Blockchain is not ready to fit all the requirements of Digital Securities
ICO market passed and crypto community preparing for new Era — Digital Securities Offering or simply STO. The amount of funds raised through ICO is less than $270m in November. This might be a sign that people don’t trust ICOs anymore. The next big stage of Blockchain is Security Tokens approved by regulators and more secure for investors. But for now it’s not so clear how new platforms will work, what exchanges will better adapt to to Security Tokens, and whether there will be a common Security Token standard approved by SEC and used by each project. There are more than 40 STO platforms for now, but most of them have some issues: in token standard, in platform, in features etc. So let’s look at them.
Private key recovery
Most of standards allow investors and issuers to recover their accounts after losing private keys. In case of investor tokens will be transferred to his new address: some standards will do it by burning tokens from his previous address and minting to the new, some standards have managers or regulators, who will transfer it from his previous address to the new. In case of issuer it’s not so simple, because token may be tradable on the Exchange when the loss occurs and reissuance of new tokens will come as extra work for exchanges too. The bigger challenge occurs when issuers’ private key will be stolen, because unlike ICOs here issuer has more rights and power, like access to cap table, in some standards also access to transferring tokens from investor addresses or to changing regulator contracts and managers. Using these rights hackers may create chaos that then it will not work again to reissue tokens.
Investors could be from different jurisdictions and could be situation that this jurisdiction will have different set of overlapping transfer restrictions. The common decision is issuing several tokens for each type of investors, but creating several whitelists with different restrictions and using it in one token is better.
Issuer of Security Token has lot of rights and sometimes it goes beyond the allowed . For example in Atomic Capitals’ AtomicDSS token standard there is a function forceTransfer that allows the issuer(in this case owner) to transfer tokens to any address without checking restrictions.
No readiness for exchanges
Using Ethereum for Security tokens could be a bad decision because of high transaction costs. Centralised exchanges are not the best place for trading security tokens because the whole trade history will be stored off-chain and it’s not as secure as saving it on chain. Now most of the platforms working on making SEC-compliant smart contracts. Market will need new Blockchain for security tokens, with low transaction fees, fast transactions, built in KYC/AML, etc.
KYC for each asset
If you are an investor and want to participate in STOs you will need to pass KYC for each asset. Now only few platforms think about doing one big investors registry on-chain and it should resolve the problem for investors of going through KYC process multiple times before each STO. Also it will be useful gives each investor an ID which connects to his info on-chain and gives ability for attracting few addresses for one ID in case investor wants to use different addresses for each STO he participates.
STO market will not be the same as ICO market, it’ll be more secure for investors. But for now there are lot of projects from ICOs market trying to adapt to STOs market with having nothing related to Security Tokens. The main problem of cryptocurrency market — Investors who ready to stupidly give all their money for projects without learning any details of this project. We need more clever investors and more trustful projects.
In cooperation with ILDAR SHAKIROV.