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Understanding Security Tokens and Programmable Regulations

Security tokens aim to offer a degree of asset liquidity unattainable in the markets of the past. The liquidity that a token imparts on assets regardless of where you are in the world makes it attractive among traders. It is one of the most exciting investments and trading inventions since the invention of the stock market itself. But what distinguishes security token offerings from an initial coin offering is that it brings the stability of real-world regulation online.

How security tokens reinforce regulation in online trading

Since crypto-assets can be coded and run by anyone who knows how to do them (crypto-assets are said to be “programmable” in this respect), no third-party agency or organization can rein these assets in. Thus, financial regulators have struggled for years trying to find a tool that would define a common standard across the industry of crypto-asset trading. Crypto-asset trading can be executed from anywhere in the globe. Sales can be conducted simultaneously on several platforms as well, unlike real-world assets.

How can you bring in regulation to keep the crypto market in order? The solution is security tokens. Security tokens offer a form of writing down the letter of the law unto the crypto-asset itself. Security tokens can be programmed to follow a strict set of rules before they can be traded virtually. Financial regulators between various jurisdictions can then sit down and agree on a standard regulatory model that would govern security token trading. These rules then can be programmed on the security tokens to be exchanged between different jurisdictions.

Security tokens and the Programmable Regulation Model

How exactly can security tokens be programmed to follow real-world trading rules? The idea of using programmable regulation is that security tokens can be made as a form of contracts that can be exchanged across different blockchain platforms. This ensures that accountability is identified and delineated regardless of where the security token is traded.

One of the most basic forms of programmable regulation in security tokens is the coding of rules meant to curb money laundering in these trading instruments. There are also know-your-customer (KYC) programs that require and allow traders to conduct a check on the background of the people they’ll trade their tokens with. However, even with these basic coded regulations, there is still room to code a lot more rules that would ensure that security token contracts are honored and enforced.

Types of programmable regulation

There is no single technological approach or framework with which a programmable regulation model operates. Despite this, here are some of the most common ways programmable regulation is viewed:

Token-Based Regulation:

In this scheme, regulatory and compliance rules are considered part and parcel of the crypto-token, which is the most fundamental unit of trading and transactions.

Composable-Token Regulation:

In a case where token trading involves two or more jurisdictions with different financial regulations, this scheme allows for the aggregation of programmed rules each token bears, such that the trading transaction complies with all the regulatory models. The most obvious problem with this perspective is how programming can harmonize two or more regulatory schemes, given that there will be differences and contradictions between the rules of one jurisdiction from another.

Exchange-Based Regulation:

There are more complex rules in real-world asset commodity exchange that can’t easily be written as a programmable code. These rules include liquidity terms and custody models, which can quickly shift. Thus, there are a lot of research and projects ongoing to overcome these limitations and bring about exchange-based regulation even in the blockchain world.

Party-based Regulation:

Under this scheme, security tokens are programmed to undergo scrutiny and oversight of regulatory agencies and all trading stakeholders. The smart contract in a specific security token offering could also be programmed in such a way that lawyers offline would still have to follow. With party-based regulation, there would exist a notion of compliance with standards similar to what is set in the physical world.


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