While ERC-20 smart contracts where enormously successful, they are failing in their ability to comply with the regulations. Using ERC20 tokens, it's pretty much impossible to fully enforce SEC regulations or other forms of regulation worldwide. The NYX standard is a smart contract package developed to fully cater all issuers, buyers AND regulators of financial instruments. Deploying an ICO or STO smart contract in full compliance with the law on the Tezos blockchain, will be as easy as filling out a form. In addition to that: Regulators could likely adopt the NYX standard, because it allows for an unprecedented audit, making their work more efficient.
What problem does it solve, and what is the use case?
There are two things we learned from the ICO explosion and the period after:
1. Offering tokens while using blockchain smart contracts is very effective. The ease with which you can participate in ICO's made this concept become popular quite fast.
2. Many ICO's should have been qualified as a security and should have followed regulations. But using ERC-20 tokens it becomes a complex task to comply with regulations.
The term securities was pretty much an unknown in the crypto space at the beginning of the ICO era. Now, we all know that the way many ICO's were held, is not exactly in compliance with the law. Additionally, a new term has been buzzing around: STO's (Security Token Offerings). Security Tokens are tokenized real-world assets such as real-estate, bonds and equity, etc. STO's are a new form of assets. While there are some offerings completed and in process, STO's are still in an earlier adoption phase than cryptocurrencies. The important difference here, is that STO's are the tokenized version of something that is already being traded in enormous numbers. The reason why tokenization of these assets is interesting for issuers, is that "Security tokens pose several benefits [compared to] their utility token counterparts, such as reducing transaction costs, allowing for cross-border settlement, automation, and significantly allowing for enforcement and restrictions within the underlying technology dissuading the need for legal systems."
Tokenizing real estate has additional advantages. In tokenized form, you can invest in a percentage of real estate instead of buying up complete properties. This will make it possible for a new group of investors to enter the market, since the threshold for investing is virtually disappearing. As Florian Glatz of the Fundament Group says:
“Right now, capital markets are segregated between professional and retail investors. Small investors, in particular, find it difficult to build sustainable wealth through attractive dividends and are largely restricted from investing in certain asset classes. It is our vision to break down these barriers and build a truly inclusive market for financial products on a global level, without compromising on investor protection.”
Interestingly fact is that Fundament Group partnered up with Tezos a while ago.
So STO's on blockchain is a very interesting and promising part of the market with an incredible growth potential. It could very well be the next big thing, where fees for STO transactions through blockchain smart contracts, push the underlying tokens to new heights. Just like ICO's did for Ethereum in the past.
As mentioned before: to launch an ICO or STO, you need to comply with regulations. Certain laws apply to how they should be offered and how they can and can't be handled. Things like KYC (Know Your Customer), AML (Anti Money Laundering), number of shareholders etc. To make things more complex, these laws could obviously change in the future.
The problem with ERC-20 smart contracts is that they are very limited. ERC-20 tokens don't have any restrictions on transfers and can be freely traded by anyone. When dealing with securities, this is unacceptable. As an issuer or an exchange, you simply can't afford an unknown entity to hold or transfer one of your security tokens.
ERC-20 tokens have six functions and two events. Very basic: total supply, balance on ETH address, allowance (rarely used), transfer function, approve and transfer from. They are useless for enforcing regulations which need you to be able to enforce transfer restrictions. To follow regulatory restrictions and to be able to enforce them on chain, you need to standardize and simplify all the needed options in a new smart contract standard.
Tokensoft, a company specialized in building tools for tokenization of assets, had to build it's own tool for it's own convenience to launch STO's on ETH and has now developed the ERC-1404 standard. With that, ETH is still missing some important aspects for optimal secure STO launches:
Tezos already solved this issue at launch, but is in the process of creating an improved version: the NYX standard. This improvement will elevate Tezos to an even higher quality for regulation enforced tokens than today. In the tokenize industry, Tezos is already known for its Institutional grade smart contracts. Tokensoft, with a great track record in that industry and the creator of the ERC-1404 standard, said it quite well:
- Institutional Grade Smart Contracts - The Tezos blockchain facilitates formally verified smart contracts, the same methodology used to ensure safety in mission critical settings, such as in aerospace technologies and the $500 billion semiconductor industry.
