-the-art Security Tokens. 


micobo solves real business problems, offering transactions built on trust, without complicated and inefficient processes. Our selection of standards are ready to deliver privacy, security, interoperability, and scalability. 


Our platforms not only help issuers of Security Tokens to significantly reduce their costs and time-to-market through the use of our Tokenization white-label solutions but also enable financial institutions to tap new sources of income by providing them with customized solutions exactly meeting their requirements. 

 

We empower digital leaders in the capital market of tomorrow.


Contact us now to start your Security Token Offering, with one of the leading partners in the market. 



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