Harbor’s Security Token Stack features a network of on-chain smart contracts and off-chain processes which work in unison to effectively allow for the issuance, trade, and audit of security tokens. They believe that for security tokens to flourish, a thriving ecosystem of technology, market-makers, investment banks, broker-dealers, and regulatory compliance will be necessary, which is precisely what the Security Token Stack aims to bring.
The Increased Difficulty that Comes with Security Tokens
The benefits extend to all variations of stakeholders. For issuers, both capital and compliance come with a significantly lower cost. For investors, never before seen levels of access and liquidity will become the standard. For regulators, the blockchain allows for increased transparency and easier enforceability.
Yet with different varieties of stakeholders come different requirements; the landscape becomes increasingly complex. And this is exactly what Harbor’s Security Token Stack aims to simplify.
The Security Token Stack as a Streamlined Ecosystem
The stack, as seen below, is comprised of five different layers. In unison, the layers entail on-chain smart contracts and off-chain processes that bring efficiency to the many aspects of security tokens.
From bottom to top, the five layers are as follows:
The Blockchain. This offers transparent, trustless transactions. It’s the foundation of the network— all other layers are built on top of it. Harbor is considered to be chain agnostic, but they openly favor the Ethereum network due to its developer community and overall support. Notably, the Ethereum community has also been busy developing their own security token standards, such as the ERC-1400 and ERC-1404.
The Security Token. This is the on-chain technology which enforces compliance required by both regulators and issuers. Harbor has built their own R-Token, which is ERC-20 compatible and contributes to compliance from STO to secondary trading. It performs initial checks to ensure that all transactions are set to conform to pre-established rules, by verifying the who, what, and where of each transaction.
The Compliance Platform. Here, off-chain processes ensure investor qualification, and modify rules and permissions as required by issuers, or changing real-world laws. Importantly, this layer correlates real-world identity to digital identity (wallet address), in real time, to allow for each issuer to have immediate access to investor real-world identities. Such access is needed for the sake of dividends, distributions, or to provide necessary withholding and tax reporting.
Exchange Protocol. This layer deals with liquidity. Different protocols connect order books from various marketplaces, which enable the exchange of different tokenized securities, and can therefore provide increased liquidity. Decentralized protocols offer lower expenses, remove barriers based on international investor location, and enhance security by eliminating centralization.
Exchanges. These provide the specific venue for trades to occur. Of critical importance here is a properly licensed exchange, respective of both the exchange’s jurisdiction and its operational objectives.
The team at Harbor believes the Security Token Stack is absolutely necessary to bridge the gap between traditional finance and the imminent future of security tokens. Not just one single layer, but the five total layers— the stack— will provide the necessary ecosystem for the actualization of security tokens from the perspective of all shareholders.
“The Security Token Stack and blockchain technology have the potential to re-engineer financial markets, bringing massive efficiencies to private securities and making it possible to connect buyers and sellers around the world to trade tokenized securities 24/7/365 with near-instantaneous settlement and no counterparty risk — something only possible with blockchain.”
What do you think about Harbor’s Security Token Stack? Will layered ecosystems become a benchmark of success in the future of security tokens? Tell us what you think in the comments below.
Meet Tim. Tim is a co-founder of The Tokenist. Originally from Kalamazoo, Michigan, Tim is a mechanical engineer by training and has been investing his whole life. He started his career with GE in engineering and operations management where he held various leadership roles before leaving to pursue an MBA (he is a proud former co-chair of the Milton Friedman Group at Chicago Booth). After business school, Tim spent several years with Baird Capital where he made private equity investments in consumer and industrial companies. He left Baird to found Protective Technologies Capital in 2018, where he continues to make private equity investments in family businesses looking for help with succession planning. Tim lives in Chicago, where he enjoys watching Michigan football and basketball and traveling with his wife Kristen. Like Sia, he also likes telling jokes. However, his wife adamantly insists that he not share his “dad jokes” publicly so he reluctantly sticks to writing about finance and technology.