Ravencoin — Tags and Restricted Assets

The Problem

As things stand right now in February of 2019, there are several attempts to create tokens that represent securities to be compliant with SEC rules established in 1933, 1934 and 1940. These days computers can do just about anything. Computers can read and summarize books, drive cars up a twisty canyon road, and even display an overhead view of anywhere on the planet. But making these tokens work according to consensus rules and simultaneously comply with a really arcane, and often fuzzy set of rules is a genuine challenge. It’s a bit like mating a Golden Retriever and a Squid.

Naturally, a platform that lets you experiment and rapidly prototype is a good place to start. For this, most developers have been using Ethereum and building on top of the ERC-20 template. This has led to several proof-of-concept tokens. The problem with many of these experiments is that they’re converging on different incompatible whitelist solutions. This has two problems 1) The whitelisting systems will likely be incompatible silos, and 2) It may not scale very well when a particular token is held by many people, and the whitelist is per-token.

The Solution

The proposal below represents a method by which the core protocol of Ravencoin can be improved to create two new token types that allow for Restricted Assets. The purpose of these restrictions is to limit the transferability of a token to known good actors, but without revealing the identity of the actors to anyone other than the original entity that verifies their identity. Only when legally required to do so, would the verifier reveal the identity.

Two new Ravencoin token types.

  1. One starts with a $ and represents a completely new token type which is a Restricted Asset. Restricted Assets only move to Tagged addresses.
  2. The other starts with a # and is a Tag. Tags tokens can only be transferred by the issuer. Tag tokens can be sent or revoked only by the Tag issuer.

When a Tag token is sent to an address, the meta-data will provide enough information on-chain to allow anyone (read regulators) to know where the KYC/AML and PII data is stored. This allows for fool-proof audits and perfect accountability.

Use Cases

The use cases for Restricted Assets are limitless, but a few are listed here to inspire the imagination.

Use Case #1

Subscription-based assets.

Upon payment of a subscription fee, your address gets a tag #SUBSCRIPTION_GAME_X

Game tokens are created $SWORD_OF_X, $SPELL_OF_Y which honor the #SUBSCRIPTION_GAME_X tag. There could even be subscription tiers.

These tokens move only among subscribers. If the subscription expires, the tokens still belong to the holder and could be sold, but the player can’t receive more if the #SUBSCRIPTION_GAME_X has been removed from their address.

The tokens can be sold and transferred to any subscriber even by a non-subscriber that earned or purchased them during their subscription.

Use Case #2

A security token that complies with regulatory rules when operating in peer-to-peer mode.

For this use case, the primary consideration is whether the transferee is allowed to hold the token under a set of rules that have morphed over the years. While these rules began in a time when information asymmetry was at a high between the issuer and potential purchaser, the rules still apply at a time when anyone can look up information on their mobile phone.

As things stand today in early 2019, the SEC has not provided clear guidance on whether a security token can operate in a peer-to-peer mode on a perfect publicly auditable decentralized ledger. For this reason, the conservative approach is to ensure that peer-to-peer operation is restricted to addresses that have been “whitelisted” or “tagged” and for which an entity has done KYC/AML on the address.

For this use case, the best practice when using Restricted Assets is to have a consortium of regulated entities join together to provide KYC/AML that issuers will trust.

Example:

In this example, a group of trusted verifiers get together and operate under the token named #USKYC. This token will be managed by the consortium and only trusted (regulated) verifiers. Once the verifiers have verified the identity and done proper KYC, they will send one of their tokens to the address of the user. A user could have an address with Tags from multiple verifiers. Accredited individuals might have several Tags.

#US_KYC/#SWARM
/#VERIFYINVESTOR
/#IDENTITYMIND
#US_ACC/#VERIFYINVESTOR
/#STARTENGINE

An issuer of a security will specify which Tags are necessary for their token to be held in an address.

We will use $UBER as our example security token. The issuer of $UBER will specify the tags needed. This can be specified as one simple tag that must be present, or a collection of Tags with some simple AND, OR, NOT logic.

Examples:

(#KYC & #ACC) & !#DEA
#KYCANDACC
#KYC & #UNDER2000

FAQ on Restricted Assets

Q. How does this affect the existing Ravencoin asset tokens?

A. Not at all. The existing system of creating tokens that move freely and are censorship resistant does not change at all. It is only the new token type which is easily identified with a $ at the beginning of the token name that has these special restriction properties.

Q. What if I bought a token name already, but I want the same name as a Restricted Asset?

A. This is not set in stone yet, but there will likely be a grace period where the holder of the Admin token for the regular (non-restricted) token of the same name can reserve the same name as a Restricted Asset up until a certain block number.

