How to create a regulation-compliant marketplace for tokenized Real World Assets (RWAs)

This article explains the business and technology aspects of how anyone, be it an independent software vendor, or platform operator can create a marketplace for tokenized securities aka Real World Assets using the Verified Network.

So, what is the Verified Network?

The Verified Network is a decentralized network of regulated financial services providers — transfer agents, custodians, asset managers, brokerages, payment institutions, and compliance managers — that enable the issue, distribution, and servicing of tokenized securities aka Real World Assets (RWAs). Transfer agents are licensed in each country and are responsible for keeping a record of securities that are issued by issuers who are their clients. When securities such as shares and bonds are traded, transfer agents make a change in the records of their ownership. Custodians safe keep securities for issuers and investors. In the world of tokenized securities, custodians safe keep the private keys of security tokens. Custodians are again licensed and often offer insurance against theft or misuse of private keys. Asset managers manage capital and on the Verified Network, they can also underwrite issues of tokenized securities and provide liquidity for tokenized securities. Providing liquidity refers to the manager making bids and offers on a security so that anyone trading that security can get their orders filled without delay. Brokerages are licensed businesses that enable the issuers of tokenized securities to trade underlying assets. For example, if an issuer of a Credit Linked Note wants to create and manage a portfolio of underlying bonds, it would need a brokerage to buy and sell those bonds from exchanges. Payment institutions on the Verified Network accept fiat currencies (EUR, USD) and issue electronic money tokens aka cash tokens that can be used to pay for and settle trades of tokenized securities. Payment institutions are often licensed as e-money issuers. Compliance managers are licensed administrators that perform Know Your Customer (KYC) checks on new users and perform ongoing Anti-money laundering (AMLA) checks on users and wallets they use to trade securities and store cash tokens. A partial list of financial services providers on the Verified Network can be seen on its  website.

What does an operator need to create a RWA market place ?

A RWA market place can be created by a company to offer its own shares to investors. It can also be created a platform operator to manage multiple issuers. An example of a RWA market place is here. An operator needs the following components to create a RWA market place

• transfer agents, paying agents, cash / securities / digital asset custodians, compliance managers. Here, the Verified Network has the service providers and the backend applications for servicing issuers and investors.
• blockchain smart contracts to create security tokens, liquidity pools for trading them, and portfolio management tools for investors to manage their investments. Here, the Verified Software Development Kit (SDK) and Verified Subgraphs are available for free so that software developers can focus on implementing the application front ends for web and mobile users. The Verified SDK is a set of Javascript interfaces to smart contracts that are already deployed on multiple blockchains including Ethereum and Base main nets. The Verified subgraphs provide GraphQL interfaces for software applications to query blockchain data generated by smart contracts on the Verified Network.

Compliance first, but how ?

KYC checks and AMLA monitoring is crucial when it comes to being regulation compliant on offerings of tokenized securities. Software applications that allow their users to use blockchain wallets to hold cash tokens and tokenized securities must first get the wallets whitelisted after licensed compliance managers on the Verified Network have performed KYC/AMLA checks on them.

For this to happen, anyone developing applications using the Verified SDK can use the KYC plugin code to expose the KYC workflow to their application users, and this workflow is serviced by licensed compliance managers on the Verified Network that can then view user KYC data and whitelist their wallets or request more information from users to process their KYC.

KYC workflows depend on whether the user is a retail investor, qualified investor, a financial institution or a business entity. AMLA processes allow for reporting of suspicious transactions, freezing wallets, sanctions monitoring and use sophisticated blockchain analytics tools.

Requesting issue of security tokens

While businesses offering their own shares or bonds may not want this feature on their website since they are themselves the issuer, market place platforms may want to enable prospective issuers to request issues of their securities. Requests for issuances of security tokens can be for new capital raising (primary issues) or trading existing securities (secondary trading). Requests include submission of information such as the name and symbol for the security token, the cash token it is paired with which refers to what investors can pay for the security token with, type of investors (retail, qualified) that the issue is open to, country of issue and countries where the issue should be restricted to, besides submission of business and financial information on the issuer, and offering documents on the issued product itself.

Software developers can use the Verified SDK’s issuing functions to implement such functionality.

All requests made in the issue’s country of origin are processed by a licensed registrar and transfer agent that either approves or declines the issue request. Approved requests result in the minting of security tokens on the Verified Network. Such security tokens are based on the CMTA standard and allow for whitelisting, freezing, and snapshots of holders. Minted security tokens are credited initially to the issuer’s wallet from where it can offer them for sale on its website or use a liquidity pool to enable investors to trade them.

Offer for sale of Tokenized securities

Issuers and Market place operators can offer tokenized securities for sale to investors. Such offers for sale can be of two types — primary issues, where a new security is offered for subscription to raise capital for the issuer, or secondary issues, where an existing security is offered for trading to enable liquidity for investors. Primary issues have a different workflow that allows for closure of the issue on a specific date, subscriptions to the issue to a certain amount, allotment of securities in the case of over subscriptions and refunds to investors whose subscriptions have not been or are partially accepted. Secondary issues allow both market and limit orders that are entirely on chain and matched orders are settled by the transfer agent for the issue. Settled trades allow sellers to withdraw capital (that is, the paired cash token to the security that is traded) and allow buyers to transfer the security tokens from their wallet (that is, only after trade settlement, the buyer’s wallet is whitelisted for the security token).

Software developers can use the Verified SDK’s Liquidity pool contracts to execute trades of tokenized securities paired with cash tokens such as USDC.

Orders can be changed before they are filled or cancelled. Complete code for a walkthrough of a swap (that is, a Delivery versus Payment transaction) of a security token against a cash token, order cancellation and change order requests, and trade settlement can be seen here.

Managing Investment portfolios

Letting investors manage their portfolio of investments involve querying data from the Verified subgraphs and displaying them in the application. Application developers can show profits and losses, asset statements and balances.

Application developers can also display corporate actions published by registrars and transfer agents and enable investors to vote on resolutions in cases where they are allowed.

We will be publishing complete code for a mock application with the above features, but till then, anyone needing help can get in touch with us on Discord and use the complete developer documentation here.