Proposal of a Service Model for Blockchain-Based Security Tokens
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This section proposes a service model for blockchain-based security tokens to facilitate investment in tokenized tangible and intangible assets.
The proposed service model is partially similar to the existing cryptocurrency service model. The main difference between the proposed service model and the cryptocurrency service model comes from asset collateralization and tokenization. Since blockchains for cryptocurrencies, cryptocurrency wallets, and cryptocurrency exchanges are well known and used to provide many services, this section does not address the implementation evaluation of the proposed service model.
3.1. Service Model
The proposed service model includes holders with security token wallets, custodians with security token wallets, tokenization service providers (TSPs), investors, asset owners, issuers, exchanges with security token wallets, traders, anti-money laundering (AML) regulators, and the blockchains for security tokens.
The proposed service model expands investment products and increases the convenience of asset investment compared to existing investment systems. Through the proposed service model, users can invest in tokenized tangible and intangible assets (e.g., buildings, art, music, movies, etc.) with a small amount, even $5–10, and receive dividends of profits after asset management (e.g., sales, etc.) is fulfilled. Additionally, if asset management is not fulfilled, users who hold security tokens can make a profit by selling the security tokens.
Holders, custodians, TSPs, issuers, exchanges, AML regulators, and blockchain providers are the stakeholders in the proposed service model. There are requirements for each stakeholder to make the proposed service model successful. The holder should prevent the loss and theft of security tokens. The custodian should prevent the embezzlement and theft of security tokens owned by the holders. The TSP should guarantee the value of tokenized assets and prevent embezzlement and theft of investments. The issuer should guarantee that the amount of issued and revoked security tokens matches the amount of investment. The exchange should prevent the embezzlement and theft of security tokens owned by traders. The AML regulator should administer and supervise exchanges to prevent money laundering involving security tokens in accordance with AML laws. The blockchain provider should guarantee the storage and maintenance of a ledger for the issuance, transfer, and revocation of security tokens.
In Figure 1, the role-based entities of the proposed service model are described as follows:
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The holder with security token wallets is the owner of security tokens issued by issuers, bought from exchanges, or transferred from other entities. Holders transfer security tokens on the blockchain and entrust their private keys or security tokens to custodians.
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The custodian with security token wallets stores and maintains the holder’s private keys, which are used to transfer the holder’s security tokens. If the holder is a legal person, a child, an elderly person, or a digitally disabled person, the custodian transfers the holder’s security tokens on the blockchain on behalf of the holder. The custodian stores and maintains the security tokens received from the holders.
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The tokenization service provider (TSP) registers tangible assets (e.g., real estate, art, agricultural products, fishery products, livestock products, etc.) or intangible assets (e.g., music, movies, copyrights, intellectual property rights, etc.) and provides tokenized assets for investment. The TSP requests the issuer to issue and revoke security tokens and retrieves the issuance and revocation information of the security tokens from the blockchain.
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The asset owner registers his/her tangible and intangible assets with the TSP and receives payment from the TSP for investments in the registered assets. The asset owner provides the price for the registered asset to the TSP.
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The investor pays the TSP for investments in tokenized assets and receives the profit from the asset management of the TSP.
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The issuer issues and revokes security tokens in accordance with the request of the TSP. The issuers store issuance and revocation information for the security tokens on the blockchain.
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The anti-money laundering (AML) regulator administers and supervises exchanges to prevent money laundering involving security tokens.
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The blockchain stores and maintains information on the issuance, transfer, and revocation of security tokens. Since the proposed service model does not require the mining of security tokens, the type of blockchain can either be private or permissioned. The consensus algorithm can be either Proof of Stake (PoS) or Delegated Proof of Stake (DPoS). TSPs, issuers, exchanges, and AML regulators can participate as nodes on the blockchain.
In Figure 2, Exchange-1 includes security token wallets, cryptocurrency wallets, central bank digital currency (CBDC) wallets, and a trade ledger containing personally identifiable information (PII). If Exchange-1 does not include CBDC wallets, traders can trade security tokens with traditional fiat currencies, such as USD, EUR, etc. The fact that Exchange-1 includes security token wallets means that Exchange-1 can hold security tokens. Exchange-1 identifies and authenticates traders before trading. Exchange-1 provides traders with trading between security tokens and fiat currencies, including CBDCs, between security tokens and cryptocurrencies (e.g., Bitcoin, Ether, etc.), and between security tokens. Exchange-1 stores and maintains the trade ledger containing the PII of the traders. The AML regulator administers and supervises Exchange-1 to prevent money laundering involving security tokens.
In Figure 3, Exchange-2 includes cryptocurrency wallets, CBDC wallets, and a trade ledger with PII. Exchange-3 includes security token wallets, CBDC wallets, and a trade ledger with PII. If Exchange-2 and Exchange-3 do not include CBDC wallets, traders can trade security tokens with traditional fiat currencies, such as USD, EUR, etc. Exchange-2 and Exchange-3 identify and authenticate traders before trading. Although Exchange-2 does not include security token wallets, through interoperability between Exchange-2 and Exchange-3 (e.g., sharing order books, etc.), Exchange-2 and Exchange-3 can enable traders to trade between security tokens and fiat currencies, including CBDCs, between security tokens and cryptocurrencies (e.g., Bitcoin, Ether, etc.), and between security tokens. The fact that Exchange-2 does not include security token wallets means that Exchange-2 does not hold security tokens. Exchange-2 and Exchange-3 store and maintain a trade ledger containing the PII of the traders. The AML regulator administrates and supervises Exchange-2 and Exchange-3 to prevent money laundering involving security tokens.
As shown in Figure 4, the life cycle of security tokens includes issuance, distribution, usage, storage, and revocation phases. Unlike the life cycle of cryptocurrencies (e.g., Bitcoin, Eth, etc.), the life cycle of security tokens has a revocation phase. Since security tokens are used to tokenize tangible and intangible assets, the security tokens must be revoked when the tokenized assets are destroyed or tokenized asset management is fulfilled. The issuance phase occurs when issuers issue security tokens. The next phase of issuance is the distribution phase, which occurs when the issuers distribute the security tokens to the investors. The next phase of the distribution can be a usage, storage, or revocation phase. The usage phase occurs when the holders transfer their security tokens to other holders and trade their security tokens on exchanges. The next phase of the cycle can be either the storage or the revocation phase. The storage phase occurs when the holders keep their security tokens for a certain period. The holders can entrust custodians with their security tokens during the storage phase. The next storage phase can be either the usage or revocation phase. The revocation phase occurs when the issuers revoke the issued security tokens. Since security tokens are asset-backed tokens, security tokens that have fulfilled asset management must be revoked. The issuers can revoke the issued security tokens by transferring them to a predefined revocation wallet. The history of the issuance, distribution, usage, storage, and revocation of security tokens can be stored and maintained on the blockchain. The trading history of security tokens can be stored and maintained by the exchanges.
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