Solving Challenges with Smart Assets
In late 2018, Waves Platform released Smart Assets on MainNet and launched Tokenomica, a fully compliant exchange for digital assets. This article, centered on use cases for Smart Assets, comes as the first in a series focused on how Waves solutions facilitate building the financial system of the future.
Over the last couple of years, regulated crypto exchanges have faced challenges related to compliance with requirements imposed by regulators. Specifically, those requirements include user identification and quality assurance of assets admitted to trading.
Tokenomica offers a solution to these challenges based on technologies already proven successful on Waves DEX, and centered on Smart Accounts and Smart Assets.
Smart Account is an account with an attached transaction script, which allows to validate every transaction before confirming it. Smart Account allows restricting any outgoing transaction based on multi-signatures and other supplied data.
In Tokenomica, Smart Accounts will be used to allow outgoing transactions only to users that were previously identified and approved, or so called “whitelisted” users, in order to comply with relevant regulatory requirements.
In addition, for compliance or security reasons, transactions could require two signatures: one from the user, and another one from Tokenomica.
Smart Accounts will allow Tokenomica to make sure that any transaction made on the platform is only possible between whitelisted users.
But what about the quality of traded assets? Here is where Smart Assets come into play.
Smart Assets are unique tokens (meaning that they contain a unique set of rules provided in the script) that can be purchased, sold or exchanged as defined by the script, which validates every transaction within that asset.
In Tokenomica, Smart Assets will be used to restrict trading to pre-approved pairs of assets. Pairs will be formed by assets compliant with relevant regulations, based on applicable rules and guidelines provided by the regulators.
Another promising area for implementation of Smart Assets is Security Token Offerings (STOs). We define security tokens as financial instruments subject to securities markets regulation that are issued and traded with the use of blockchain.
Smart Assets allow issuers to design their security tokens in a customized way, creating a fully compliant asset with attractive features for the investors.
These are benefits that security tokens can bring to financial markets:
- Reduction of listing fees for issuers who will be able to access liquidity of secondary markets through security tokens trading platforms instead of going through burdensome and costly process of listing on traditional exchanges;
- Automated corporate actions, redemptions and periodical payments processed on the blockchain;
- Immediate execution of deals at any time — something that is not available on financial markets, bound by working hours of exchanges, custodians, clearing houses and other financial intermediaries;
- Access to new types of investors familiar with the industry, who will be willing to invest in security tokens to support technology based projects.
What elements of a security token can be designed with the use of Smart Assets?
Transferability of instruments and record keeping
- Pre-emption rights: there are cases when a company’s shareholders are restricted from selling their shares to anyone except other shareholders. This restriction can be implemented in Smart Assets’ script, allowing the transfer of security tokens only between their holders.
- Qualification of investors: in some cases securities can be offered only to qualified or accredited investors. Breaching this requirement can lead to negative implications and fines for the issuers. Smart Assets’ script can incorporate a restriction allowing their transfer only to investors classified by the issuer as qualified or accredited.
- Record keeping: the issuer may be required to keep record of all its shareholders. Issuing a share in form of a Smart Asset creates an electronic database of shareholders on the blockchain, which is updated in real time taking into account every transaction with tokens between the investors.
Issuers can establish certain conditions for converting financial instruments into another type of security. For example, if a predetermined date is reached, an equity warrant can be converted into a share in the company. Such conditions can be implemented into Smart Assets and become automatically enforceable by the script, significantly reducing the burden for the administration of the conversion process.
Payments and redemption
A process for periodical payments could be made substantially simpler and cheaper thanks to cutting intermediaries. If securities are issued on the blockchain, payments are made to token holders’ addresses, known to the issuers, which reduces the costs for payment administration.
Also, with Smart Assets, a new payment option can be introduced allowing to calculate periodical payments based on a certain set of requirements. For example, the amount of dividends paid to a specific investor could increase depending on the amount of time for which the token is held by such an investor (so called “loyalty dividends”).
In addition to periodical payments, securities have a redemption price, which can be fixed or calculated upon certain conditions. Those conditions can be implemented in Smart Assets’ script, making the redemption process fully automated for the issuers.
Workable Solution for Financial Markets
Smart Assets represent a perfect solution for business models that require implementation of restrictions, required for compliance or other reasons.
Just about any product to be offered in the financial services industry without breaching applicable laws and regulations, specifically when regulated cryptocurrency exchange or security token offerings are involved, is set to face restrictions.
However, the good news is that Tokenomica offers a workable solution for regulatory challenges in the financial markets.
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