Securitize Logo

Web3 And Digital Asset Securities

Compliantly Raising Capital with Blockchain Technology

by Miguel Schneider, Blockchain Research and Product Development at Securitize
Jul 12, 2022

Last week, Security Token Market (STM), the leading global oracle for all digital asset security financial data and research, achieved a major industry milestone when it launched the first-ever Web3 crowdfunded capital raise on Securitize. While the financial news often focuses on the boom and bust cycles of digital assets like bitcoin and ether, digital asset securities like STM represent a significant step forward in the evolution of financial services. This is because they operate under the same regulatory exemptions that traditional financial services follow, but do so more efficiently and at less cost to investors. Using digital asset securities, businesses can efficiently raise capital and investors can gain exposure to new investment opportunities faster, more efficiently, and with greater control than using traditional methods.

Since 2018, I’ve been at the heart of the blockchain space, and have come to develop a keen sense of what kinds of innovation make a splash vs. what makes a real-world difference. So, in the following article, I will share my perspective as a blockchain researcher and developer, who has worked through both the boom and bust cycles, to show you how digital asset securities have evolved over time, and how they can offer businesses a better way to raise capital today.

Fits and Starts

In 2017, Initial Coin Offerings (ICOs) helped raise capital from the crowds using blockchain technology, seemingly democratizing capital markets access overnight. People who previously could not access early-stage investments were suddenly able to invest in promising blockchain-based companies, or so they thought.

While the blockchain technologies powering these new opportunities enabled a more efficient way to invest, by and large, ICOs did not make use of existing investor protections. And this contributed to their downfall. Nearly as quickly as it made investors rich, unregulated fast capital left them empty-handed without recourse, and raised questions about the legal frameworks used (or not used) by ICOs.

Digital Asset Securities Make This Better

At Securitize, we consciously built the DS protocol underlying our services to be blockchain-agnostic and make use of identity so that verified digital asset security tokens can provide investor protections and more people can access early-stage investments in a regulated manner. How is this possible?

Digital asset securities register the ownership rights of conventional financial instruments like equity and debt on the blockchain and provide standard investor protections such as KYC and AML.

Securitize is a leader in the development of regulated digital asset securities, which are consistent with regulatory standards since 2017, and have issued multiple different kinds of digital asset securities under all of the common exemptions. We know that the process needs to be simple, secure, and consistently compliant to scale. And we know the right way to do it:

Leverage automation to streamline the investment process and provide an extremely simple user experience so investors can simply invest without jumping through all the underlying technical and operational complexities.

Making Digital Asset Security Investing Easy

To do this, we broke down the investor experience into four simple steps and built an easy-to-use interface to streamline the investment flow. In the following sections, we will briefly describe how we leveraged different elements of Web3 technology to support a very simple user interface and frictionless user experience, while maintaining all the same Know-Your-Customer (KYC), Anti-Money-Laundering (AML), accreditation and qualification checks that traditional investment platforms use to determine suitability and ensure that securities exemptions are followed.

By streamlining the user interface into three simple elements (e.g. Stepper, Information, and Action), and by reducing the investment journey to just four steps (e.g. Investor Information, Submit Application, Qualification, and Purchase Tokens), we enabled investors to seamlessly invest across devices and know exactly what step of the process they're in along the way.

Interface Design

Web user interface on the left, with stepper, action and information from left to right.

Our aim was to help investors know exactly what is happening when, and provide investors with all the information they need to perform their investments upfront.

All the work started by clearly defining how investors would interact with the platform and how they would ultimately invest in the opportunity.

Therefore, we decided to divide the screen into three different sections:

  • Stepper: On the left-hand side, investors will see where they are in these four steps: 1) provide investor information, 2) submit the application, 3) complete qualification criteria, and 4) purchase the digital asset. Knowing at which step of the investment the investor is is of paramount importance to guarantee the success of the investment.
  • Information: Contextual information appears dynamically on the right-hand side. We know that certain aspects of interacting with digital wallets and Web3 technology can be obscure or difficult to understand for traditional investors. So, we decided to save some space in the user interface by providing contextual information to investors dynamically. Depending on the action investors are expected to take, contextual information will appear on the right-hand side of the screen. For instance, if investors are required to perform an ERC20 Allowance, we provide information about the process so it’s easy to act on.
  • Action: Jump to action at the click of a button. We apply best practices to mimic many of the already existing user experiences in the digital asset space, like decentralized exchanges, borrowing and lending protocols, and many other decentralized finance services, so that the action is executed seamlessly. This way, investors can act on investment decisions in four simple steps.

Digital Wallets

Digital wallets like Metamask and Wallet Connect are key to accessing Web3 and blockchain technology. And this is why we designed the main interaction between Securitize’s fundraising portal and investors to take place in the investor’s digital wallet.

As multi-purpose tools, digital wallets function across devices and - in addition to storing value - can uniquely identify investors, transfer funds from investors to issuers, sign agreements, and transfer digital asset securities from issuers to investors, among other things.

To simplify the investor experience even further, Securitize designed our fundraising portal to seamlessly interact with the most-used digital wallets, including MetaMask and Wallet Connect. This way, more people have more access to Web3.

Using USDC

To provide a more efficient investment process, we decided to use USDC as the funding vehicle to acquire digital asset securities issued under a Reg CF regulatory framework, so that once an investor has USDC, it is possible to invest instantly.

USD Coin (USDC) is a tokenized U.S. dollar pegged 1:1 to the value of one U.S. dollar. USDC’s reserve assets are held in segregated accounts with regulated U.S. financial institutions, which the accounting firm Grant Thornton oversees to provide monthly attestation reports.

