How to create a legal and compliant STO project (Part 2)——ST circulation
This article is from Digital China (ID: shenzhoushuzi_group), author: Sun Jiantao (CEO of Digital China, founder of Goopal Group), please indicate the author and source when reprinting.
This article is from Digital China (ID: shenzhoushuzi_group), author: Sun Jiantao (CEO of Digital China, founder of Goopal Group), please indicate the author and source when reprinting.
In the past week, there were two nodal events for STO, and they formed a strong contrast.
The first event was triggered by OpenFinance, which is known as the first STO exchange in the United States to obtain a compliance license. On November 28, OpenFinance completed the initial transaction work of SPiCE VC, the first transaction bid launched by the beta trading platform. That is to say, investors outside the United States can already trade SPiCE security tokens, and local investors in the United States need to wait until March 2019 to conduct such transactions due to time constraints. The day before, relevant parties of the project, including Muwu Capital, OpenFinance, SPiCE VC, etc., held a press conference in Beijing to officially disclose the details of the entire ST transaction, which aroused widespread attention and discussion in the industry.
Just three days later, a second important event occurred. The director of the Beijing Local Financial Supervision Bureau stated in his speech at the "2018 Global Wealth Management Forum" that if practitioners of security token issuance carry out STO activities in Beijing, the government will regard them as illegal financial activities and drive them away. This move seems to be a cooling off of OpenFinance’s press conference in Beijing, and it is also a blow to the current hot STO topic, which makes STO practitioners and followers who are still immersed in the excitement for a few days depressed. , Some people even assert that STO will be completely "cool".
In fact, the position of the leaders of the Beijing Municipal Bureau of Finance is expected. We have always believed that regulatory risk is the biggest uncertainty of STO, especially in a country like China that is very prudent and has a strong regulatory tradition. However, after using the word "expulsion", there was another sentence that was selectively forgotten. He said, "When the relevant department approves you to do STO, you can do it again", the meaning of which can be understood by everyone.
Shortly after the speech of the Beijing Municipal Bureau of Finance, Zhu Youping, deputy director of the China Economic Net Management Center of the State Information Center, also made a related statement. In addition to agreeing with the speech of the Beijing Municipal Bureau of Finance, he also emphasized that "STO training and academic Activities are not illegal", which means that exploration and research are still necessary before STO actually lands.
In view of this, we will continue the topic of the past two weeks, namely "how to build a legal and compliant STO project". Previously, we passed two articles "How to Build a Legal and Compliant STO Project (Part 1) - Business Closed Loop and Early Strategic Planning Preparation" and "How to Build a Legal and Compliant STO Project (Part 2) - Fundraising Mechanism and Tokenization" , three-quarters of the closed business loop of STO is described, and then we will continue to explain the last link in detail, that is, the circulation of ST.
In fact, for STO, the ultimate goal is to make assets circulate more safely and conveniently, so the circulation link is very important. Although STO was popular before, but because it was in a relatively early stage, the circulation link was not smooth. With the continuous improvement of regulatory policies, the emergence and self-evolution of major issuance and trading platforms, the intervention of high-quality assets, and the popularity of investors and education, the circulation of ST will gradually become smoother.
However, from the perspective of the participants, some points that need special attention in the circulation link are the difference between the primary market and the secondary market circulation, the similarities and differences between the issuance and the trading platform itself, and the significance of the identity authentication system. Next, I will elaborate on these three points.
To be precise, the primary market is STO, while the secondary market is the circulation of ST. The former is mainly the issuance link, and the participants are investment institutions and high-end investors (qualified investors who are more prominent in terms of assets and risk resistance) ), which determines the life and death of the project; the latter is mainly the transaction link, and the participants are all qualified investors (investment institutions, high-level investors and ordinary investors) that meet the supervision, which determines the development potential of the project.
Or take the United States, where the current regulatory laws are the most complete, as an example. When STO is issued in the primary market, legal compliance can be carried out. When STO is opened in the secondary market, it can also be traded on exchanges by avoiding the United States. It should be noted that the compliance of the trading market also includes the compliance of the primary market and the compliance of the secondary market. As mentioned in the issuance part of the previous article, the compliance of the primary market must follow the registration exemption under the regulatory framework of each jurisdiction. Taking the United States as an example, there are Reg D, Reg S, Reg A+, Reg CF, etc.; the secondary market To put it simply, compliance means going to an exchange. If an exchange without a US license cannot trade in the US, the flaw in the compliance of STO is that the protection principle of the US criminal law may lead to excessive interference. It is recommended that the issuer consider the US jurisdiction In addition, transactions in the secondary market are also carried out simultaneously on compliant exchanges in other jurisdictions. Isn't this exactly where ST's technical advantages lie?
It is especially important that STOs must comply with the issuance rules set by the regulatory jurisdiction. The issuer must not only comply with the corresponding laws and regulations of the jurisdiction where the investor is located, but must also consider the relevant laws of the jurisdiction where the investor is located. These rules may include a series of standards such as raising caps, using a wide range of financing, qualified investor requirements, transaction lock-up periods, information disclosure, auditing and reporting. However, in addition to this series of requirements, in secondary market transactions, each platform must provide a method for token issuers to ensure that their security tokens exceed their initial issuance in terms of compliance and make every transaction All comply with the requirements of owning financial regulators. The importance of this task cannot be overlooked.
