ERC3643 Unveiled: Enhancing Compliance and Control in Tokenizing Real-World Assets

ERC3643 Unveiled: Enhancing Compliance and Control in Tokenizing Real-World Assets

ERC3643 is an Ethereum standard for permissioned tokens, also known as security tokens. It is an open-source suite of smart contracts that enables the issuance, management, and transfer of tokens that represent real-world assets, such as equity, debt, real estate, or art. It is designed to work with an on-chain identity system that allows for the validation of the identities and credentials of investors and issuers through signed attestations issued by trusted claim issuers. It aims to provide a comprehensive framework for managing the lifecycle of security tokens, from issuance to transfers between eligible investors, while enforcing compliance rules at every stage. Also, supports additional features such as token pausing and freezing, which can be used to manage the token in response to regulatory requirements or changes in the status of the token or its holders. In this article, I will provide a personal perspective on the current state of ERC3643, provide statistics and data to support an opinion on its benefits and challenges, and offer research to support an argument for or against its adoption.

ERC3643 was first proposed in July 2021 by a group of developers from Tokeny Solutions, a platform for tokenizing securities. The proposal was based on the previous T-REX protocol, which had been used by Tokeny and its partners to tokenize over €28 billion worth of assets across 180 jurisdictions. The proposal was reviewed and accepted by the Ethereum community as an official standard in 2021, becoming the first standard for permissioned tokens on Ethereum. Since then, ERC3643 has been adopted by several projects and platforms in the security token space, such as SecuritizePolymath, and Tokensoft.

One of the main benefits is that it enables the tokenization of real-world assets in a compliant and efficient way. Tokenization is the process of converting the ownership rights of an asset into a digital token that can be stored and transferred on a blockchain. This process can bring several advantages, such as:

  • Increased liquidity: Tokenization can lower the barriers to entry and exit for investors, allowing them to trade fractional ownership of assets in a global and 24/7 market. This can increase the demand and supply of assets, resulting in higher liquidity and lower costs.
  • Reduced intermediaries: Tokenization can eliminate or reduce the need for intermediaries, such as brokers, custodians, and lawyers, who often charge high fees and introduce delays and risks in the transaction process. By using smart contracts and blockchain technology, tokenization can automate and streamline the issuance and transfer of tokens, reducing costs and increasing efficiency.
  • Enhanced transparency: Tokenization can provide a higher level of transparency and trust for investors and issuers, as the tokens and their underlying assets are recorded and verified on a public and immutable ledger. This can improve the quality and availability of information, as well as the accountability and governance of the token issuers.
  • Improved accessibility: Tokenization can democratize access to assets that are traditionally illiquid, expensive, or exclusive, such as real estate, art, or private equity. By creating fractional and digital ownership of assets, tokenization can enable more investors to participate in the market, diversify their portfolio, and benefit from the returns of the assets.

However, tokenization also faces several challenges, especially when it comes to security tokens, which are subject to complex and varying regulations across different jurisdictions. Security tokens must comply with the laws and rules that govern the issuance and transfer of securities, such as KYC (Know Your Customer), AML (Anti-Money Laundering), and CFT (Combating the Financing of Terrorism). These regulations are meant to protect investors and issuers from fraud, manipulation, and other risks, but they also impose restrictions and requirements that can limit the potential of tokenization. For instance, security tokens may have to comply with:

  • Eligibility criteria: Security tokens may only be issued and transferred to investors who meet certain criteria, such as accreditation, residency, or income. These criteria may vary depending on the type and jurisdiction of the token and the investor, and they may require the verification of the identity and credentials of the investors.
  • Transfer restrictions: Security tokens may have to follow certain rules and limitations when they are transferred between investors, such as lock-up periods, holding periods, volume limits, or whitelists. These rules may depend on the status and jurisdiction of the token and the investor, and they may require the approval of the issuer or a third party.
  • Disclosure obligations: Security tokens may have to provide certain information and reports to the investors and regulators, such as prospectuses, financial statements, or audits. These information and reports may vary depending on the nature and jurisdiction of the token and the issuer, and they may require the involvement of professionals and authorities.

