Some of the key areas discussed included:

Identity on the Blockchain

Establishing the identity of investors is critical for KYC & AML purposes, and is one of the inputs used to determine when, and to whom, securities can be transferred.

Fabian Vogelsteller (author of ERC-20 EIP) discussing identity on the blockchain. Photo by Sash.Alexander

We were lucky to have Fabian Vogelsteller with us, who proposed the original ERC20 standard, and more recently the ERC725 / 735 standards that focus on identity.

Understanding how to concretely integrate and use identity within the securities token standard was a key take away of this round table.

Fungible and Non-Fungible Tokens (ERC20 & ERC721)

Securities share many of the characteristics of both fungible and non-fungible tokens. Whilst securities of the same tranche issued by an organisation are technically fungible, the restrictions placed upon those securities (that relate to transfers of ownership and trading) are non-fungible.,

Thomas Borrel (CPO of Polymath) discussing fungible vs non-fungible tokens

In the traditional world this is represented through legends attached to each share certificate which, when taken together with the identity of the individuals wishing to transfer securities, establishes rules and regulations around those transfers.

Most participants agreed that for adoption and easy integration with wallets, exchanges & custodial services, complying with the ERC20 (fungible) standard and newer backwards compatible standards was critical. Determining how best to integrate these two approaches was a key take away from the roundtable.

Smart Regulations

The ability to ensure regulatory compliance at the protocol level through the use of smart contracts is game-changing for both regulators and market participants.

Michael Didiuk (formerly SEC) and Lowell Ness (Perkins Coie, LLP). Photo by Sash.Alexander

The ability to enforce transfer restrictions, that depend both on the specifics of the tokens being transferred (e.g. their legends) and the identity of the individuals wishing to transfer the tokens, in a way which is predictable, compliant and secure is one of the key advantages of issuing securities on the blockchain.

A flexible interface that allows issuers, regulators and transfer agents to build rule sets for transfer restrictions and provide metadata on those rules is critical. Transfers should be able to gracefully fail and provide error reason codes when needed. These rules must support both general rules based on identity, legends, and timestamps, as well as the ability for authorised individuals (e.g. transfer agents or brokers) to provide single-use, time limited approvals for investors to use when transferring securities.

Trustless and Immutable Infrastructure vs. Regulatory Requirements

Crypto-communities are accustomed to immutable tokens, usually with fixed functionalities on both how tokens can be transferred in the secondary market, and in the manner that those tokens are issued or minted.

From left to right: Adam Dossa, Michael Didiuk, Pablo Ruiz

For securities, regulatory and legal requirements need more flexibility to deal with a host of situations, such as lost private keys, as well as additional issuance for future funding rounds or other lifecycle events (e.g. stock splits, new tranches).

How best to manage these conflicting requirements was a hot topic at the round table with a range of views. It is clear however, that in the short-term, in order to remain compliant with regulations and future proof security tokens against unforeseen events, an issuer must maintain some level of flexibility with regard to future issuance and forced transfers. Establishing the correct governance through a system of checks and controls will allow both investors, issuers and other key ecosystem participants to participate in and have full transparency around security tokens.

Lifecycle Events and Custodial Services / Exchanges

Securities go through a number of life-cycle events, from their original issuance, to dividend & governance voting, to stock splits and further issuances and funding.

Photo by Sash.Alexander

The blockchain provides an excellent basis for delivering these lifecycle events in a transparent and trustless environment in general, but one large area of debate was how best to provide this when security tokens were being held in custodial wallets (e.g. at an exchange) rather than directly by investors.

As an example of where this is important, we’ve seen exchanges struggle to manage airdrops and voting for EOS based tokens recently, with a variety of approaches taken without any clear, standardised approach.

Being able to act on behalf of its clients is critical for any organisation wishing to hold securities on behalf of investors, so providing controls and standardised methods for this is a challenging, but important piece of the security token standard.