Security Token Standard ERC 1400 — tokenization of assets
If you are an old crypto enthusiast or even newbie on the market you might still have heard of ERC20 and the battle between utility and security tokens in the token offerings. ERC20 has been the standard for most ICOs for years now. A big majority of tokens are created using it but with the new wave of tokenization of assets, this standard became an issue. It basically doesn’t comply with all intricate regulations of securities which are much more regulated financial instruments than utilities. It became a sensitive subject in the US and pushed crypto space to find new ways of being compliant with financial regulators.
In response to the issue, ERC1400 was created. What is exactly ERC1400 token and why is it so important to have it when you release security token?
Security tokens are designed to represent complete or fractional ownership interests in assets and/or entities. They carry characteristics of both fungible and non-fungible tokens (more information about non-fungible tokens in the article here: https://medium.com/@bitcademyfb/nft-non-fungible-tokens-in-bitcademy-offer-822550fb6375
The most important thing about ERC1400 token is the fact that it has mechanisms to restrict its usage based on identity, jurisdiction and asset category. It assigns ownership to its holder — it can easily replace paper shares as it is designed on the blockchain that brings significant transparency.
Let’s check a simple example:
Company is offering security tokens to its investors in Europe. It wants to exclude investors from the US because its token is addressed to non-accredited investors that are not permitted on American soil.
Now, if we build on ERC20 token protocol, we can KYC and whitelist the initial investors but we can’t force them to hold token or re-sell it to non-whitelisted accounts. In other words, your token will not meet regulations because you do not protect your tokens for re-selling it to an excluded group of people.
Now, with ERC1400 we can make all kind of restrictions:
- regulate holding period in a wallet
- whitelist all potential buyers/sellers
- KYC wallets and restrict sales when KYC expired
- put a threshold on transactions
- limit the number of tokens per wallet
and many more. The idea was to create a group of standards required by financial regulators and then tailor the token to the need of issuer.
Currently, here are few standards that fall under ERC1400 umbrella:
ERC-1594: Core Security Token Standard
Serves as a standard to support off-chain injection of data into transfers, issuance, redemption and also the ability to check the validity of a transfer as well as on-chain functionality that could determine whether a transfer will succeed.
Token Issuance and Redemption
To enable a security token issuer to specify when issuance for the security token has finished and also allows a token holder to redeem tokens.
ERC-1410: Partially Fungible Tokens
A partially-fungible token allows for the attaching of metadata to the partial balance of a token holder.
ERC-1643: Document Management Standard
Provides a standard to support the attaching of documentation to security token contracts.
ERC-1644: Controller Operations
This standard allows a party, for example, an issuer, regulator or anyone else acting as a controller, to retain the ability to force the transfer of security tokens between addresses.
For more information about security tokens issuance, you can reach us on https://bitcademy.io