There are many claims of security tokens being 'compliant', usually by way of a whitelist to allow transactions between authorized wallets. Yet, these tokens are not compliant in a regulatory sense.
Blockchain is trustless but security tokens require trust
A traditional paper security certificate is not compliant; it is an output of a compliant process. The same is true of digital security tokens. A digital token, like a paper certificate, by itself, does not demonstrate compliance. On the trustless blockchain, we are being asked to trust an off-chain claim that a security token is somehow compliant to all associated regulations.
Further, while essential, a simple whitelist of what wallets are allowed to make transactions is not compliance. Compliance is demonstrating issuers, offerings, investors and associated transactions fulfill all regulatory obligations.
Whitelists are not enough
Whitelists alone cannot fully address compliance, as factors can change off-chain and off-platform which may result in a compromised whitelist. Additionally, an investor may qualify for one offering but not another, creating complexity and risk for error in managing multiple whitelists. For example, an investor may not be eligible for secondary trading or the issuer may exercise first right of refusal. Also, whitelists do not handle the proper registration of securities, which is something Vanbex does, working together with regulatory bodies and transfer agents in the appropriate jurisdictions.
Vanbex understands these shortcomings because we have been whitelisting authorized issuers, investors and transactions since July of 2018 via Rocket, our digital tokenization solution, where we process Know Your Client (KYC), Anti-Money Laundering (AML) and Accredited Investor certifications on all users and transactions. So, Vanbex's Rocket digital securities platform provides regulatory compliance because that is where the actual compliance processing takes place.
Tokens are not compliant, they are only compliant to smart contracts
Now, Vanbex Labs is pioneering security token compliance with actual smart compliance contracts, which moves compliance onto the blockchain, where it belongs. These smart compliance contracts ensure compliance, providing transparency into compliance requirements while enabling multiple regulators and exchanges to take a more active role.
Smart compliance contracts for regulators and exchanges
In this use case, regulators and exchanges provide compliance regulations via a smart compliance contract in real time. For example, regulators or exchanges could suspend or halt trading, in a highly targeted manner, via a smart compliance contract on the blockchain if pre-determined compliance obligations are not being met. And, as regulations evolve and change, regulators and exchanges take advantage of Vanbex Lab's smart contract version control system, which ensures that compliance is always current and that there is an audit trail of what exact compliance parameters were historically met. This is not possible with a token or whitelist alone.
Off-chain compliance does not make a token compliant
In summary, there are many claims of tokens being 'compliant', even if only associated with a whitelist. However, the reality is that compliance is not happening on the blockchain, such as compliant registration of securities. Off-chain compliance determination does not make a token compliant because the off-chain process is obfuscated and cannot be verified. Compliance belongs on the blockchain.