These challenges pose significant technical and legal difficulties for the tokenization of real-world assets, as they require the integration and coordination of multiple systems and parties, such as blockchain platforms, identity providers, claim issuers, regulators, and intermediaries. Moreover, these challenges may also affect the attractiveness and feasibility of tokenization, as they may reduce the liquidity, efficiency, transparency, and accessibility of the tokens.

This is where ERC3643 comes in. It is designed to address these challenges by providing a standard and flexible framework for the creation and management of permissioned tokens on Ethereum. Leverages the power and versatility of smart contracts and blockchain technology to encode and enforce the compliance and control rules of the tokens, while also integrating with an on-chain identity system to validate and verify the identities and credentials of the investors and issuers. It defines several interfaces that are described below:

  • Token interface: This interface defines the basic functions and events of the token, such as minting, burning, transferring, pausing, and freezing. It also defines the functions and events related to the token lifecycle, such as issuing, redeeming, and updating. It also inherits from the ERC-20 interface, which is the standard for fungible tokens on Ethereum.
  • Identity Registry interface: Defines the functions and events related to the identity registry, which is a smart contract that stores and manages the on-chain identities of the investors and issuers. The identity registry allows the registration and removal of identities, as well as the addition and revocation of attestations. An attestation is a signed statement issued by a trusted claim issuer that attests to a certain attribute or credential of an identity, such as accreditation, residency, or income. The identity registry also allows the verification of the eligibility of an identity to hold or receive a token, based on the attestations and the token rules.
  • Identity Registry Storage interface: Defines the functions and events related to the identity registry storage, which is a smart contract that stores the data of the identity registry, such as the identities, the attestations, and the token rules. The identity registry storage is separated from the identity registry to allow for the upgradeability and modularity of the identity registry.
  • Compliance interface: Defines the functions and events related to the compliance, which is a smart contract that implements the logic and rules for the compliant transfer of tokens. The compliance contract checks the eligibility of the sender and the receiver of a token transfer, as well as the validity and availability of the token. The compliance contract also allows the issuer or an agent to update the token rules, such as the eligibility criteria or the transfer restrictions, as well as to force or block a token transfer in case of emergency or dispute.
  • Trusted Issuers Registry interface: Defines the functions and events related to the trusted issuers registry, which is a smart contract that stores and manages the list of trusted claim issuers that can issue attestations for the identities. The trusted issuers registry allows the issuer or an agent to add or remove claim issuers, as well as to specify the claim topics that each claim issuer can attest to. A claim topic is a numerical identifier that represents a certain attribute or credential of an identity, such as accreditation, residency, or income.
  • Claim Topics Registry interface: Defines the functions and events related to the claim topics registry, which is a smart contract that stores and manages the list of claim topics that can be used for the attestations. The claim topics registry allows the issuer or an agent to add or remove claim topics, as well as to specify the description and the verification method of each claim topic.

By using these interfaces, ERC3643 provides a standard and flexible framework for the tokenization of real-world assets on Ethereum, while ensuring the compliance and control of the tokens. It allows the issuer or an agent to customize and update the token rules and the identity system according to the specific needs and requirements of the token and its jurisdiction. Also allows the investor to register and verify their identity and credentials on-chain, as well as to transfer and receive tokens in a compliant and efficient way.

In my opinion, ERC3643 is a valuable and innovative standard that can facilitate and accelerate the adoption of security tokens on Ethereum. It can enable the tokenization of a wide range of asset classes and industries, such as real estate, private equity, funds, and debt, which can unlock new opportunities and benefits for investors and issuers. It can also enhance the liquidity, efficiency, transparency, and accessibility of security tokens, while ensuring the compliance and control of the tokens. It can also foster the interoperability and compatibility of security tokens with other Ethereum protocols and applications, such as decentralized exchanges, lending platforms, and wallets.