Q. What if I have purchased a $<token>, and the issuer freezes it?

A. Then it is visible in your account and marked as frozen. You’ll need to work with the token issuer on the reason it was frozen to get it unfrozen. It is strongly recommended that the token issuer specify the reason for the freeze in the meta-data for the transaction.

Q. How does this interact with messaging, voting, and dividends.

A. It should be 100% compatible. Messaging, voting, and dividends should work with Restricted Assets.

Q. Isn’t this against the crypto ethos of un-censorable, unrestricted, un-revocable tokens?

A. Yes. Yes, it is. This new token type is intended to serve a very different purpose. Please know that we’ve thought about this quite a bit, and understand that the existing tokens will not change. The admin token for a token that doesn’t start with a $ does not have the power to freeze, nor are the regular tokens restricted. Think of it as a Ferrari with the option to mount a ski-rack. Yes, it goes against the spirit of the Ferrari, but it adds versatility if you’re going skiing. Keep the ski-rack off (don’t use Restricted Assets) and it stays true to its purpose.

Q. What happens if someone sends my Ravencoin address a Tag token that I don’t want? Can I get rid of it?

A. We are considering an option to send them to a burn address. The technical details of these tokens are still being worked out.

Q. Why can Tag tokens only be transferred once?

A. They are used to effectively tag an address. If they were allowed to be transferred again, then it defeats their purpose. If Alice were sent a Tag token that pointed to Alice’s KYC information, and then she sent it to Bob, then the KYC info would be Alice’s info attached to Bob’s account. That wouldn’t work for a Restricted Asset.

Q. Why is Ravencoin messing with the purity of design to add Restricted Assets?

A. Because Ravencoin is well positioned to help an industry that’s struggling with how to make a token that interacts with the legacy global financial system. There were three options: 1) Ignore the wave of 2018/2019 experiments with a compliant token. 2) Fork Ravencoin — or let someone else fork it — to build a compliant token. 3) Embrace the transition and build a small core set of capabilities to allow for elegant compliance and bridge the crypto and legacy financial systems of the world. We think the last option benefits RVN the most.

Q. How do I choose which Tag my Restricted Asset will honor?

A. What? Oh, you mean which Tag token will the Restricted Asset look for before moving into the Ravencoin address. That will be set at issuance. You’ll specify a root level Tag (or Tags) that your Restricted Asset will ensure exists in an address before moving to that address when you issue the Restricted Asset. Sub Tag tokens will also be allowed, so make sure you either control or trust the holder of the private key for the root Tag because they can add additional providers.

Q. Can I change the Tag that my Restricted Asset trusts?

A. Yes, provided the Restricted Asset is still set to re-issuable. There might be a way to re-issue and change that information. The details are being worked out.

Q. Are there specifications for the meta-data for Tag tokens and Restricted Assets?

A. Yes, there will be. Some will be required like choosing a Tag for your Restricted Asset. Others will be strongly recommended, like the meta-data for your Tag. If others trust your Tag and sub-Tag, then a shared economy can develop. We hope that different projects and jurisdictions build trusted consortiums of Tag issuers. This will allow eco-systems to develop for issuers and secondary trading that remains compliant in their respective jurisdictions.

Q. Isn’t this just to satisfy the crazy rules the SEC put in place almost a century ago?

A. Partly, but interestingly other jurisdictions besides the US have rules that must be followed. The rules may be less restrictive in other jurisdictions but still needed for compliant secondary trading and peer-to-peer operation. If a jurisdiction has no rules for secondary trading or for peer-to-peer transfers then keep using the regular Ravencoin assets as they’ll continue to work just like they always have.

Q: Has this been approved by the SEC?

A: First, I’m not a lawyer. Second, that’s not how it works. As I understand it, you can even get in trouble for saying that the SEC has approved something. Third, I’ve heard first hand that the regulators are being reasonable and trying to figure out how to make things work for blockchain projects. Ravencoin is simply providing a better tool that we hope will allow compliance, keep bad actors out, and keep regulators happy.

Q: Was this originally the plan for Ravencoin?

A: No. This is in response to the regulatory ramp up in 2018 in some jurisdictions which requires that only known individuals or entities send peer-to-peer on certain tokens (securities). For jurisdictions that allow unrestricted peer-to-peer transfer, we strongly encourage the use of the original Ravencoin assets. The Restricted Assets are an adaptation to satisfy burdensome, privacy-destroying regulations, with a goal of reducing information replication which makes Ravencoin Restricted Assets a better alternative to those being promoted now.