STO is a very natural financial product with the development of blockchain. When traditional financial institutions, especially the securities industry, encounter blockchain technology, they actively embrace this technology, and try to use DLT technology to reconstruct the issuance and trading network, and improve the efficiency of clearing and settlement and transfer registration.
However, it is regrettable to see that any current STO issuance and trading platform still uses a very traditional business model, and still has not recognized from a more fundamental point of view that with the Token as the representative of digital security (Security Token) With the gradual development of the securities industry, the transactions and flows of the securities industry will be completely different, and will completely change the operation mode of the existing securities industry.
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The contradiction between the traditional business model and the innovative technology is the fundamental contradiction that has led to the delay in the large-scale popularization of STO. We all agree that the arrival of blockchain technology has brought the network economy to the stage of the value network. Value can be transferred in a more reliable and flexible way, as is the case with Bitcoin and digital securities.
Why is the traditional business model incompatible with digital securities?
Let us discuss why the existing business model is outdated through real-world issuance and trading cases. At the same time, I will also explain that STO will be able to use a completely new type of infrastructure through the digital infrastructure of sovereign digital identity. Way to release new liquidity.
Under the existing model, an investor participating in the issuance and trading of a compliant digital security generally adopts the following process:
(1) From the investor side (if it is a new user), you must first register on a licensed issuance / transaction platform, and then fill in the necessary personal information according to the requirements of the relevant jurisdictions to become a Qualified investors (at a minimum, you also need to fill in real personal information in order to confirm the ownership of securities).
(2) The issuance and trading platform will provide relevant information to a third-party identity information management company for verification to confirm the authenticity and integrity of the relevant information, and will also determine based on the relevant information whether the user complies with the account opening rules, And judge whether it is a qualified investor.
(3) If the personal information of the new user meets the relevant rules, the issuance / transaction platform will create a new account for the new user and grant the corresponding authority, and the new user can participate in the transaction. Whether the trading assets are fiat currency and digital currency, or digital securities, they are managed by the issuance / trading platform itself (need to hold a license) or entrust a qualified third party. The platform is also responsible for the functions of clearing and transfer agency.
(4) Users can also specify a blockchain address and enter the white list to prepare for future coin withdrawal.
Yes, the above model is almost no different from any existing trading system. The core is to rely on the account system for management, and all users also conduct trading activities around this platform. Even if digital securities use the form of Token or DLT for transfer registration and liquidation, it is only a supplement to the existing system, and there is no essential difference to the actual electronic transaction.
Unfortunately: Compared with the vision of digital securities (STO), this model has natural flaws:
(1) The issuance of any digital security hopes to reach potential investment on a wider global scale, and the customers that a platform can attract are limited, or the ability of the platform limits the development of potential investors. All a platform can do is to attract more investors by issuing good products (preferably exclusive investment products).
(2) Any investor who wants to get in touch with more digital securities products needs to register and open an account on a different platform, continuously repeating the entire process of KYC / AML and qualified investor identification, and also undertakes All costs need to manage each account.
(3) Cross-platform-also means that transactions across jurisdictions will be extremely complicated. Open interfaces will inevitably cause users to flow to platforms that have better investment products, which is detrimental to the platform's own business. Business negotiations between platforms will be lengthy and inefficient, making it impossible to achieve a larger global investor network.
The traditional solution to cross-platform / cross-jurisdiction transactions is nothing more than:
(1) Persuading other platform partners to join their own platform, or (2) Implementing a complex unified gateway between platforms. It is worth noting that the latter adds another participant (gateway) to the list of parties that need to be trusted and may incur more transaction costs.
From this model, it can be clearly seen that the existing platforms are a very narrow and traditional model, using the so-called compliance as an excuse to form the so-called by binding investors and customers to their own platforms. Moat and competitive advantage without fundamentally considering the core needs of investors / issuers.
And this is precisely the fundamental reason why this model is not destined to be very successful: it does not fully respect the autonomy of customers, nor does it bring true convenience and selectivity to customers.
Through market observations, we can find that whether it is the transformation of a traditional platform with certain customers or some new STO issuance platforms, opening up is not a strategy, but development is based on the strategy of privatizing customers. This deep-rooted traditional business closure is the biggest enemy of digital securities, and breaking requires the support of technical tools.
How does autonomous digital identity become a key cornerstone of digital securities?