However, ERC3643 is not without its challenges and limitations. It still faces the complexity and diversity of the regulatory landscape, which may differ from country to country, or even from state to state. This means that they may have to adapt and comply with different and changing regulations, which may pose technical and legal challenges for the issuer and the investor. For instance, ERC3643 may have to deal with the issue of cross-border transfers, which may involve different jurisdictions and regulations, as well as the issue of regulatory updates, which may require the modification or migration of the token and the identity system.

Another challenge is the scalability and security of the Ethereum network, which is the underlying platform that supports ERC3643. Ethereum is a public and decentralized blockchain that allows anyone to create and execute smart contracts and applications. However, Ethereum also suffers from some limitations, such as:

  • Low throughput: Ethereum can only process a limited number of transactions per second, which is currently around 15-20. This means that ERC3643 may face congestion and delays when there is a high demand for token transfers or identity operations, which may affect the user experience and the performance of the token.
  • High fees: Ethereum charges a fee for every transaction that is executed on the network, which is called gas. The gas fee depends on the complexity and the demand of the transaction, and it can fluctuate significantly depending on the network conditions. This means that ERC3643 may incur high and variable costs for the issuer and the investor, which may reduce the profitability and the feasibility of the token.
  • Security risks: Ethereum is a public and open network that is secured by a consensus mechanism called proof-of-work, which relies on the computational power of the network participants, also known as miners. However, proof-of-work also exposes Ethereum to some security risks, such as 51% attacks, which occur when a malicious actor gains control of more than half of the network’s computing power and can manipulate or disrupt the network. This means that ERC3643 may face the risk of losing or compromising the tokens or the identities, which may result in financial or reputational losses for the issuer and the investor.

These limitations are not inherent to ERC3643, but rather to the Ethereum network, which is still evolving and improving. Ethereum is currently undergoing upragdes, which relies on the stake of the network participants, also known as validators. Proof-of-stake is expected to increase the throughput, reduce the fees, and enhance the security of the network, which may benefit ERC3643 and other Ethereum protocols and applications.

In conclusion, ERC3643 is a promising and innovative standard that can enable the tokenization of real-world assets on Ethereum, while ensuring the compliance and control of the tokens. It can bring several benefits, such as increased liquidity, reduced intermediaries, enhanced transparency, and improved accessibility, for both investors and issuers. It can also foster the interoperability and compatibility of security tokens with other Ethereum protocols and applications. However, it also faces some challenges and limitations, such as the complexity and diversity of the regulatory landscape, and the scalability and security of the Ethereum network. ERC3643 is still a relatively new and evolving standard, which may require further development and testing before it can achieve its full potential and adoption. Therefore, I believe that ERC3643 is a valuable and innovative standard that deserves our attention and support, but also our caution and scrutiny.

 

 

 

Source: https://www.securities.io/erc3643-unveiled-enhancing-compliance-and-control-in-tokenizing-real-world-assets/

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

j j j

Asian nations more cautious of crypto regulation after Hamas taps digital assets for Israel strike

Asian nations more cautious of crypto regulation after Hamas taps digital assets for Israel strike

Kapoor, who was a speaker at one of the G20 committee meetings on cryptocurrency assets, said the statement had not been translated into action. It was time to revisit the declaration and come up with solutions to back it, he said.

Digital-currency wallets that Israeli authorities linked to the PIJ received as much as US$93 million in cryptocurrency between August 2021 and June this year, the WSJ report said, citing analysis by crypto researcher Elliptic.

Wallets connected to Hamas received about US$41 million over a similar time period, the report added, citing research by crypto analytics and software firm BitOK that is based in Tel Aviv.

“Some countries may bring up the narrative that banning cryptocurrencies is the way forward,” said Anndy Lian, Singapore-based author of the book NFT: From Zero to Hero.

“I would argue that banning cryptocurrencies would not stop terrorist financing, but rather drive it underground and make it harder to trace and stop,” he added. “Cryptocurrencies can be traced and tracked, while fiat (currency) such as US dollars cannot.”

