Blockchain Technology's underlying structure of decentralization guarantees tamperproof and complete transparency. Blockchain platforms can track commodities, record contractual agreements, and serve as a trusted register for trade documentation. Smart contracts can automatically execute contracts, and participants can manage and settle transactions reliably.
A Digital Asset that passes the Howey Test is deemed a Security Token. Security tokens are designed to represent complete or fractional ownership in an asset such as shares and stocks of private companies, commodities e.g. 1gram Gold, or fractions of Commercial Real Estate / Properties. Essentially, tokens are financial securities that derive their value from an underlying tradable asset, on top of an immutable database that does not need to be controlled by a central party.
Security Token Features
- Allows fractional ownership, leading to smaller required investments
- Tokens can be traded on secondary markets, earlier and better liquidity to investors, accessible worldwide 24/7
- Larger investor base, allows everyone to participate
- Immutable — once an investor buys tokens, nobody can “erase” the
- Ownership records are completely transparent
- Cost-effective — tokens eliminate the middlemen
Security Token Standards
ERC20 has gained widespread adoption and allowed the interoperability of all kinds of tokens on different exchanges. ERC20 is a blockchain-based asset that is created and hosted on the Ethereum Blockchain. ERC20 is an official protocol for proposing improvements to the Ethereum (ETH) network. ERC stands for Ethereum Request for Comment, and 20 is the proposal identifier. This is a common standard for creating tokens on the Ethereum blockchain. This token standard defines a set of rules that apply to all ERC20 tokens that allow them to interact seamlessly with one another.
Security Tokens builds are on top of standards like ERC20 to add the ability to enforce transfer restrictions at the token level. Another reason to build on Ethereum is the widespread adoption for wallets, exchanges, and other applications. Security Token can also be created on other Blockchain protocols such as SRC20 on Swarm's private blockchain on a cold fork of Stellar.
An ST20 token is an Ethereum-based token implemented on top of the ERC20 protocol that adds the ability for tokens to control transfers based on specific rules. ST20 tokens rely on Transfer Managers to determine the ruleset the token should apply in order to allow or deny a transfer, be it between the issuer and investors, in a peer to peer exchange or a transaction with an exchange. ST20 is brought to us by Polymath.
StartEngine has developed this standard. It is a digital stock certificate. Using this token, investors can take possession of their tokenized certificates but will be unable to transfer these. Ownership is stored off-chain with a registered transfer agent. This agent initiates the transfer after a trade is completed.
R-Token is a permissioned token on the Ethereum blockchain, enabling token transfers to occur if and only if they are approved by an on-chain Regulator Service. The Regulator Service can be configured to meet relevant securities regulations, Know Your Customer (KYC) policies, Anti-Money Laundering (AML) requirements, tax laws, and more. Implemented with the correct configurations, the R-Token standard makes compliant transfers possible, both on exchanges and person to person, in ICOs and secondary trades, and across jurisdictions. R-Token is brought to us by Harbor.
The ERC1400 security token standards provide document management, error signaling, transfer restrictions, forced transfers, off-chain data injection, issuance/redemption semantics, and expose partially fungible subsets of a token holders balance.
Standard is split into several modular sub-standards:
- ERC1410 which defines partially fungible tokens where balances of tokens can have an associated metadata
- ERC1594 which defines transfer restrictions and core security token functionality
- ERC1643 which splits out document management functionality
- ERC1644 which splits out controller operation functionality
With ERC1404, token-issuers have a way to restrict transfers of ERC20 tokens to be compliant with securities laws and other contractual obligations. ERC1404 provides a Simple Restricted Token Standard for issuing tokens with transfer restrictions. The following draws on input from top issuers, law firms, relevant US regulatory bodies, and exchanges. ERC1404 is brought to us by Tokensoft.
