What can Ontology do for security token offerings (STOs)?
Ontology announces the new OEP-506 token standard
STOs have increased in popularity recently, even being regarded by some as the next capital market revolution. Ontology’s technology philosophy is to be transparent, regulatory-friendly, and utilize decentralized digital identity. We have conducted a series of research and case studies on what we can do to support STOs and recently released the OEP-506 token standard proposal. OEP-506 standardizes a series of interfaces for security token offerings (STOs) and meets other requirements they have, such as KYC completion.
In this article, we take a deeper look at STOs and related services and then talk about how Ontology fits into this process.
What are STOs?
STOs, or security token offerings, are securities that are tokenized and then distributed in private and public sales to receive funding under regulatory frameworks. Private sales are still the main component of this process, and risk preference makes high net worth customers and institutions the main participants.
STOs take existing financial assets or interests into blockchain-based digital assets, such as corporate equity, creditor’s rights, intellectual property rights, trust shares, or precious metals. STO projects need to undergo compliance review, project code audits, and team background checks. They are also subject to strict review before registration.
It is generally accepted that STOs have improved the efficiency of project financing, expanded security tokenization, and reduced barriers to user access — greatly improving global liquidity of assets.
What can Ontology do for STOs?
An infrastructure that supports STOs needs to be able to support full lifecycle management and give the issuer access to the relevant dApp service. The necessary services include:
- Trust services: Management of participant rights at all levels. Interfaces should be configured for initial distribution, additional issuance, token burning, rights removal, and so on;
- Registration services: Investor information registration and review. Appropriate access to specific regulatory areas;
- Compliance services: Implement regulatory policies required by the issuer;
- Notification message services: Information disclosure to investors.
Ontology’s multi-level authorization mechanism and smart contract access control allow for control of regulatory agencies, issuers, and investors.
Pre-built security token services allow for a range of business activities (predefined by a portion of the stock exchange’s business rules), including:
- Assign different levels of permissions for addresses of investors. For example, it may be possible to add the information of several investors to the registration service, but only one specific address will manage all registration information.
- Authorize an exchange to import additional information into the registration service. For example, the collection of KYC information from investors under the commission of an exchange. Investors authorize exchanges they trust to perform these services.
- Authorize other services for certain permissions.
Registration services are used for investor registration. Each investor is identified by one ONT ID (Ontology’s DID).
Using this cryptographic component of Ontology, investors are allowed to conduct KYC and AML while protecting privacy, including support for the following services:
- Identifying the regulatory rules in the country/region of the investor;
- Identifying the investor’s KYC status;
- Identifying investor qualifications;
- Investor KYC due date;
- Investor certification due date;
- Investor KYC hash;
- Investor certification hash.
With on-chain identity and KYC/AML services, it is easy for investors to link identities, qualifications, and account information.
Compliance services mean completing the compliance process and contract signing for investors based on the regulations of their country/region.
The written regulatory rules are placed in smart contracts. The investment agreement between the investor and the issuer are completed through the ONT Sign electronic signature and attestation services, and both sides will sign to approve and comply by regulations and investor risk statements.
Regulatory smart contracts often monitor the following information:
- Information about a specific investor, such as a hash of a signed agreement or agreement document;
- The number of investors in a specific category, such as non-accredited investors from a country;
- The number of transactions occurred during a certain period of time.
Notification message services
Ontology provides an information disclosure interface for the issuer, and links and deposits important announcements for investors to report false advertisements and information fraud.
Finally, for token registration, Ontology provides the OEP-506 protocol for the issuance of encrypted digital securities and defines multiple flexible query and conversion interfaces. The issuer can customize the address of the exchange and the receiving institution to achieve a seamless investment process delivery. In addition, OEP-506 provides support for the transfer board to allow the issuer to transfer flexibly according to needs of their market.
In the process of building a blockchain infrastructure to serve the real economy, Ontology has accumulated a series of capabilities to serve physical business needs. In line with the development of STOs, we can also provide on-chain trust services for these players.
People used to buy stocks and sign contracts using physical signatures in a single geographical area and a single market. Now, with blockchain, the future trend is to develop and digitize the process of issuing, matching, signing, and trading of asset transactions. Ontology blockchain infrastructure is making this possible.
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