If we jump out of this inherent and traditional business model, fully absorb the ICO, social network development, and also refer to OAuth2.0 \ SAML \ OpenID protocol, independent digital identity and other technological and business model innovations, we will see a kind of A new and concise digital securities issuance and trading network, and the core point of this network is: by giving investors (of course, issuers also need) a new independent digital identity, investors can freely access any trading platform for Transactions, digital securities themselves are also stored in wallets linked to digital identities (we can understand this process as the signature of digital securities), and the owner of digital securities can always put a digital securities product at the best price Discover and trade in-depth trading venues without having to wait for the exchange to list the security.
We can use a scenario to describe the form of future investors' participation in digital securities (STO) transactions and how digital identities can build a global platform-based network economy by saving trust costs.
There are three most important attributes under this digital identity model:
- Credible statement credential
- Verifiable ownership confirmation and transfer
When any investor enters the digital securities market, he first needs to go to a specific qualified trading platform to complete the account opening. Due to compliance requirements, this process is no different from the account opening process described above. But at the same time, the platform also needs to support investors to apply for an autonomous identity system (for autonomous identity system, please refer to https://www.altoros.com/blog/the-journey-to-a-self-sovereign-digital-identity- built-on-a-blockchain /), and issue a statement voucher for the digital identity of the investor who can open an account through user verification. This statement voucher is tied to the digital identity. It can prove that the investor has passed the KYC / AML verification and qualified investor certification.
Next, when an investor already has a digital identity with a certificate of qualified declaration, he can conduct more flexible transactions on the premise of compliance with his own wishes. For example, investors can bring digital securities to their wallets from the account opening platform; log in to other exchanges with digital identities without having to repeat the tedious KYC / AML / qualified investor review work; or obtain another transaction at the same time The issued statement certificate can further improve the credibility level; can recharge the digital securities to another exchange with better price and depth, and conduct transactions; perform peer-to-peer transfer with another digital identity holding a qualified declaration; mortgage the digital securities Go to the DeFi platform and get digital currency loans automatically; if we think that the above scenario is completely driven by the platform company, there will be a lot of coordination and technical connection work.
Fortunately, if digital identity is used as a brand new entry, the entire process will be greatly simplified. Just as cryptocurrencies flow freely around the world, because digital identities can be used to confirm rights and manage transactions on digital securities, digital securities have truly achieved portability for the first time. And portability and interoperability are the basis for digital securities to truly break away from the limitations of the platform and move towards broader liquidity.
More importantly, this digital identity system is autonomous, that is, we call it an autonomous digital identity. The generation of identity is supported by cryptography. There are many independent identity projects on Ethereum. The original intention is to establish a digital identity that is different from the previous one issued by an authoritative platform, and completely give sovereignty to the identity of the subject. At the same time, the verifiable declaration system built by smart contracts integrates various data outside the chain, and achieves control of digital identity attributes through a verifiable verification and privacy protection.
When we extend this thinking further, we will find that digital securities networks based on digital identities will be displayed as a true network economy. Under the individual value-oriented digital securities network, Metcalfe's law will begin to play a role. With the gradual formation of bilateral and multilateral transactions, the entire market will begin to form an exponential growth trend.
Imagine that when a startup starts to raise funds through digital securities, it can directly reach qualified investors around the world through the issuer, without being limited by the issuer ’s own customer resource coverage. In the same way, an investor can also place the purchase of digital securities in any compliant market at a reasonable price for trading at any time. The power of the market itself will drive the development of scale and the formation of innovation.
If we simply summarize the above model, we can easily draw the following conclusions:
(1) Digital identity / independent digital identity will replace a single wallet and become the entrance of digital assets.
(2) The issuance and trading are based on digital identities to achieve cross-platform and cross-jurisdiction, and become a global digital securities network.
(3) This issuance and trading network is a completely open and free securities network. By giving autonomy to investors / issuers, even any compliant market maker / issuing agent / market analyst / Rating institutions / credit institutions can freely access and participate in transactions, as well as empower different roles to improve competitiveness.
(4) The adoption of the network economy model will bring the possibility of exponential growth to the brand new digital securities industry.
Finally, I want to explain the current technical challenges. When we try to implement the above picture, letting the complex technology be concealed under the concise and easy-to-use experience is the first problem to be solved. Sovereign digital identities still face the tedious challenge of key management, and the learning cost is steep. In addition, the standard makers of digital securities have not fully recognized the importance of integrating digital identities in the interface for securities ownership management. At the same time, since digital securities are managed based on digital identities rather than just managed within the platform's account system, how to build a full network of Cap Table management is also a technical challenge facing this industry.