- Secure Custody - A formally verified multisignature contract is now included natively within the Tezos client software. This enables cold storage deployment and management of smart contracts for the highest level of security.
- Familiarity - The FA1.2 managed ledger standard includes some functionality inspired by ERC-1404, making it possible to enforce requirements on a jurisdictional basis when it comes to banking, securities and tax regulations.
- Upgradability - Tezos includes a formal mechanism by which stakeholders can upgrade the protocol. This enables Tezos to smoothly adopt new technical features and stay at the cutting edge."
Tezos after the introduction of the NYX standard:
There is always room for improvement. With the NYX standard, perfection is in the making: an entire new standard for assets trading in general. NYX will be the full financial infrastructure, from issuance, purchase and exchange of securities in its entirety in smart contracts on the Tezos blockchain. It is being designed to fully cater all issuers, buyers AND regulators of financial instruments:
"Given the benefits, the question is no longer whether, but when issuers and buyers of securities will massively adopt smart contracts. In order to streamline the exchanges, it will nevertheless be necessary to provide adapted and easy-to-use platforms and an intelligent contract that is scalable and adaptable to their needs. Using the NYX standard is to modernize its back office for issuers of securities while offering an unprecedented investment experience to investors. Our vision is simple: Regulators will adopt Standard NYX because it allows for an unprecedented audit, making their work more efficient." (Source in French but Google translate will get you where you need to be.)
The NYX standard is a set of 4 smart contracts. This set of smart contracts will make it possible "to automatically secure and execute over 160 predefined business rules, which will reduce transaction costs and avoid a number of administrative errors, specifically on topics of [legal] conformity."
The complete set of NYX smart contracts will communicate with each other and form a new kind of standard. It will cover for example: anonymized databases accessible for issuers of financial instruments and regulators, KYC and anonymized digital on-chain identities, AML, automatic verification of the transferability conditions of the securities, time restricted KYC according to European law, on-chain company registration, evaluation of buyer permittance, maximum number of shareholders, max cap, materialization of securities registers (shares, funds and bonds) and the conservation of the titles directly on the blockchain.
Utilizing Tezos' on-chain voting mechanism, it can be expected that this may allow holders of equity securities to hold their general meeting, vote and exercise their rights (such as dividend rights) in a completely decentralized manner.
Equisafe is creating the setup where the user experience will be as simple as filling out a form. "Each contract will be customizable and customizable according to the local compliance rules." It will be accessible and user friendly, while cutting out costs for administration and services that will now be replaced by the blockchain.
The NYX standard will do it all. It will be ultimate push for assets to move to blockchain. The well known immutability of decentralized blockchain, combined with a complete and user-friendly platform to tokenize assets, while being able to comply with any set of regulations necessary. All resulting in cost and error reducing, while it allows regulators to experience an unprecedented efficient way of auditing.
The NYX standard is simply THE most complete smart contract set up for STO’s and anything tokenized. Combined with Tezos' other strongpoints, such as its unique on-chain governance model which obsoletes forking. (Imagine security tokens on a hard-forked chain where both chains carry a copy of the tokens.) The on-chain governance model also offers the advantage that it can move and adapt faster than traditional decentralized governance models. Consensus for traditional decentralized governance models is time-consuming and hard to reach. Tezos’ upgradeability is therefore unmatched, which means it will be able to adapt to future needs and changes in a swift and smooth manner like no other decentralized network. Speaking of decentralized: the decentralized state of the Tezos network is impressive compared to other PoS chains. With 441 nodes at the time of writing, it has four times more nodes than Cosmos and BNB. Tezos is the most decentralized PoS chain today.
Tezos future looks bright. And with Tezos, the future is closer than you think:
"The [NYX] standard should be unveiled to the general public in early 2020, after being deployed in a first use case on the Equisafe platform."
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