SWM by Swarm Fund is the utility token, which enables users to purchase the SRC20 tokens on Swarm’s private Blockchain (based on the Stellar network). These tokens can interoperate with other compliant platforms. SRC20 token trading can also happen on a private blockchain which will help Swarm monitor trades and ensure compliance SRC20.
ERC2258 by Polymath aims to standardize an approach towards the custodial ownership of assets represented through security tokens, cleanly differentiating between custodial and beneficial ownership in order to solve the above issues.
ERC884 tokens offer a mechanism by which a Delaware corporation can maintain an official share register using an Ethereum smart-contract, rather than using a traditional mechanism. ERC884 allows for the creation of tradable ERC20 tokens where each token represents a numberless (or vanilla) share issued by a Delaware corporation. ERC884 is designed to represent equity issued by any Delaware corporation, whether private or public.
ERC223 tokens are backward compatible with ERC20 tokens. It means that ERC223 supports every ERC20 function and contract or service working with ERC20 tokens, and will work with ERC223 tokens correctly. Examples include ChainLink (LINK) and ShineCoin (SHC).
ERC721 are usually non-fungible tokens such as Decentraland (MANA) and 0X Protocol (ZRC). ERC721 tokens, more commonly referred to as Non-Fungible Tokens (NFTs). Non-Fungible tokens allow developers to tokenize ownership of any arbitrary data, drastically increasing the design space of what can be represented as a token on the Ethereum blockchain. The biggest differentiator of Non-Fungible tokens is that each one is tied to a different identifier, making each token unique to its owner.
ERC725 allows for self-sovereign identity. Users should be able to own and manage their identity instead of ceding ownership of identity to centralized organizations. Describes proxy smart contracts that can be controlled by multiple keys and other smart contracts.
ERC621 token standard is an extension of ERC20 and allows projects to modify the total supply of the tokens they created. ERC20 does not allow the token supply amount to be changed, but ERC621 solves this issue by enabling changes with the help of two additional functions: increaseSupply and decreaseSupply.
ERC1155 allows developers to issue multiple types of tokens as fungible, non-fungible, and semi fungible. An example of the ERC1155 is the Enjin multiverse where the items created in the game can be both fungible and non-fungible tokens. ERC1155 is the only token standard that enables you to create every type of asset, from currency and real estate to digital art and gaming items.
DS Token by Securitize is to provide the “proper Digital ownership Architecture to address all aspects of the digital securities lifecycle. Securitize's innovative DS Protocol has the highest adoption rate in the industry and enables seamless, fully compliant trading across multiple markets simultaneously.
A list of more ERC token formats can be found here: https://eips.ethereum.org/all
Token standards specifically related to Security Tokens (Micobo):
Sources: Micobo, Yos Riady, Coinmonks, Blockchain Council, Global Banking & Finance, district0x, Bankex, Moonwhale
Looking for Security Token Consultants? Need help funding non-investment grade projects or SME for expansion and growth? Tokenize Commercial Real-Estate?
Moonwhale Ventures positions itself to provide quality STO solutions, helping businesses with our STO Financing service eg. tokenizing real estate, digitalizing company shares, fractional ownership of real-world assets. Moonwhale will assist you in the One-Stop-Shop solution.
- Business Model Review & Financial Modelling
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- Marketing Materials
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Please feel free to contact us. For more information on Blockchain projects or STO, here are our articles entitled: What Are Security Token Offerings? or Tokenizing Commercial Real Estate. Get free 20 min consultation here: https://calendly.com/moonwhalebv/20min
About The Author:
Danny Christ is the CEO of Moonwhale Blockchain Ventures Inc.
Based in Bangkok, Danny has over 20 years of IT, Operations and Supply Chain experience across Singapore, Indonesia, Thailand, Malaysia, Vietnam, and the Philippines. He managed IT projects (ERP, CRM, POS, BI) and regional expansion (franchise, M&A) for various SMEs in the Consumer Industry. His career rose to Vice President of a 3500 employees organization.
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