Singapore and Hong Kong have regulated cryptocurrency markets, but most of the governments in the region are just beginning to understand the power of cryptocurrencies that could open up new financing opportunities.

However, investors’ faith has been time and again been tested by scandals and collapses of digital exchanges.

Hong Kong’s cryptocurrency sector was recently hit by a JPEX scandal in which more than HK$1.5 billion (US$192 million) went missing, prompting complaints against an ostensibly Hong Kong-based exchange, run by people who have still not been identified.

The revelation about Hamas funding could add to public discomfort, analysts said.

“The disclosure about Hamas could potentially lead to stricter regulations and enhanced scrutiny of crypto transactions in Singapore. It may prompt the MAS to enhance its oversight and enforcement of the crypto sector, as well as to collaborate more closely with other countries to prevent and disrupt terrorist financing through digital assets,” Lian said, referring to Singapore’s central bank.
The Monetary Authority of Singapore (MAS) has been taking measures to regulate the cryptocurrency industry, and has been one of the first to regulate the sector in Asia. Hong Kong has been following Singapore’s lead.

“While the government recognises the economic and social potential of cryptocurrency, it is also cautious about identifying and managing risks involved, such as consumer protection and anti-money-laundering/counter-financing of terrorism,” Lian added.

But cryptocurrencies could easily be tracked down “so this may not be the best way for terrorist organisations”, said Singapore-based Branson Lee, who runs custody solution provider Custodize.com.

“Finally, there are many tools to track and trace these funds. Overall, the crypto industry remains aware of these risks and has done well since to conform to many regulations from FATF (Financial Action Task Force) to jurisdictional compliance,” he said.

Southeast Asia, with nearly 700 million residents, has one of the world’s fastest-growing populations, with some 480 million of them as active internet users.

Consumers in countries like Vietnam and India have been among the fastest worldwide to adapt to cryptocurrencies, but authorities in many other places have not yet found a path to govern the ecosystem effectively.

India does not have any specific cryptocurrency regulations in place, but has been working on introducing legislation.

Earlier this month, local media reported that a probe by Indian police brought to light a case where 3 million rupees (US$36,000) in cryptocurrency was stolen from the digital wallets of a Delhi-based businessman and transferred to the accounts of Hamas.

Manhar Garegret, India head at digital wallet Liminal, highlighted that Hamas had launched campaigns on social media to raise funds through cryptocurrency, but Israel used its technical know-how to block the crypto accounts.

The case of digital theft in Delhi together with the report on Hamas funding showed why each country needed to have standards for cryptocurrency regulation and use technical know-how to integrate into a global standard, Kapoor said.

“Criminals are always one step ahead, but if you reverse-engineer processes, then you can have some solutions,” he said. “Every country is vulnerable to some extent or the other.”

Source: https://emeatribune.com/asian-nations-more-cautious-of-crypto-regulation-after-hamas-taps-digital-assets-for-israel-strike/

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

j j j

Asian nations more cautious of crypto regulation after Hamas taps digital assets for Israel strike

Asian nations more cautious of crypto regulation after Hamas taps digital assets for Israel strike
  • The use of crypto by Hamas is a warning for Asian nations looking to regulate digital assets, and highlights the need for standardised laws, analysts say
  • In Asia, just Singapore and Hong Kong have regulated cryptocurrency markets but scandals and collapses of crypto exchanges continue to test investors’ faith

The use of cryptocurrency by Hamas to fund its strike on Israel is likely to raise red flags in Asian countries that are framing regulations to govern the digital currency, and underscores the need for harmonising standards, analysts have said.

According to a report in The Wall Street Journal, three militant groups – Hamas, Palestinian Islamic Jihad (PIJ), and their Lebanese ally Hezbollah – received large amounts of crypto funds in the year leading up to the October 7 attack.

“It is a kick on the backside for most governments. All regulatory bodies will take a closer look at crypto regulation. Governments will need to start implementing new rules and regulations,” said Raj Kapoor, founder of India Blockchain Alliance.

