Fully Tokenised Equity
An Industry Game-Changer and Alethena’s Way Forward
Prologue — What Happened so Far
The past 6 months have been an incredible experience for our team. Aside from launching a token sale in May we have worked tirelessly to transform Alethena into a fully operational company.
In May the very first version of our rating portal (the so-called MVP) has been released. Since then, a number of full use-cases have been featured and many more are in the pipeline. Furthermore, we have partnered with companies that are complementary to Alethena’s services:
- As part of our due diligence, we extract the exact business logic as described in the project documentation, which is the perfect starting point for a full security review. For this specific area we have partnered with ChainSecurity, an ETH Zurich startup, which offers state-of-the-art security reviews and has recently received a grant by the Ethereum foundation.
- Moreover, since we provide a fully-fledged due diligence analysis, a key part of the latter is also the legal assessment. For this domain we have partnered with LEXR, a young and innovative Swiss-based law firm, that also acts as the legal partner of Bitmain in Switzerland.
Conducting a token sale has also been an invaluable source of insight to enhance our methodology. What does the process with Swiss Financial Market Authority (FINMA) really look like? What do you have to do to receive the famous “no-action-letter”? How does ICO marketing really work? And what are the potential pitfalls when it comes to the interplay between legal and smart contract developments? These are just an infinitesimal selection of the questions that we were able to answer from first-hand experience.
However, there is no denying that the Alethena token sale was not able to reach the soft cap. At this point we would like to thank all the investors for their patience and are very grateful for their support in our endeavour of making the cryptomarket more transparent and sustainable.
It is hard to access exactly, why the ICO failed. Certainly, the declining markets were not helpful, and competing with typical marketing budgets of successful ICOs turned out to be impossible.
We have also identified another critical factor. At the time the Alethena token sales was conceived, it was not yet clear, how actual equity could be fully tokenised. We tried to be transparent about that fact and came up with a solution (i.e. “limited voting- and profit-share rights”), but some uncertainty remained nonetheless. These circumstances are one of the major reasons preventing further professionalisation of the market.
However, it turns out that over the course of the last few months, there have been a number of extremely relevant developments with respect to the tokenisation of equity. For instance, there has been a re-interpretation of the current legal doctrine by well-known scholars in Switzerland (e.g. Prof. Dr. iur. Hans Caspar von der Crone) that now makes it possible to offer fully tokenised equity with enforceable rights.
Consequently, we have decided to refund all investments from the main token sale and are funding the project through traditional VC with fully tokenised shares.
How we are implementing this solution from a legal and technical point of view is part of the next section.
Solution Outline — Fully Tokenised Swiss Equity
1) High-Level Summary
What does tokenised equity exactly mean?
Simply put, in our new framework token holders are the shareholders! Phrased in other words, for the first time in the history of security tokens in Switzerland, holders of tokens get enforceable rights (e.g. voting- or/and dividend rights) by holding the corresponding tokens. Thus, the revolutionary step we have achieved is the amalgamation of two worlds: the old-fashioned law doctrine with the progressive blockchain technology.
How we achieve this cornerstone from a legal and technical point of view is outlined in the following and should serve as a high-level abstract for an upcoming announcement with the detailed specifications.
2) Legal Setup
From a legal perspective, the solution of fully tokenised equity is quite comprehensive. First of all, the legal qualification of share-tokens needs to be considered. These tokens qualify as uncertified securities. These securities confer only civil law rights and no financial market laws are being touched.
Second, the connection between tokens and stocks needs to be established. This causes a restriction on the power of disposition since the tokens need to be transferred in order to transfer the rights associated with the shares. This restriction needs to be empowered in the bylaws.
Third, the transfer of the tokens itself is regulated in the sense of uncertified securities. And that’s where the innovation has taken place over that last months! The corporation gives implicit approval of the transfer of tokens, which takes place without specific form requirements and this enables the transfer of rights.
What is important to note here, is that the shares are legally bound to the tokens. So transferring the token is similar to handing over a physical share certificate: the possession of the share is transferred along with it.
With said tokens, the buyer must register himself with his real name in the shareholder registry of the company, which is a legal duty. Without registration, the shareholder cannot neither receive dividends nor use his voting rights (but he can still sell the share to a next shareholder).
3) Technical Setup
At the core of the share smart contract is a piece of code that runs on the Ethereum network and records the token balances and includes standardised functions that define how the token can be transferred. In a nutshell, this is what is known as ERC20 compliance.
Apart from the core ERC20 functionality, the smart contract also includes common utility features like ‘minting’, the creation of tokens which might be necessary for example in case of a capital increase, and ‘pausing’ of the contract to be used for emergency situations or permanent upgrades.
Ledgy can track operations like token transfers or a capital increase automatically and adjusts the shareholder registry accordingly.
It is important to make sure that tokens don’t get lost, which can easily happen for example when a corresponding private key is lost. The share contract contains features that facilitates recovery of the lost tokens in such a case. The rightful owner can post a collateral in order to claim his address ‘lost’ and recover his tokens if no one else can prove ownership during a lock period. It should be noted that tokens cannot be forcefully transferred.
All of the functionality relating to this has been consolidated into the ‘claimable’ smart contract.
There are endless possibilities regarding additional features that could have been added to the smart contract, e.g. enforcement of contractual agreements.
We have deliberately decided to keep the contract as simple as possible because the increase in security and usability far outweighs the advantages of replicating a lot of paperwork in the code. It is conceivable that in the future, a revised version of the contract could include such features if absolutely necessary.
If you have questions or would like to know more, feel free to contact us. The full code can be found on GitHub.
Conclusion — A Blueprint to Develop Further
We at Alethena are strong advocates of the security token movement and truly believe that the future lies in the are of fully tokenised equity, benefiting from the enforceable rights you have as a shareholder and profiting from a liquidity premium you get by tokenising an asset. Our blueprint should serve the community as a starting point for further refinements/amendments and should be used as an investment framework to institutionalise crypto-asset investments.
The entire implementation of the suggested solution above is still work-in-progress and will hopefully be executed in the upcoming weeks — we keep you posted!
Next Steps — Remaining Challenges Ahead
Tokenising shares is only a part of a bigger picture. The aim is to eventually enable selling shares from a company’s float directly on the blockchain through a share dispenser smart contract. This is more complex from a legal perspective and there are also some open technical questions. For example, there is no standardised way to feed price information into the blockchain, an issue which relates also to the type of (crypto)currency that the shares are sold against.
Note: All involved investors and key stakeholders have been contacted and are fully informed about the procedure.
Alethena is the first Blockchain-Asset Rating Agency made in Switzerland that is 100% independent, transparent, and neutral. Visit www.alethena.com for more information.