A Primer for Investors
This is the 2nd post in Swarm’s series on Market Access Protocol, the compliance layer for security tokens. Read the entire series here.
MAP (Market Access Protocol) is a protocol that facilitates regulatory compliant trading of security tokens. MAP provides a solution to the liquidity problem and trade of tokenized securities, maintaining privacy, and introducing qualification portability between environments. In our previous piece on how MAP provides a compliant security trading infrastructure for token issuers, we defined what a security token is, and outlined the regulatory challenges faced by issuers — who bear the obligation to ensure that all trading is compliant at both issuance and in secondary markets.
As promised, we are continuing our close-up look at each of the core participants in the security token landscape, the challenges they have faced up to now, and how Swarm’s Market Access Protocol (MAP) can help resolve some of these. Today we explore how MAP reduces and eliminates specific frictions faced by investors navigating the security token ecosystem.
Who are security token investors?
In this case, we define “investors” as any party seeking to purchase or hold security tokens. Investors provide capital to security token issuers, and in some cases, receive dividends based on revenue generated by the investment.
Whether an individual or an institutional investor, participants in security token issuances and transactions are required to comply with all applicable regulations regarding investor identity and accreditation. To further complicate things, relevant requirements often vary from one jurisdiction to another, creating an additional layer of hindrance to comply with regulations.
Beyond simply navigating the complex terrain of compliance, there are a number of challenges faced by investors in the current security token environment that impede the efficient operation of the market. These include:
- lack of a low-cost, low-friction means of verifying their status as qualified to participate in the security token market
- insufficient guarantees of privacy and sovereignty (the ability to control access and usage) of their personal data
- the need to re-qualify for each security token they seek to purchase, and often even before they can gain access to browse the marketplace listing the tokens..
- absence of liquidity due to the high friction associated with qualifying investors and a poor understanding of the regulatory environment.
MAP solves these issues for investors.
With Swarm’s protocol, investor accreditation is not tied to a specific security token. MAP allows portable qualifications, enabling investors to transfer their qualification status between different tokens and across participating exchanges.
Each time investors gain qualifications from new providers, each additional qualification permits trading in not only the specific token initially desired, but also any other tokens with the same requirements. This facilitates investors being able to compliantly trade a whole gamut of security tokens with fewer hold-ups due to multiple and repetitive verification processes.
With MAP, investors’ personal information is kept secure. MAP only associates trading wallets with the qualification data of an individual. The actual identities of the persons trading are never exposed to MAP. In other words, MAP will create an abstraction layer between the identity of the investor and the wallet used in the transaction, in practice maintaining a strong level of privacy for the individual behind the trade.
For example, wallet ABC belongs to David Smith and has been qualified as an accredited wallet from the US. It has also passed KYC and AML. In this scenario,
- MAP holds the wallet ID (“ABC”) and the fact that it was qualified to trade in the US as an accredited investor.
- The identity of the owner of the wallet (“David Smith”) is not known to MAP.
- In this way, MAP provides an abstraction layer between the identity of the person trading and the wallet being used to trade, maintaining privacy of the individual.
Qualification Providers (QPs)
Qualification providers process the data in an application (ie, passport, drivers licence, proof of address, etc) without being able to associate the data with a wallet.
For example, let’s say David Smith wants to trade token “AAA”. He holds a wallet that is supported by MAP (this could be any key-pair wallet such as bitcoin, ethereum, or NEO), which has not yet been qualified to trade “AAA”. In fact, in this situation, none of David’s wallets are qualified to trade “AAA” token. Here is how MAP allows David to attain requisite qualification without compromising his privacy:
- Since “AAA” token is MAP-compliant, David can apply for qualification to trade it from any of the Qualification Providers associated with the “AAA” token.
- His application consists of providing his passport, a proof of address and a selfie.
- MAP generates a non-identifying key that associates the application request with his wallet.
- When the QP approves the application, MAP is updated to reflect David’s ability to trade “AAA” token, and by extension, all other tokens that require the same level of qualification.
At no point is the QP able to associate David with a specific wallet, and his trading history is always kept private.
Exchanges only have access to the wallet ID and its qualifications. The individual’s personal data is obfuscated to the exchange because of the abstraction layer provided by MAP.
MAP’s protocol enables verifiable audit trails to be surfaced by participants with sufficient permissions. Based on legally enforceable requests, regulators can be granted single-use time-limited access to an audit trail and its underlying data.
Investors benefit immediately from being able to trade comfortably and securely in a compliant manner, while prolonged usage of MAP builds a valuable history of compliance — an audit trail and reputation that is portable and reusable — for each investor. As token issuers, exchanges, and qualification providers adopt MAP, the spectrum of tradable assets grows. Combined with increased use by a larger pool of investors, MAP becomes an ever-growing compliant platform for liquidity. Thus, MAP removes inefficiencies hindering investor access to a complex ecosystem, solving many of the challenges of compliant trading within a simple interface.
Update: In our next post in this series, we explain how qualification providers can supercharge investor wallets to be security token compliant now and into the future.