At the G20 summit in New Delhi last month, a joint declaration called for the regulation, supervision and oversight of crypto assets, among other things, with the bloc saying it would support “a coordinated and comprehensive policy and regulatory framework”.

Kapoor, who was a speaker at one of the G20 committee meetings on cryptocurrency assets, said the statement had not been translated into action. It was time to revisit the declaration and come up with solutions to back it, he said.

Digital-currency wallets that Israeli authorities linked to the PIJ received as much as US$93 million in cryptocurrency between August 2021 and June this year, the WSJ report said, citing analysis by crypto researcher Elliptic.

Wallets connected to Hamas received about US$41 million over a similar time period, the report added, citing research by crypto analytics and software firm BitOK that is based in Tel Aviv.

“Some countries may bring up the narrative that banning cryptocurrencies is the way forward,” said Anndy Lian, Singapore-based author of the book NFT: From Zero to Hero.

“I would argue that banning cryptocurrencies would not stop terrorist financing, but rather drive it underground and make it harder to trace and stop,” he added. “Cryptocurrencies can be traced and tracked, while fiat (currency) such as US dollars cannot.”

Singapore and Hong Kong have regulated cryptocurrency markets, but most of the governments in the region are just beginning to understand the power of cryptocurrencies that could open up new financing opportunities.

However, investors’ faith has been time and again been tested by scandals and collapses of digital exchanges.

Hong Kong’s cryptocurrency sector was recently hit by a JPEX scandal in which more than HK$1.5 billion (US$192 million) went missing, prompting complaints against an ostensibly Hong Kong-based exchange, run by people who have still not been identified.

The revelation about Hamas funding could add to public discomfort, analysts said.

“The disclosure about Hamas could potentially lead to stricter regulations and enhanced scrutiny of crypto transactions in Singapore. It may prompt the MAS to enhance its oversight and enforcement of the crypto sector, as well as to collaborate more closely with other countries to prevent and disrupt terrorist financing through digital assets,” Lian said, referring to Singapore’s central bank.
The Monetary Authority of Singapore (MAS) has been taking measures to regulate the cryptocurrency industry, and has been one of the first to regulate the sector in Asia. Hong Kong has been following Singapore’s lead.

“While the government recognises the economic and social potential of cryptocurrency, it is also cautious about identifying and managing risks involved, such as consumer protection and anti-money-laundering/counter-financing of terrorism,” Lian added.

But cryptocurrencies could easily be tracked down “so this may not be the best way for terrorist organisations”, said Singapore-based Branson Lee, who runs custody solution provider Custodize.com.

“Finally, there are many tools to track and trace these funds. Overall, the crypto industry remains aware of these risks and has done well since to conform to many regulations from FATF (Financial Action Task Force) to jurisdictional compliance,” he said.

Southeast Asia, with nearly 700 million residents, has one of the world’s fastest-growing populations, with some 480 million of them as active internet users.

Consumers in countries like Vietnam and India have been among the fastest worldwide to adapt to cryptocurrencies, but authorities in many other places have not yet found a path to govern the ecosystem effectively.

India does not have any specific cryptocurrency regulations in place, but has been working on introducing legislation.

Earlier this month, local media reported that a probe by Indian police brought to light a case where 3 million rupees (US$36,000) in cryptocurrency was stolen from the digital wallets of a Delhi-based businessman and transferred to the accounts of Hamas.

Manhar Garegret, India head at digital wallet Liminal, highlighted that Hamas had launched campaigns on social media to raise funds through cryptocurrency, but Israel used its technical know-how to block the crypto accounts.

The case of digital theft in Delhi together with the report on Hamas funding showed why each country needed to have standards for cryptocurrency regulation and use technical know-how to integrate into a global standard, Kapoor said.

“Criminals are always one step ahead, but if you reverse-engineer processes, then you can have some solutions,” he said. “Every country is vulnerable to some extent or the other.”

Source: https://www.scmp.com/week-asia/economics/article/3238397/asian-nations-more-cautious-crypto-regulation-after-hamas-taps-digital-assets-israel-strike

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

j j j