The Growing World of Security Token Protocols
Security tokens are one of the fastest growing sectors in the cryptomarket. These tokens allow companies to remain government compliant and utilize blockchain technology to enable more secure business transactions. As the security token market expands, more security token protocols become available to the public.
The Right Token for the Job
Security tokens contain regulatory protocol directly within their coding. This self-contained script is perfect for use in tokenization scenarios. When a token represents ownership rights to a piece of property, revenue sharing, security or other regulated item, security tokens are the only option.
Security token adoption increased significantly in the last few months. Currently, Security tokens make up around 6.54 percent of the total crypto market according to a recent study provided by Hashgard. Service tokens account for the largest percentage of the market at 49.05 percent, followed by utility tokens (25.3%), and hybrid tokens (12.47%). Another report published by ICORating showed that STO growth climbed 1.66 percent during Q3 2018. At the same time, utility token issuance decreased by 10 percent.
Security token protocols come in a lot of different styles nowadays and depending on the functionality of the security token in question, certain protocols are better suited to handle the tasks. Consequently, this need for function-specific security tokens ushered in a wave of new security token protocols.
Polymath‘s ST-20 protocol was one of the first security token standards to enter the market. The token features integrated KYC (Know Your Customer) and AML (Anti-MoneyLaundering) mechanisms. Polymath users can issue customized security tokens directly through the platform using the simplistic interface. What makes the ST-20 unique is that the token is issued on Polymaths custom built blockchain.
The token is hugely popular as Polymath is one of the largest security token launch platforms available to the public. The company was the first firm to launch a global security token conference. As an early entry to the security token race, Polymath wanted to take all the regulatory shortcomings of the ERC-20 protocol and give companies a more secure alternative. The firm succeeded in creating a widely used security token standard.
SFT (Secured Financial Transaction Protocol)
The SFT protocol entered the market on November 28, 2018. This security token protocol uses Solidity. Solidity is a programming language used by Ethereum developers. SFT tokens live on the Ethereum blockchain.
This protocol features many of the robust and modular features found in the popular ERC-20 protocol such as easy smart contract programming.SFT tokens enable the tokenization of debt and equity-based securities.
German-based Hyperlink Capital entered the market on July 1, 2018. The development team created the SFT protocol for their digital securities platform which is intended to expand adoption of blockchain-based capital markets. The company has a history of activity in the blockchain space. Recently, Hyperlink Capital’s focus is on tokenized securities.
News of the ERC-1450 protocol entered the market in November 2018 via a medium post by StartEngineFounder Howard Marks. This protocol was developed for creating digital stock certificates. The company behind the protocol, StartEngine Secure, seeks to offer entrepreneurs democratized access to funding.
StartEngine Secure entered the blockchain sector in2012 shortly after the signing into law of the Jumpstart Our Business StartupsAct which was an effort to provide access to more capital for startups. The platform features full transparency and a registered transfer agent updates ownership details in accordance with securities laws. The data is published via the Ethereum blockchain.
CAT-20 / CAT – 721
The CAT-20 and CAT-721 protocols are the world’s first multi-ledger security tokens. These tokens can be transferred across blockchains including Ethereum, Ripple, EoS, GoChain, and Stellar. Tokens issued on CAT-20 and CAT-721 protocols support Securrency‘s full suite of token issuance tools.
Washington-based Securrency entered the market in2015. The Securrency platform features an automated source of funds verification system and an easy to learn user interface. Additionally, the company behind the protocol, Securrency, employs a Service and Rules engine which maintains compliance across secondary market trading.
The DS protocol is an open-source development infrastructure designed around the needs of the security token industry. TheDS Protocol is open-source and designed to support third-party applications. Tokens issued on this protocol reside on the Ethereum blockchain.
Securitize issued the DS Protocol on Jun 5th, 2018 via a press release. DS includes integrated compliance and registry services. Also, token holders receive regular updates about relevant events via their tokens. The DSProtocol focuses on creating more liquidity within the security token arena.
The R-token standard entered the market on February 6th, 2018. R-tokens are ERC-20 tokens with built-in regulatory smart contracts. The regulatory services of these tokens configure to meet the needs of the issuer. The R-token standard features integrated KYC, AML, and taxation services.
Harbor developed the R-token protocol for use within their popular token issuance platform. In April 2018 Harbor successfully raised $28 million to further development into their tokenized securities platform.
The SRC20 protocol allows users to tokenize any item. The protocol is a cryptographic standard with integrated governance. Users can tokenize securities, buildings, farms, businesses, hedge funds, and even ownership in development projects. The flexibility of the SRC20 token is its strong point.
