ERC1400 Security Token Protocol

The ERC1400 Security Token Protocol is the latest protocol development from authors Adam Dossa, Fabian Vogelsteller, Stephane Gosselin, and Pablo Ruiz to:

 

“Accelerate the issuance and management of securities on the Ethereum blockchain by specifying a standard interface through which security tokens can be operated on and interrogated by all relevant parties.”

Adam_Dossa

Adam Dossa

Fabian_Vogelsteller

Fabian Vogelsteller

Stephane_Gosselin

Stephane Gosselin

Pablo_Ruiz

Pablo Ruiz

Indeed one of the major hurdles to mass adoption of the security token industry rests on the protocol layer.

 

The ERC1400 authors expand on this remaining hurdle in their motivation for developing this protocol:

 

“Security tokens differ materially from other token use-cases, with more complex interactions between off-chain and on-chain actors, and considerable regulatory scrutiny.

 

Security tokens should be able to represent any asset class, be issued and managed across any jurisdiction, and comply with the associated regulatory restrictions.”

 

We understand this to mean that the Authors intend to standardize automated processes for handling contingencies and regulatory compliance in security token smart contracts.

 

Our view is that how the Authors implement these protocols will have lasting ramifications for the security token industry as a whole, affecting whether security tokens truly become a financial innovation.

Protocol Requirements

As discussed in Equity Evolution or Revolution, any financial instrument must engender improvements along at least one of the following three dimensions in order to be characterized as an innovation: time value of money, contingent claims, negotiability.

 

The ERC1400 Security Protocol promises to allow for major advancements in both contingent claims and negotiability.

 

By defining a rule set, the protocol can provide a framework for tokens to respond to different conditions, thus delivering the promise that security tokens can resolve contingent claims in real time.

 

By standardizing this rule set, the protocol contributes to security token negotiability as market participants begin to trust the integrity and reliability of tokens enough to invest and trade them at higher volumes. We cover the nuances of the standardization requirement in the Token Issuer section of  The Security Token Ecosystem.

 

More specifically, the Authors explain requirements for their security token protocol as follows:

 

“The following requirements have been compiled following discussions with parties across the Security Token ecosystem.

MUST have a standard interface to query if a transfer would be successful and return a reason for failure.

MUST be able to perform forced transfer for legal action or fund recovery.

MUST emit standard events for issuance and redemption.

MUST be able to attach metadata to a subset of a token holder's balance such as special shareholder rights or data for transfer restrictions.

MUST be able to modify metadata at time of transfer based on off-chain data, on-chain data and the parameters of the transfer.

SHOULD be ERC20 and ERC777 compatible.”

MAY require signed data to be passed into a transfer transaction in order to validate it on-chain.

SHOULD NOT restrict the range of asset classes across jurisdictions which can be represented.

Technical Standards

To achieve these ends, the Authors propose three security token types:

 

#1400 Security Token Standard

“Security tokens should be able to represent any asset class, be issued and managed across any jurisdiction, and comply with the associated regulatory restrictions.”

 

#1404 Simple Restricted Token Standard

 

“A simple and interoperable standard for issuing tokens with transfer restrictions…draw[ing] on input from top issuers, law firms, relevant US regulatory bodies, and exchanges.”

 

#1410 Partially-Fungible Token

“Describes an interface to support an owners tokens being grouped into tranches, with each tranche being represented by an identifying key and a balance. Tokens are operated upon at a tranche granularity, but data about the overall supply of tokens and overall balances of owners is also tracked”

 

In addition, the Authors propose the following structure of features and functions to be inherited by these security token types:

 

ERC-1400: Security Token Standard
   ERC-w: Semi-Fungible Token (Metadata tranches)
       ERC-w-1: Tranche metadata schema
   ERC-x: Permissioned Token Transfers (canSend() and status codes)
   ERC-y: Token Metadata (set/getDocument)
   ERC-z: Optional Security Token features
       Forced transfers
       Permanent end to Issuance
       Trading Halts
       Batched transfers

 

This level of detail demonstrates a concerted effort to develop the underlying protocol.

 

For those who are skeptical of security tokens achieving mainstream adoption within the next few years, the development of ERC1400 is one among the many concrete instances of progress we can point to that contradict the notion that security tokens will remain a niche.

 

To understand what it means for security tokens to achieve “mainstream adoption,” read our article Security Tokens Coming of Age.

 

 

 

 

 

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