The ecosystem
Security token offerings
Utilizing a decentralized platform presents two prominent challenges:
Technological: it connects the dApp’s back end which runs completely on a public blockchain through smart contracts. The smart contracts must be flawless to ensure the protection of issuers of tokens and their investors.
Legal/regulatory: the objective is to issue STOs in a compliant manner. Investors must also pass a KYC process to comply with regulatory and anti-money laundering regulations.
When dealing with standard securities, the ownership information of the investment product is recorded in a certificate which can take the form of a simple PDF. With a security token, the information is stored into an immutable blockchain and instead of a certificate being issued, a token is.
All countries have very precise and extensive regulations in relation to what securities are, how they must be issued, who can participate, who can buy them, and what protection investors are afforded.
The complexity of creating PassiveSphere’s dApp lies in merging both the regulatory and legal issuance of securities and the technical aspect that allows the issuance of this type of financial instruments without PassiveSphere acting as an intermediary. Furthermore, countries may have similar, but ultimately different legislation. This adds a layer of complexity as the regulatory compliance requirements in one country can greatly differ from another.
PassiveSphere aims to create a decentralized uniform protocol of security token issuance.
The goal is for any issuer of security tokens to use PassiveSphere’s technology, and for this issuer to:
Comply with local regulations.
Comply with the specifications of the issuance itself (the what).
Comply with the process of how selling the security tokens may occur and by whom (the how).
Slow legally compliant transfer of security tokens to occur in secondary markets (the where).
Additionally, it is important to consider that while the biggest complexity lies in providing a solution that is compliant from a regulatory and technological point of view, the financial structure and tokenomics of the security token issuance must adhere to the end goal of the project.
In this sense, the dApp must allow the issuer to establish what are the hard and the soft caps, what is the term or maturity of the loan in case of issuance of debt, or what is the shareholding allocation in the case of tokenized shares.
The PPX utility token
3600 trillion initial issuance, with additional issuance later based on ecological construction
The STO factory
Bringing companies on-chain
PassiveSphere’s vision is to onboard companies into Web3, so its dApp was built under this premise. The dApp allows companies to tokenize their existing shareholding, and transform its equity into tokens.
In a very lean format, companies can establish what their current equity is, who their shareholders are, and perform their first token issuance. This would allow any business to begin its journey into Web3. In such token issuance, the shareholders will receive tokens in the same value as the shares they possess, and transform the tokens into the digital twin of the existing equity. This process allows the migration of companies from offline entities, to online organisms belonging to a decentralized ecosystem.
Furthermore, by creating this frictionless process, and providing them a management solution that can solve their needs now that they have been digitized, companies can now exist on-chain, interact and operate in this environment, and coexist with native structures such as the DAOs.
It is in this starting point that DAOs can also be onboarded into PassiveSphere’s dApp, since the tokenization process does not necessarily have to rely on the preexisting condition that shares or real world assets exist, as tokens can become the genesis for any project that is to be created natively in the blockchain.
The fundraising mechanism
One of the main functionalities of the dApp is to use technology as a fundraising mechanism, which is enabled thanks to the escrow contract linked to the Security Token Offering (STO).
STOs dedicated token will be generated within an STO factory that will deploy an BEP20 token contract for each new tokenization.
This STO token will utilize whitelist access that will prohibit recipients from receiving tokens if they are not whitelisted, for example, if they did not pass the KYC process. These will only be tradable in secondary markets if the buyer has passed the KYC process and the issuer has accepted the request.
It is of utmost importance that the issuer of the security tokens controls the whole flow of security tokens from the primary to the secondary market, understanding and accepting which users can acquire security tokens.
This ensures compliance with the applicable legislation in relation to regulatory and anti money laundering (AML). Therefore, promoters or issuers of security tokens will always be responsible for the whitelisting of investors.
STO tokens will be acquired through an escrow contract specific to each tokenization. The escrow contract is a secure contract where investor capital is stored and protected by the smart contract. The smart contract is completely autonomous, independant and self-regulated.
Issuers will be able to call on the STO factory to deploy a new STO by using PPX utility tokens and ETH for the transaction. Investors, once whitelisted, will be able to purchase the corresponding STO tokens in any crypto asset for a fixed STO selling price.
Whenever an investor participates in an STO, the capital will be stored in an escrow account.
The first release of the security tokens will be made once the soft cap has been reached. The issuer of tokens will decide before the release the tranches of tokens between the soft and hard cap.
As a safety mechanism, it is important to establish that if the soft cap of a Security Token Offering is not met by the pre-established deadline, the capital already deposited into the escrow account will be reimbursed to investors.
As soon as the soft cap is reached, and the first tranche of tokens is released, these tokens will begin accruing income in the form of interests or dividends, and the issuer will be legally bound to meet obligations to investors.
The payments flowing from the issuer to investors will be deposited in the escrow contract by the issuer in any cryptocurrency and paid out to investors through the same escrow contract.
Regarding the security of the STO factory, clones will be deployed through a minimal proxy pattern and the entire protocol will be upgradeable through a UUPS pattern.
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