SRC20 operates on the SWARM platform. The SWARM platform incentivizes users for their positive contributions. The platform learns from your fundraising campaigns and uses the data to facilitate a more user-friendly experience every time you start a new campaign.
The tZERO protocol integrates the benefits of blockchain technology into the existing market systems. ThetZERO platform will one day facilitate both the issuances and easy trading of security tokens. The developers seek to create the first national securities exchange specifically designed for security tokens.
tZERO is the direct result of a strategic partnership with BOX Digital Markets. Earlier in the year tZERO filed an SEC form D. Form D is required by companies that seek to issue securities. IF the form is approved, tZERO would be the first SEC regulated security token issuance/trading platform in the cryptospace.
More Security Token Protocols on the Horizon
The Security token sector is just heating up and you can expect many more entries into the market as the year wraps up. Companies want the benefits of blockchain technology and security tokens provide these features without worry. It will be interesting to see how each of these protocols fair in the coming months as the market’s competition increases.
Aaron Kaplan, CEO of Prometheum – Interview Series
Prior to Prometheum you were the Founder of EquityArcade, a platform that enabled consumers to buy shares in video game startups. Can you let us know how your experience at EquityArcade transitioned over to Prometheum?
EquityArcade was a Reg CF equity crowdfunding platform that allowed consumers (investors) to invest in the future revenue generated from indie game funded on the platform. Reg CF is part of the JOBS Act, which also contains the Reg A+ crowdfunding rules. Prometheum uses Reg A+ as a means to allow the general public to invest in blockchain securities. All JOBS Act regulations relate to online equity crowdfunding. As a result, we have been able to leverage many of the experiences and lessons from EquityArcade in building Prometheum’s Reg A+ offering platform.
Prometheum enables companies to raise capital by offering their own Smart Security Tokens (SSTs). Can you share with us how SSTs differentiate themselves from other industry standards such as STOs (Security Token Offerings) or DSOs (Digital Security Offerings)?
SSTs, STOs and DSOs are all different protocols that are attempting to solve the same problem. Until there’s complete regulatory clarity around certain critical components – including custody – of the blockchain securities ecosystem, it’s not possible to conclude which protocol provides the best foundation.
What’s the process for a company to launch an SST?
An issuer looking to issue a SST will submit an application for an offering to Prometheum. At that point, the issuer will submit all relevant documents that will allow Prometheum to conduct the requisite due diligence in order to determine whether the company is qualified to issue an SST. Upon passing the due diligence process, the issuer will complete the Reg A+ offering circular and submit that document to the SEC for qualification. Once qualified by the SEC, the offering will be listed on Prometheum’s offering platform and begin their capital formation activities. When the stated amount of capital is raised, there will be a closing and distribution of the SST into the investors’ Prometheum brokerage account. Upon distribution of an SST, Prometheum’s issuance platform coordinates the multi-signature, multi-stage process that is used to place investors’ SSTs in either their Master or Personal Wallet. Once the distribution occurs, Prometheum will list the SST on our retail based (i.e. open to all investors) Alternative Trading System (ATS), and secondary market trading will begin in the issuer’s SST.
What type of fees should companies expect from launching an SST and hosting it on your platform?
Our goal is to allow companies to raise up to $50m in the most efficient way possible: faster, less expensive, and easier than any other legal capital raising method. In terms of direct fees, we plan on charging issuers a small percentage of the total amount they raise (1-3% dependent on the total raised). Once a token has been distributed and is trading on the ATS, companies are charged a quarterly membership fee of $2,500 for maintaining their order book.
Indirect fees not charged by Prometheum can vary and are related to legal and prep for the creation of the Reg A documents, accounting, auditing, marketing, and other possible professional services.
SST will be Reg A+ issued. For investors who are not familiar with this legislation and what does it mean? Could you explain the benefits?
Regulation A+ allows issuers to raise up to $50 million from the general public annually, and such securities, when issued, are freely tradeable on a secondary market. Reg A+ is really the perfect regulation for issuing blockchain securities as it meets the spirit that was initially conceived by the crypto community- it allows the general public to invest, and the asset is freely tradeable upon distribution but in a regulated manner (unlike many historical token investments).
Tokens that are created on your platform will then be tradeable on a custom ATS (Alternative Trading System). Could you elaborate on how your ATS will operate?
