The Blocks of a Security Token Platform
In my previous article about security tokens we discussed some of the key components that are necessary to build a robust ecosystem around the new asset class. Among those components, security token platforms are the key building block to bring security tokens to the broader cryptocurrencies market. In order to understand security token platforms we should take a look at some of its fundamental building blocks.
The first generation of security token platforms is just emerging with technologies such as Securitize, TrustToken, Harbor and Polymath leading the charge. From a market development perspective, these group of technologies can be seen as an evolution of an earlier group of technologies that attempted to tokenize alternative asset classes such as real estate, art or diamonds in the blockchain using traditional utility tokens. In my opinion, the vast majority of products first generation of asset tokenization platforms haven’t seen mainstream adoption because they lacked the legal, technological and regulatory elements to enable key capabilities such as legal fractional ownership, dividend issuance, governance, etc. However, that first group of technologies paved the way for the first generation of security token platforms.
What is a Security Token Platform?
The objective of a security token platform is to manage the automate the lifecycle of security tokens from creation to trading. To be more specific, there are several elements of the lifecycle a regulated crypto asset that should be an integral part of security token platforms:
If you read the whitepapers of security token platforms such as Polymath, Securitize or Harbor, you will find many commonalities in their architecture model and protocols. Those common components effectively represent some of the fundamental building blocks of security token platforms. If we were to combine those building blocks into an abstract architecture of a security token platform, we will get something like the following figure:
What are the specific roles of the components of a security token platform? Let’s review a few of the ones included in the previous diagram:
a) The Base Token: This component represents a security token standard that is the base of all security tokens created in the platform. Standards such as Harbor’s R-Token, Polymath ST20 or the ERC-884 proposal provide the foundation for this token model.
b) The Utility Token: Many security token platforms used utility tokens to compensate some of the internal participants in the network. Polymath’s POLY is one of the best examples of this model.
c) Token Issuers: This persona represents the owner of an alternative asset to be tokenized on the platform.
d) Investors: These are individual buyers and traders or security tokens.
e) Legal Delegates: Very often, security tokens require legal processes that take place off-chain in the real world. As a result, security token platforms should provide smart contracts that outline the role of entities such as law firms or notaries in the tokenization of alternative assets.
f) Custodians: Security tokens are often collateralized by real world asset such as real estate leases or shares of private companies. During the tokenization process, these assets should be kept in the custody of third parties using mechanisms such as Trust companies or Special Purpose Vehicles(SPV). The role of those participants should also be abstracted via smart contracts that I like to call Custodians.
g) Regulators: The issuance and trading of security token is subjected to regulatory models such as KYC, AML and many other compliance mechanisms specific to country or industry. Any viable security token platform should provide interaction with several regulatory services also abstracted via smart contracts.
h) Inspectors: How do we certify the value of the alternative assets behind a security token? Inspectors are responsible for regularly auditing and certifying the value of the assets related to security tokens and issue the corresponding reports into the network.
i) Liquidity Providers: The role of liquidity providers is to ensure the viable tradability of security tokens. From security token exchanges to alternative vehicles such as Bancor, liquidity providers are an important component of security token platforms.
There are many other relevant building blocks of security token platforms but the aforementioned list represents a good start to understand the DNA of this new type of crypto asset. As security tokens grow, we can see several of the foundational blocks of security token platforms to evolve into standalone ecosystem focused on enabling a specific aspect of the security token lifecycle.