Introducing DS (Digital Securities) protocol: Securitize’s Digital Ownership Architecture for complete lifecycle management of security tokens
It is clear that security tokens or more adequately digital securities (not to be confused with the currently more popular utility tokens) are becoming the talk of the street these days as they have the potential to improve on a massive market. According to a recent article from the the Wall Street Journal, $1.6 trillion securities were sold privately in the US alone in 2017. Our research shows that the global market without China is closed to $2.6 trillion.
Digital securities address the fundraising, automation and liquidity needs of a very large pool of financial assets including companies (traditional and blockchain-based), funds (VC, PE, etc.) and other illiquid assets like real estate or art. Tokens digitizing any kind of securities in the blockchain are a huge play and are what really gets us excited about this market because of their potential benefits, namely:
- Better capital formation: Enabling fractional ownership in a scalable way and reaching out to more investors globally. Security tokens basically allow anyone with an internet connection and the right accreditation (depending on their home jurisdiction) to invest in a deal. While providing legal compliance may reduce the number of potential investors (compared to utility tokens where legal status/standards still remains unclear), the available investor pool for tokenized securities is still quite large. In the US alone, there are more than 12 million accredited investors and only less than 2.5% have participated in a private placement of securities last year.
- Automation of the entire lifecycle of a security: From the investment side (automating the process of passing KYC/AML, determining the accreditation level of an investor as well as outlining the collection of funds, token issuance) to the complaince on the secondary market trading (more on this below) and the process of token reimbursement, when needed. You can even automate governance on the blockchain and provide transparency to the entire process.
- Liquidity. Security tokens are digitally tradable under an ATS license in the U.S. or an MTF license in Europe, and there are already dozens of companies that have announced entering this space- OpenFinance Network, tZero, VRBex, Coinzoom, BnkToTheFuture, etc. Unlike traditional exchanges, these marketplaces will be more efficient, cheaper and open 24/7 and will have automated compliance. They also have the potential to eliminate some intermediaries like central depositories, clearing houses or transfer agents. Liquidity is also known to increase the value of an underlying asset.
- Enable more complex investors rights. Smart contracts on security tokens allow to programatically code complex economic and voting rights for investors that previously would have been not feasible.
Securitize’s mission is to be the leading platform for enabling regulatory compliant digital securities issuance, capital formation and liquidity on the blockchain. Over the last 5 months since the Securitize launch, we have been evolving our platform to cater to a variety of our customers’ needs — 17 of them signed, as we write this.
So how do we make make security tokens a reality in a manner that facilitates a dynamic and open participation across all actors in the ecosystem? Our proposal is the DS (Digital Securities) Protocol, Securitize’s Digital Ownership Architecture for the Complete Lifecycle Management of Digital Securities that we are unveiling here.
Securitize is currently implementing a new blockchain protocol and architecture for digitizing ownership. It will be focused on creating infrastructure which supports third-party apps to address all aspects of the digital security lifecycle. We believe that the ability to create independent apps for any existing and future use cases is a more robust, scalable, and open solution, as proven in many other software environments.
To achieve this, we are developing DS Services, the basic infrastructure of our protocol enabling lifecycle management and compliance for digital securities. These services are available to provide basic capabilities to all stakeholders. The smart contracts will include:
- The Trust Service: enabling the authorization of different players (like exchanges) and DS apps to be used for an existing issuance.
- The Registry Service: an on-chain register of investor information, allowing the KYC information about investors to be considered in the different interactions during the digital-security lifecycle.
- The Compliance Service: which implements specific compliance rules applicable to a DS token, enabling compliance in token ownership and trades.
- The Comms Service: to provide communication of relevant events to investors.
The DS Protocol considers the whole lifecycle of a digital security enabling applications (DS Apps) to address relevant events associated with the ownership of tokenized economic rights; considering not just the issuers but also investors and exchanges, and the relationships of trust that may be required among them; and creating an ecosystem in which developers can expand the value that digital securities provide to stakeholders. It also includes additional APIs enabling Exchanges to integrate into the Digital Securities ecosystem in a simple way that also improves the customer experience for investors.
The potential around the market of digital securities is so vast that any approach needs to consider the multiple actors that will need to be involved. That is why, rather than expecting to control a specific network or marketplace, Securitize wants to help build an ecosystem in which issuers, DS Issuance Platforms, investors, DS App developers and exchanges will be able to unlock the full potential of digital securities.
Our approach to solve the problem has been top down. We provide an end-to-end platform that works for a specific issuance and has all the tools the issuer needs- eliminating any worries during fundraising about the technical process. We then build and customize from there. This has allowed to us capture a much larger market share than any other company in this space- specifically those who have taken a bottom-up approach for their technology by trying to build complex, low-level protocols first.
We have moved from funds to companies, from companies to real estate, from equity to revenue share models and even daily dividends and more complex structures like tokenizing equity in multiple companies simultaneously under one token. The breadth of our customer base and our pipeline has allowed us to view many different use cases. Our multiple security token offerings (STOs) have made us understand in detail, the needs of an issuer when undertaking a security token raise.
Recently, Securitize has started to interact with several forthcoming security token exchanges to understand how integration will look. We have already signed a partnership with OpenFinance Network to trade our tokens in their marketplace- the world’s first agreement between a security token issuance platform and a security token exchange. So, we now have a solid understanding and foundation for lifecycle management and managing secondary trading in regulatory compliance across multiple exchanges.
Securitize will make available to anyone a reference implementation of this protocol on our own DS Issuance Platform, which will also be supported with the real-world issuance of tokens for our customer base. In addition, we expect DS App developers to enrich the ecosystem providing new capabilities to extend the value that comes with owning digital securities for all stakeholders.
You can read the full details of our blockchain architecture and protocol in our whitepaper available here. Let’s tokenize the world!!