First ever Security Tokens traded with a decentralized compliance protocol
During the last months we have been hard at work with several liquidity partners to fulfill the promise of Security Tokens, or Digital Securities as we prefer to call them. Our team is working with these partners to integrate the mechanisms of Securitize’s Digital Securities Protocol (DS Protocol) within their platforms. Our protocol provides a guarantee to issuers that the required control mechanisms (due to regulatory and business reasons) are enforced during trades and it does so automatically and in a decentralized way using smart contracts on a public blockchain (Ethereum in this case).
Decentralized Compliance is the Key
Earlier this year, Templum announced that it was to be the first company to execute a secondary market Security Token transaction of Blockchain Capital’s BCAP token. Given our intimate knowledge of the BCAP token (the original version, and not the current one upgraded with our protocol), we well know that this was not done using a decentralized compliance protocol on the blockchain, so the approval and necessary checks were presumably done manually.
What we will show you here is the first ever usage of a Security Token protocol to approve a trade on an exchange. The compliance checks for this exchange were run on the blockchain in a completely automated and decentralized way, implementing Securitize’s Digital Securities (DS) Protocol’s set of smart contracts. The trades were done in two different marketplaces — two of the many that are integrating our compliance protocol. Please note that while some exchanges choose to use their own internal protocols for compliance, the advantage of using an independent one (like ours) is that the same token can be issued with a single protocol, and traded compliantly on multiple exchanges simultaneously, which will increase liquidity for issuers. We believe that, as in capital markets today, the role of the exchanges versus the role of the so-called transfer agents (which in this case are just protocols on the blockchain for Security Tokens, decentralized transfer agents) will be delineated. A protocol (transfer agent) that is proprietary in one exchange is less likely to be adopted by competing exchanges.
Trading via Open Finance Network
We started working with Open Finance Network (OFN) back in May and have integrated the DS Protocol into their system. Thanks to the integrations made, we have now seen how an investor who onboards and runs KYC checks via the OFN platform can be cleared into the Registry Service associated with a DS Token. We saw this happen with the SPiCE VC Token, and it was possible because SPiCE VC “trusted” OFN via the DS Protocol to execute.
With this possibility, a new investor is able to buy SPiCE VC Tokens from other investors selling them. The OFN platform matches such orders and clears them via the
transferFrom() method in the DS Token (a standard ERC20 method since we are ERC20 compatible). The DS Protocol then checks not only that both parties in the transaction are in the Registry Service (what would be a basic whitelisting), but also that the current context and the parties' categories allow such a transfer to happen. Note here that simply creating whitelists of investors on a contract is not enough to run a decentralized compliance protocol; you also must check compliance rules and investor limits in real time.
The approved transfer will move tokens from one party's wallet to the other’s.
And here is the first transaction that ever executed such a transfer between parties using the DS Protocol via the OFN platform, which happened a couple of weeks ago:
Ethereum (ETH) detailed transaction info for 0x721c5bce52230148d810cc153e3f556eb482582e4a40063c125b986f2d35267aetherscan.io
The transaction shows how 4 SPiCE tokens were exchanged. There is no other token being exchanged as part of this transaction because the trade was made for US dollars held in custody by the OFN system.
This trade was facilitated between two European investors (one in Spain, one in Germany), and therefore was approved following Reg S and the local restrictions of those two countries.
Trading via AirSwap Spaces
We have also been working with AirSwap, so that their bulletin-board service can facilitate trades between individuals holding DS Tokens — but in a controlled way. The way AirSwap works is different than OFN which is a licensed ATS. AirSwap provides pure P2P (person to person) trades, has no order book, no order matching and no transaction fees, and simply acts as a place where people that want to buy and sell tokens find each other and agree on a price to trade. But still, we must ensure that these trades happen in a compliant way and this is where our protocol plays a role.
The tests, done via AirSwap Spaces, permitted trades between investors who were identified by their holding of a wallet owning an SPiCE VC token issued with our DS Token protocol. Since they own tokens, they are already part of the DS Token Registry Service, and therefore are registered investors. AirSwap Spaces then facilitates the tools for these investors to create a personal chat channel in which they can arrange a trade. Such a trade will materialize in a buy or sell order, to exchange some quantity of a DS Token for some other token.
The trade is then executed via the AirSwap smart contract, which manages both exchanges (the DS Token and the counterpart token) as part of a single transaction, so that both exchanges, or neither, are cleared. AirSwap also relies on the ERC20
transferFrom() method, which the DS Protocol controls to ensure the validity of the transaction.
This is the first transaction that ever processed such a trade of DS Tokens via the AirSwap protocol:
Ethereum (ETH) detailed transaction info for 0xe6988ff8b12f33724b28150699b3b64ff1060496c511563a9dac7c853bb5d177etherscan.io
In this case we can see how the AirSwap contract linked two transfers in the same transaction, allowing the exchange of 1 SPiCE VC token for 0.00875 ($1.77) of WETH (Wrapped Ether).
And many more to come!
We are very proud to be working with OFN and AirSwap to advance the future of Security Tokens, and provide compliant trade via a decentralized protocol on the blockchain — the first time that has ever been done in the world. The above transactions are still not real transactions but tests done using tokens just for that purpose but completely simulate how it will work in a real situation when they launch, something that is happening very soon. We are also working with other partners to enable compliant liquidity for Digital Securities, like Blocktrade, BnkToTheFuture, ERC Dex, Hyperion, Tzero and SharesPost, and we will very soon be listing many more Security Tokens, issued by us beyond SPiCE VC, on all of these marketplaces.
For many more digital securities to trade…