In addition, taking the idea of the United States as an example, due to the restrictions of qualified investors, even after the lock-up period, security tokens can only be traded between qualified investors and cannot be traded on other exchanges. Peer-to-peer transactions and over-the-counter transactions are not allowed. Similarly, in the primary market, after the initial issuance, projects exempted from Reg S registration can be circulated among qualified investors, and projects exempted from Reg D registration can also be circulated among qualified investors after the lock-up period ends.。
As mentioned in the previous article, due to the rapid development of STO, there are more and more ST generation and distribution platforms that provide a package of solutions. In fact, distribution and trading are often separated. At present, there are dozens of secondary trading platforms of ST all over the world, and they are constantly growing. How to choose is also a big problem for both project parties and investors. Tracing back to the source, we can simply divide these trading platforms into three categories: new STO (ST) exchanges; original digital currency exchange transformation/upgrade/incubation; traditional stock exchange derivative/compatible
1. The nascent STO (ST) exchange
The OpenFinance mentioned above is a typical representative. It is an exchange dedicated to serving the ST secondary market. It is the first fully compliant security token trading, clearing and settlement platform in the United States. Such exchanges also include Polymath, Harbor, tZero, Vdax, etc., all of which are currently leading trading platforms in the STO field.
For example, Polymath, as a project that has attracted more attention in the new generation of STO (ST) exchanges, has specially designed the ST-20 standard for STO. For example, Vdax is also a licensed STO exchange, which can directly convert the digital currency held into Tokenized US stocks. The investment platform provides two trading markets, primary and secondary. The US stock through train is the primary market, and the 24H trading area That is the secondary market.
The common feature of these exchanges is that they are completely new for STO, which can be said to be born for STO. They have done a good job of legal compliance in the early days of their establishment, have a professional STO (ST) team, can help the project to complete the security tokenization, and have the functions of issuance and trading (for details about these exchanges, see the previous article article), and another key point is whether they have a license issued by a regulatory agency?
2. Digital currency exchange transformation/upgrade/incubation
The representative of this category is Coinbase. As an early digital currency exchange, it has successively obtained the qualifications of Broker-Dealers and Alternative Trading System (ATS); FINRA for short) has approved Coinbase’s security token business development plan, etc., thus obtaining many compliance qualifications including the legality of STO (ST) issuance and trading.
Well-known digital currency exchanges such as Binance and OK are also making relevant arrangements. For example, Binance and the Malta Stock Exchange have cooperated in the STO exchange business, and OK has also established a joint venture with the Malta Stock Exchange to incorporate supervision and establish an STO exchange.
The biggest feature of this type of exchange is that it has been deeply involved in digital currency transactions for many years, is very familiar with token transactions, and has accumulated a large number of digital currency users, and these users are obviously very receptive to STO (ST). Coupled with the reputation of such exchanges in the blockchain and digital currency fields in the past few years, their influence is greater than that of the new STO (ST) platforms. Whether these platforms can catch up with the STO bus depends on their cooperation. Can the regulations really be implemented? After all, many top exchanges have grown wildly in the gray area of policy.
3. Derivative/compatible with traditional stock exchanges
Previously, Nasdaq stated that it was preparing to enter the STO field, which aroused excitement in the industry and proved the great appeal of the traditional capital/securities market. At present, there are not a few traditional stock exchanges that intend to enter the STO field. Compared with Nasdaq staying in the idea stage, the New York Stock Exchange has already taken a step ahead.
Bakkt, an exchange launched by Intercontinental Exchange (ICE), the parent company behind the New York Stock Exchange, offers physically delivered futures trading for bitcoin. Due to background issues, it decided to be legal and compliant at the beginning of its establishment. Since there is still a time issue for SEC's review and approval, its STO product will be postponed to December 12.
Compared with the first two types of exchanges, the STO (ST) platform derived from and compatible with traditional stock exchanges can be said to have a promising future, and is supported by capital giants, and its advantages of late development cannot be underestimated. Although in the STO field, such issuance and trading platforms have not yet had a great impact on the former two, the power of capital may make the gap between the two in terms of STO-related technology, experience, and users relatively short. Smooth over time.
Judging from the current situation, in the future, more STs will flood into exchanges and enter the secondary market. For project parties and investors, the three types of exchanges have their own advantages and disadvantages, so you must choose the one that suits you best. of. For project parties, compliance security, technical level, issuance cost, past experience, etc. are very important; for investors, platform security, financial strength, quality of online projects, and transaction costs are important considerations.
Regardless of whether it is the primary market or the secondary market, the threshold for qualified investors is the minimum entry limit during the transaction process, which will be formulated by each exchange itself in accordance with relevant laws and regulations. Regardless of the type of exchange, due diligence is the most basic configuration. Customer due diligence (KYC) and anti-money laundering (AML) are not only related to legal compliance issues, but also important factors to win the trust of project parties and investors.
KYC is the process by which a business verifies the identity of a customer and assesses the potential risk of illicit intent in a business relationship. In fact, regulators have been working hard to ensure that anyone converting digital currencies into fiat is subject to the same KYC requirements as they would with traditional banks.
Regarding KYC, there are two news worthy of our attention. The first is Binance, the largest digital currency exchange (of course also entering the STO field), which recently said it will use KYC rules provided by financial software company Refinitiv, formerly known as Thomson Reuters Financial and The venture business unit, which provides market data and infrastructure, reportedly has a portfolio of more than 4,000 institutions worldwide. The second is Lufax invested by Ping An, which also officially launched version 4.0 of the KYC system not long ago. They said that the new version can not only prevent investors from buying unsuitable products, but also serve "thousands of people and thousands of people" from the investor service level. Face" personalized service has taken a big step forward.
This also reminds STO. Although it is a new thing, as the supervision becomes more and more formalized and moves closer to the supervision in the traditional field, the KYC system also presents two major characteristics: 1. More and more traditional forces Step in and endow digital currency trading institutions and future STO platforms with a new KYC system; 2. KYC will be iteratively upgraded, not only undertaking the basic functions of screening customers, but also deriving more personalized functions.
