In a recent announcement, Swarm has provided valuable insight regarding the compliance required for legal security token offerings, issuance, and trading. A major step that Swarm has taken involves the integration of Market Access Protocol (MAP) which they believe will strengthen the entire security token industry.
In January 2018, Swarm launched the SRC20 security token standard, which can be used to represent fractional ownership of world-world assets. The tokens can be traded on the Swarm Network Exchange, as well as other exchanges such as the OpenFinance Network, since the SRC20 was designed to operate across regulatory compliant exchanges.
The recent announcement provided much clarification as to the different qualifications and verifications needed for investors in the securities space. After all, such criteria have to first be understood prior to comprehending the benefits of MAP.
Since tokenized securities serve the same fundamental purpose seen in traditional financial securities, they are subject to laws and regulations of governing bodies such as the SEC in the US, or the ESMA in Europe.
Importantly, such regulatory bodies serve the purpose of protecting investors and businesses, while trying to eliminate the opportunity of exploitation and fraud. The laws and regulations which support such initiatives require investors to be qualified to trade.
How Investors Become Qualified and Verified for Security Token Trading
In order to receive qualified investor status, investors must receive certain levels of verification which are typically performed by Verification Service Providers (VPS). The information verified is correlated to the verification type and ranges from personal identity to a source of income and asset ownership.
A brief illustration of the correlation and criteria can be seen below, courtesy of Medium.
When it comes to security token trading, individuals usually have three types of verification required:
Identity: verified through passport and driver’s license checks
Address and source of funds: verified through bank statements
Sophisticated investor status: confirmed through a tax professional
All-in-all, there is not one single check which results in verification, but a series of checks.
There are also different tiers. Lower tiers, which include mere KYC screening, can allow for the trading of cryptocurrencies, but not security tokens. Higher tiers, such as AML and Accreditation status, can allow for security token trading with very high risks.
However, there are no universal verification criteria since most regulatory bodies have confined jurisdictions. Though advocated by many, a world-wide regulatory framework for security tokens is non-existent.
Thus far, we can infer two critical problems when it comes to security token regulation.
Legal Jurisdiction and Personal Identity as Potential Problems for Security Tokens
Since each jurisdiction has its own regulatory body with its own legislation, different areas end up having different laws. Yet a complaint security token offering (STO) or exchange must abide by both the laws where it operates, and where its investors or clients are located. The required verification for compliance quickly becomes very difficult and appears to result in decreased liquidity.
Further, many in the blockchain space have legitimate concerns about personal privacy protection. The common perception is that with increased knowledge of an identity comes an increased target, and therefore increased risk.
With these then, come concerns regarding the future implementation of security tokens. But MAP appears to have a solution.
How MAP Overcomes Obstacles while Maintaining Compliance
Here’s how it works:
A token issuer defines the VSPs that are allowed to perform verification for each token in every applicable jurisdiction.
Investors send requests for necessary verifications from the VSPs provided by the token issuer.
VSPs verify the necessary credentials relative to the type of verification needed.
If the investors pass the verification, they become qualified and are eligible to trade and/or receive the security token in question.
What this means then, is that investor qualification becomes associated with a specific MAP wallet. All of this happens without exposing any personal data of the investor.
Additionally, the seemingly decreased liquidity is restored through qualified status. In this sense, the qualification providers act as gatekeepers for compliance in the security token marketplace. Once qualified status is reached, the token is as liquid as the applicable jurisdictions allow.
The team behind Swarm is the first qualification provider which supports MAP. They see this integration as a necessary step for compliant STOs:
“Every account created on the Swarm platform contains a MAP wallet, and any investors that have completed KYC via Swarm are already compliant to trade security tokens anywhere that supports MAP, now and into the future.”
What do you think about the MAP protocol? Will this type of verification result in the global adoption of security tokens? Let us know what you think in the comments below.
Meet Tim. Tim is a co-founder of The Tokenist. Originally from Kalamazoo, Michigan, Tim is a mechanical engineer by training and has been investing his whole life. He started his career with GE in engineering and operations management where he held various leadership roles before leaving to pursue an MBA (he is a proud former co-chair of the Milton Friedman Group at Chicago Booth). After business school, Tim spent several years with Baird Capital where he made private equity investments in consumer and industrial companies. He left Baird to found Protective Technologies Capital in 2018, where he continues to make private equity investments in family businesses looking for help with succession planning. Tim lives in Chicago, where he enjoys watching Michigan football and basketball and traveling with his wife Kristen. Like Sia, he also likes telling jokes. However, his wife adamantly insists that he not share his “dad jokes” publicly so he reluctantly sticks to writing about finance and technology.