On the surface, the ATS operates just like a traditional equities electronic market. Every token has as order book representing supply and demand for that token – bids (what buyers are willing to pay, and the number of tokens they want) and asks (offers to sell, or what sellers are willing to sell for, and the number of tokens they want to sell). This order book is managed by the matching engine which uses an algorithm to arrange the bids and asks into a price, upon the price quote the engine then utilizes time priority, and ultimately “matches” buyers and sellers when they meet at the same price. There is an online trading platform, similar to Etrade or Schwabb, which allows traders and investors to see the order book, look at charts, enter orders and see their account status and previous transactions. Through the use of omnibus accounts, other broker-dealers will be able to offer their customers access to SSTs. Our ATS intends to operate 2 sessions everyday, both 11 ½ hours long with two 30 minute breaks for settlement. When there is an executed trade, meaning an order between a buyer and seller is matched, the trade is written to the blockchain, as well as recorded to a database to ensure compliance with traditional record keeping.
Are SST tokens launched on your platform tradeable on regular security token trading exchanges such as OpenFinance and tZERO?
SSTs are compatible with Prometheum’s ATS and work as both securities and utility tokens in the Prometheum ecosystem. It may be possible for SST issuers to create a bridge to other exchanges or blockchains by building smart contracts on the Prometheum Utility Blockchain. As the equivalent of a national market system for digital assets develops it will likely be necessary for digital assets to have the ability to trade across security token exchanges and alternative trading systems.
What are Ember (MBR) tokens and what role do they play in this project?
The Ember SST fuels all SST transactions and allows holders to provide services at the protocol and application layers. Prometheum’s Ember token has both profit-making utility (work/access) and proprietary payment currency features. Ember provides the fuel for the Prometheum blockchain Network and demonstrates the versatility and value provided by a modern approach to using securities to transfer value in a decentralized, blockchain based environment. Ember is the first SST issued on the Prometheum Blockchain and sets the legal and technical precedent for further SSTs.
It seems like you are building everything from scratch, why not use an existing blockchain?
The Prometheum blockchain is required in order to ensure that regulatory requirements are met while also providing a viable method for the use of blockchain securities as utility tokens. This includes direct interaction with distributed applications as well as processes for moving blockchain securities in and out of brokerage accounts when a user wishes to trade them on the Prometheum ATS.
Is there anything else that you would like to tell us about Prometheum?
Prometheum is creating the market infrastructure needed for digital assets to go mainstream. When the SEC essentially declared that tokens were securities in the 2017 DAO report, such infrastructure didn’t exist, which meant that there were no compliant facilities for the issuance, trading, clearing, settlement and custody of token securities. Prometheum sought to fill that void and is creating the infrastructure that will allow the general public to invest and trade in digital assets, while also providing mechanisms for clearance, settlement and custody after trades are made. The Prometheum Network is meant to allow the general public to participate, which is required in order for digital assets to go from a new asset class to a mainstream asset class.
Black Manta Capital and Tokeny to Launch Licensed ‘Multi-STO Platform’
Today, a pair of Luxembourg based companies, Black Manta Capital and Tokeny, have announced the launch of a ‘multi-sto platform’.
This move represents the first licensed offering of its kind. The licensure needed to make the endeavour possible was awarded to Black Manta in early 2019, by the European regulatory body, BaFin.
The upcoming platform will operate with each company bringing unique skills to the table. They indicate that each will work within the following roles.
- Compliance adherence
- Investor Protection
- Tech provider through a white-label tokenization platform
The Finer Points
The platform, itself, is geared towards serving not only professionals, but retail investors alike, with Europe representing the target market.
STOs, to be held through the platform, look to provide access to a variety of tokens based, not only on equity, but debt instruments and fractionalized ownership, as well.
For interested parties, investor onboarding is expected to begin in early November, 2019.
The companies indicate that the launch of this platform will be facilitated through the adoption and use of framework known as the ‘Token for Regulated Exchanges’ or ‘TREX’.
The TREX framework provides a variety of capabilities including, but not limited to, the following.
- Identity Management Systems
- Validation Certificates
- Transfer Management
Upon announcing the launch of this new platform, representatives from each, Tokeny and Black Manta Capital, took the time to comment. The following is what each had to say on the development.
Luc Falempin, CEO of Tokeny, stated,
“Working with Black Manta Capital Partners allows the both of us to focus on what we do best. We provide the institutional grade tokenization solutions for every BMCP offering and this allows them to focus on what they do best, which is building their investor community.”
