ERC-1404, one year later
A little over a year ago, TokenSoft and other blockchain developers released ERC-1404, a simple restricted token standard, with one mission in mind: reach consensus on the functionality of tokens representing assets like securities.
Reflecting on this idea on consensus, it’s unclear on how to define consensus for a restricted token standard in an open, global market. Majority security tokens in the U.S. issue ERC1404 compliant tokens? What about other jurisdictions? What about stablecoins?
While success may be hard to define and measure for open protocols, there are several clues that the industry supports ERC-1404 tokens.
Trusted by customers (and their regulators)
With a handful of ERC-1404 security token issuances already completed, another three issuances slated for this month alone, and approximately 30 security token issuances on ERC-1404 planned by customers in the next year, customer demand for ERC-1404 has been strong.
Their primary driver? Regulators like ERC-1404’s transfer restriction requirements. TokenSoft spends a lot of time with our customers on calls educating their legal counsel and regulators.
“Our legal counsel is really excited about the features of the ERC-1404, specifically its ability to help manage the flow and transfers of tokens. They expect many clients to start exploring options like this in the current regulatory climate,” stated Thane Tokerud, the financial controller at Suku, a blockchain-powered supply chain management solution.
International issuers like Suku use the ERC-1404 standard to prevent flow back of tokens originally sold to international investors to U.S. investors.
With several open-ended ’40 Act Funds tokenizing, TokenSoft’s customers clearly believe ERC-1404 meets their security token needs.
Recommended by engineers
Engineers like simplicity for ease of integration. Blockchain engineers like simplicity under the presumption that less is more from a vulnerability stance. TokenSoft has received numerous compliments on the simplicity of ERC-1404 smart contracts.
“Having reviewed 1000’s of lines of blockchain-specific code, I can’t stress the importance of simplicity in smart contact design enough,” said James Prestwich, founder of Summa who recently audited multiple ERC-1404 smart contracts pre-launch.
Built as a modified ERC-20, ERC-1404 adds only two additional functions: (1) detect transfer restriction; and (2) give a human-readable error message if a transfer will fail. Wallets and exchanges supporting ERC-20 can quickly integrate with ERC-1404, as well.
Watch TokenSoft software engineer Ron Gierlach give a technical overview at SF Cryptocurrency Devs meetup:
Broad use cases
Unlike other token standards that over-optimized for specific securities use cases, ERC-1404 was intended to support a range of use cases. This generality is implicit in ERC1404’s “Simple Restricted Token” name: the word “securities” is intentionally absent.
Today, we have customers using ERC-1404 for several unanticipated uses cases. One customer (one of the world’s largest asset managers with over $2 trillion under management) is using ERC-1404 to comply with the FINRA Gift Rule in a proof of concept project. Another customer (Swiss bank) will use ERC-1404 for everything from an index token and equity token to a reward token and a stablecoin.
To paraphrase TokenSoft’s Swiss bank customer, “ERC-1404 and blockchains make it remarkably inexpensive to experiment with multiple financial structures. The flexibility of ERC-1404 works well for us as a financial institution planning to issue multiple tokens with TokenSoft.”
The common theme among ERC-1404 issuers? Restricting transfers makes automating compliance easy.
Broad industry adoption is the biggest indicator of ERC-1404 success. If you search the SEC's public EDGAR database, you’ll find multiple filings from issuers using ERC-1404 who are not TokenSoft customers!
Our team views non-customer use of ERC-1404 as the most exciting metric of success. Why? Open standards and interoperability help blockchains flourish. We believe ERC-1404 success will lead to broad industry success which will, in turn, lead to TokenSoft success.
The ERC-1404 standard allows shareholders to interoperate with the entire Ethereum ecosystem with added functionality that allows the Fund to enforce transfer restrictions within the share’s “smart-contract.” (Source in screenshot above.)
Abroad, we have heard of ERC-1404 use from as far as Tel Aviv. Each of these groups educated themselves and adopted the standard without TokenSoft’s involvement.
The financial industry’s use of ERC-1404 has been one of the most exciting developments for us. We hope year two for ERC-1404 sees more adoption to come, as well.
TokenSoft is the leading platform for financial institutions issuing security tokens and other compliant assets on the blockchain. From banks to IPOs, our suite of technology supports the full lifecycle of securities including onboarding, distribution, custody, and ongoing token administration.
A prior version of this story referenced INX token contract being ERC-1404 compliant which was incorrect. The INX token is a modified ERC-20 with whitelist similar to ERC-1404.