For more information on why we use USDC, click here.

While using USDC, most of the friction occurs pre-trade when sending fiat funds from the investor’s account to an escrow account. This is because funds have to be sent from a legacy bank account and then manually confirmed to ensure that the transferred funds correspond to the signed agreement before the process can close.

USDC tokens are the ideal mechanism for transferring funds from the investor to the issuer using a digital wallet because of the institutional trust that surrounds them. But before any funds can be transferred, a formal agreement must be signed between the issuer and the investor, which we use blockchain technology to streamline.

Signing The Agreement

The traditional way to get a contract signed is by sending a physical copy of the final subscription agreement to the investor so that it can be manually signed and returned. At Securitize, we have used electronic signatures to reduce processing time and make it easier to invest for years. Along the way, we realized that we could drastically improve the investor experience to make it more reliable and secure by using a key feature of modern digital wallets, the cryptographic signature.

Illustration by Author

The basic idea is pretty simple: since the investor has already provided their personal information and the amount of digital asset securities to be purchased, we can generate a template of the agreement using this data and securely share it with the investor. To do this, we create a unique digital 'signature’ of the subscription agreement as a PDF called a cryptographic hash. Since the hashing method we use generates a unique 256-bit (32-byte) signature, the subscription agreement is incredibly specific. This unique cryptographic signature is later used to sign and verify the subscription agreement, completing the investment process.

Completing The Investment

Once the investor decides how much USDC to purchase, investing is just one click away. As we have already seen, completing the investment requires, potentially, multiple steps, which we have been able to join into a one simple atomic transaction: a transaction which will only occur if all the following steps happen in the order in which they are intended:

  1. Sign the contract
  2. Transfer USDC from the investor’s to the issuer’s wallet (only after the investor has allowed it in a previous step)
  3. Transfer the digital asset securities from the issuer’s to the investor’s wallet

All of these actions are performed using a smart contract on the blockchain. In order to make it all happen in a single transaction, a lot of magic must happen on the backend first.

Behind the scenes, we gather all of the required data and personal information needed to generate the final investor PDF agreement, compute a hash of the agreement, establish the USDC and digital asset security amounts to create an encoded version of the transaction, which, once signed by the investor, will call the smart contract, process all this data on the blockchain to validate the data, and finally perform the required operations to complete the investment.

The previous paragraph might sound overly complicated, but the truth is that it is far from trivial to get all the pieces working together smoothly. Fortunately, we’ve made it easy for investors so all that’s needed is to simply click a button, and all the actions will be executed, verified, and stored on an unalterable distributed ledger called the blockchain.

Conclusion

In this article, we demonstrated how Securitize provides a more efficient and streamlined user experience by leveraging Web3 technology, including how to use digital wallets to sign transactions and perform multiple operations which previously required multiple steps.

In future articles, we will provide more technical details about the agreement signing process using hash codes and emitting events on the blockchain, the generation of signed transactions by backend services, atomic transactions, and the usage of crypto wallets to authenticate users and sign transactions.

Stay tuned!

© 2022 Securitize, LLC
All rights reserved
info@securitizemarkets.io
Check the background of Securitize Markets on Finra BrokerCheck.

Securities are offered through Securitize Markets, LLC, (“Securitize Markets”) a registered broker-dealer and member FINRA/SIPC. Neither Securitize Markets, nor any of its affiliates provide any investment advice or make any investment recommendations to any persons, ever, and no communication through herein or in any other medium should be construed as such. Securities offered on the Securitize Markets ATS have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. Assets listed herein, such as digital assets or tokens using blockchain, are speculative, involve a high degree of risk, are generally illiquid, may have no value, have limited regulatory certainty, are subject to potential market manipulation risks and may expose investors to loss of principal. Investments in private placements, start-up investments in particular, are also speculative and involve a high degree of risk. Investors must be able to afford the loss of their entire investment. Eligibility to buy and sell securities on the Securitize Markets ATS is determined by Securitize Markets in its sole discretion. Offers to sell, or the solicitations of offers to buy any security can only be made through official offering documents that contain important information about risks, fees and expenses associated with the applicable securities available for trading on the Securitize Markets ATS. Investors should conduct their own due diligence, not rely on the financial assumptions or estimates displayed herein, and are encouraged to consult with a financial advisor, attorney, accountant, tax advisors, and any other professional that can help you to understand and assess the risks associated with any investment opportunity. Past performance is not indicative of future results. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided herein or through any references/links herein. Any financial projections or returns shown herein are provided by the issuer of the relevant security and Securitize Markets has not verified the accuracy. Further, there can be no assurance that any valuations provided by issuers are accurate or in agreement with market or industry valuations. Securitize Markets and its affiliates make no representations or warranties as to the accuracy of such information. Securitize Markets may collect certain information about you that helps us comply with various securities regulations and rules and the USA PATRIOT Act, a Federal law that requires all securities firms to obtain, verify, and record information that identifies each applicant. The information also helps us more fully understand your investment profile and identify what types of investments or strategies may be suitable for you. The term “Investors” used on this website, typically refers to accredited investors where applicable. Please note: if we cannot verify the information you provide, we may be required to restrict or deny your account. Trading during Extended Hours Trading Sessions carries unique risks, such as greater price volatility, lower liquidity, wider bid/ask spreads, and less market visibility, and may not be appropriate for all investors. There is no guarantee that a diversified portfolio will enhance overall returns, outperform a non-diversified portfolio, or prevent against loss. By accessing this site and any pages thereof, you agree to be bound by our Terms of Service and Privacy Policy.