Christian Platzer, Co-Founder of BMCP, stated,
“Tokeny Solutions is one of the top global technology providers in tokenization. Having worked closely with the Tokeny Solutions team for several months, we can say: we speak the same language when it comes to the prospects for our industry and together we could not be more positive about the opportunities for security tokenization in Europe and around the world.”
Speaking with Luc
We were fortunate to have recently completed an exclusive interview with the CEO of Tokeny, Luc Falempin. In this discussion we learn more about, not only Falempin himself, but the near and long term goals of Tokeny as a whole.
Black Manta Capital
Operating out of Luxembourg, Black Manta Capital is a young company which was founded in 2018. Operating under licensure received by BaFin, Black Manta is working to establish themselves as an authority in the digital securities sector.
Managing Partners, Alexander Rapatz and Christian Platzer, currently oversee company operations.
Operating out of Luxembourg, Tokeny is a Fintech company which was launched in 2017. Above all, the team at Tokeny is working diligently to develop a suite of services meant to serve the digital securities sector.
CEO, Luc Falempin, currently oversees company operations.
In Other News
While both, Tokeny and Black Manta, have been hard at work in recent months to establish, not only themselves, but the digital securities sector as a whole, it was Black Manta that most recently caught our attention. This was through their recently announced partnership, which will see Canadian based DigiMax enter European markets through licensure held by Black Manta.
The SWARM Token Issuance Dapp Changes Everything
Tokenization just got a lot easier thanks to the innovative minds behind the Swarm Dapp release. This revolutionary platform allows users to easily, and freely, create and issue security tokens at will. The news shows a shift in strategy from one of the most respected players in the market. It also demonstrates the start of a more robust issuance sector.
SWARM Changes the Game
This week, SWARM developers proved that they are serious about decentralization with their latest release of major upgrades to their smart contract suite. Built atop those smart contracts, the SWARM App by Swarm Capital is a market first in many ways. For one, security token issuance has long been a technically savvy business sector. Now that anyone can create security tokens, market innovation is no longer tethered to a person’s technical know-how. Basically, SWARM just changed the game in a major way.
Notably, Swarm Capital is the first provider to create and release a tokenization UI designed for third-party users. The company’s strategy follows the overall growing trend of B2B2B (businesses that sell services to businesses, that sell services to businesses) service providers taking the lead in the market.
Easy to Use
Swarm’s new Dapp includes a feature-rich UI (user interface) that simplifies the entire token issuance process. Notably, beginners need no training to navigate the free UI. The platform guides users throughout the entire process including classifying the token. The Dapp allows you to configure, mint, and issue tokens at no cost.
Interestingly, Swarm Capital didn’t make the Dapp compatible with just newbies in the blockchain sector. The Dapp has a host of advanced features designed to service the needs of developers, consultants, and advisors. Blockchain experts can even program smart contracts directly within the platform.
The robust smart contract capabilities of the Dapp allow programmers to integrate a wide array of regulatory stipulations into the tokens. These features include the ability to add transfer restriction rules, account freeze, and contract freeze stipulations. You can even couple real-world assets to your security token via the platform.
Swarm White Label
Perhaps one of the best features of the new Dapp is the ability to white label the services. Service providers can use the open tools to build custom UIs for clients. By allowing other service providers to profit off of its UI, the company cements its positioning in the market moving forward.
How Swarm Dapp Works
The Swarm Dapp employs a set of pre-programmed smart contracts. These smart contracts create an alterable framework for companies to build upon. Basically, anyone with a little technical know-how can create a security token using the easy to follow instructions.
Once a user completes the token creation process, the token is then sent to the Ethereum Testnet. Here, developers can experiment with their new tokens in a safe and open environment. Once an issuer completes testing the token’s functionality, publishing the token to the Ethereum Mainnet only takes a few clicks.
Additionally, Swarm’s Stake-to-Issue tokenomics allows users to create and issue tokens with zero fees. Users simply stake their SWM tokens to initiate the contract. You can retrieve your staked SWM simply by completing a burn function with the security tokens.
The SRC20 token standard is a variation on the popular ERC-20 token standard. As such, the token retains the highest level of interoperability available in the market. Importantly, these tokens remain compliant throughout the entire token’s lifecycle, including during secondary trading.
Swarm’s Bright Future
From the looks of these developments, Swarm intends to be a staple in the tokenization community for years to come. As such, the company announced that all tokens issued on the platform will be compatible with upcoming swarm fundraising events. Also, developers seek to include a fundraising model in their next release. For now, Swarm just upped the ante in the security token sector.