Standard of Standards in Security Tokens

With the number of Security/Permissioned Token standards growing, OpenFinance has developed a strong need to drive the conversation towards efficient integration and cooperation. Exchanges, issuers, and custodians must find a universally accepted, and frictionless way of tokenizing securities to usher in the new age of finance. To aid in the process of discovering this standard, we have put together a guideline of how these should best be designed for exchange acceptance & interoperability. We seek to build a coalition of partners involved in primary issuance, secondary trading, compliance, and custody. This is very much a work in progress, and we enthusiastically invite anyone interested to contact us and contribute.

There are still a lot of unknowns regarding the best practices for trading, and how each existing standard will behave. Key questions we are seeking to solve include but are not limited to:

1. Race conditions when on different exchanges, how does the permission layer delegate things such as Reg D shareholder count? If a fund is at 98 shareholders should a person buying one share get priority over someone buying 10,000? How is price-time priority honored in a decentralized world?
2. Third party custody — this adds another layer of whitelisting, and performance questions
3. Validations & permission implementations — off chain checks vs smart contracts (performance)
4. Identity & sensitive data management — Uniform standards for integration

Here is the current Technical Listing Requirements for OpenFinance. We have kept it basic, and this covers most of the Reg D,S,CF, & A+ offerings we have encountered thus far.

Standard token interface: Your token must implement ERC20.

Permissions: The token must take care of the following permissions either with an off chain validator, or at the smart contract level.

1. Anti-Money Laundering (AML) & Know your Customer (KYC). Token must only be able to transfer to validated or whitelisted permissioned addresses linked to an Entity.
2. Investor Accreditation. While traders using OpenFinance are not required to be Accredited, the token must account for this if applicable.
3. Residency. Since International customers are eligible for trading, the token must have permissions incorporated relevant to where the trader is domiciled.
4. Cap Table. Token Must account for number of owners if relevant to the security being traded.

Error Messaging: Because we want everyone to use a common interface to interoperability (ERC20), we cannot change the interface as seen by the exchanges. With the differences in accepted standards, and the way the smart contracts interact with each other, there will be different error messages in all. We require that transactions not only fail if compliance conditions are not met, but also report the specific reason for failing. We want to provide not only a great user experience on our trading platform, but a detailed compliance trail in the case of audits.

Quality Assurance: A well documented and easy to follow Readme, and functional/integration test suite.

Interoperability: There should be clear plan in place for ensuring that trades which happen outside of our trusted set of secondary markets are compliant. For example, issuers may choose to completely handle compliance for the tokens they issue.

Provisional Standards: Standards which implement most or all of the above requirements include the following.

To contribute, please contact:

contribute@openfinance.io

1. DS Protocol — https://www.securitize.io/dsprotocol
2. R-Token — https://github.com/harborhq/r-token
3. ST-20 — https://github.com/PolymathNetwork/polymath-core
4. S3 — https://github.com/OpenFinanceIO/smart-securities-standard

-Thomas & Ian

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Thomas A. McInerney is the Chief Product Officer at the OpenFinance Network. Thomas serves as the Technical Advisor to Polynexus Capital, a digital asset fund, and ST partners, a Security token Advisory. He is Co-author of S3, and speaks at crypto conferences nationwide. He studied Finance & Economics at University of Illinois Urbana-Champaign, and Computer Science at Northwestern University.

Ian Shipman is Head of R & D at CFX Markets. He holds a Ph.D in Mathematics from the University of Chicago, prior to CFX, was a postdoctoral researcher at Harvard.

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