Importance of Standardization in the Tokenization Industry

Standardizing smart contracts and compliance frameworks is crucial for the onchain finance industry to create a truly open and interoperable ecosystem. While blockchain networks and Solidity smart contracts with the Ethereum Virtual Machine (EVM) are natively compatible, true interoperability requires alignment among the operational processes of various stakeholders and asset servicers. Standardization ensures that all parties can seamlessly interact and collaborate, driving efficiency, security, and growth in the tokenization industry.

Standardizing smart contracts and compliance frameworks is essential for creating an interoperable ecosystem in the tokenization industry. This standardization benefits all stakeholders, from asset servicers and distributors to regulators and DeFi applications, fostering a more efficient, secure, and innovative marketplace:

Ecosystem

Standardization with the ERC-3643 Association

The ERC3643 Association plays a pivotal role in promoting standardization. By establishing a common set of rules and protocols, the association facilitates the creation of interoperable solutions. This standardization enables different platforms, services, and applications to work together harmoniously, fostering a more cohesive and integrated ecosystem. It also simplifies the development process, allowing innovators to build on a solid foundation rather than starting from scratch.

Standardization for Asset Servicers

For asset servicers, standardization means streamlined operations and reduced complexity. With a common framework, asset servicers can more easily manage and service tokenized assets, ensuring compliance with regulatory requirements. Standardization also facilitates the integration of new technologies and services, allowing asset servicers to offer more innovative and efficient solutions to their clients.

For example, let's consider an Issuer approaching an asset servicer to manage their security token. If the token was created using a custom method without adhering to the industry standards, the asset servicer would need to verify several aspects, including smart contract audits, control functions, and the compliance framework. This assessment can be time-consuming and costly.

In contrast, if the issuer presents an ERC-3643 token deployed via the official on-chain factory of the association, the asset servicer can be confident that the token is already audited, compliant, interoperable, and compatible with its operating model. This standardization significantly reduces the burden on the asset servicer and streamlines the client onboarding process.

Standardization for Distributors

Distributors benefit from standardization through enhanced market access and reduced friction. A standardized ecosystem allows distributors to reach a broader audience and integrate with a wider range of platforms and services leveraging the same set of guidelines and good practices. This interoperability can lead to increased liquidity and market efficiency, making it easier for distributors to connect buyers and sellers of tokenized assets.

Similarly with asset servicers, when distributors wish to offer a tokenized asset to their clients, they must ensure the asset's compliance. If they also need to verify that the asset has been properly tokenized, it adds a significant amount of unproductive work to their process.

Standardization for Regulators

Regulators play a critical role in ensuring the safety and integrity of the finance industry. Standardization helps regulators by providing a clear and consistent framework for compliance. With standardized smart contracts and operational processes, regulators can more effectively authorize projects, monitor and enforce rules, reducing the risk of fraud and ensuring investor protection. This, in turn, builds trust and confidence in the onchain finance industry.

Standardization for DeFi Applications

DeFi applications thrive on interoperability and composability. Standardization enables DeFi applications to seamlessly integrate with tokenized assets, expanding the range of financial services they can offer. With a common framework, DeFi applications can more easily build innovative products and services, driving further adoption and growth in the decentralized finance ecosystem.

ERC-3643 Interoperability with

Blockchains networks

Coded in Solidity, the ERC-3643 smart contracts are compatible with any EVM blockchain networks, public or private.

Other ERC and standards

ERC-3643 is an extension of ERC-20. It also leverages ERC-173, ERC-734, ERC-735, ERC-1822, and ERC-4337.

Smart contracts are composable, so it is not always relevant to directly compare standards. However, there are key principles to adhere to for compatibility with ERC-3643 tokens. Crucially, the on-chain identity component is vital for ensuring compliance. Additionally, most built-in control functions are essential for asset servicers to meet their legal obligations. Even if it could technically work without onchain identities or without these control functions, the tokens would lose its built-in compliance framework.

The ERC-3643 token standard is designed to be extensible, allowing for the addition of other smart contracts as Compliance Modules. This enhances the token's capabilities without compromising the overall system, ensuring seamless integration and continued compliance."

Wallets

As an extension of ERC-20, ERC-3643 tokens are compatible with most of the wallets, custodial or non-custodial.

DeFi

As an extension of ERC-20, ERC-3643 tokens are compatible with most of the DeFi protocols.

However, ERC-3643 tokens are permissioned, requiring recipient addresses to be authorized to receive them. Therefore, it is the responsibility of the Issuer or its Agent to validate and authorize DeFi protocols for their tokens. Once a DeFi protocol is approved, only eligible investors can interact with it. Unauthorized investors will be unable to withdraw their tokens from the protocol's smart contracts.

Most DeFi protocols do not display the reason for transaction failures on their DApp front-ends when a transfer cannot be executed (deposit, withdraw, etc.) because the recipient address is not authorized. To address this, the ERC3643.org Association has developed front-end components for DApps interacting with permissioned tokens. These components aim to enhance the user experience by providing clear feedback on transaction failures and improving the overall usability of permissioned tokens

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Permissioned tokens don't need permissioned DeFi protocols

With ERC-3643, it is not mandatory to separately permission DeFi protocols, as the tokens themselves are already permissioned. These tokens inherently carry compliance rules and are supervised by an Issuer who has legal obligations towards its token holders.

Legacy systems

The ERC-3643 token protocol is a set of smart contracts written in Solidity. To interconnect legacy systems with these smart contracts, it is typically essential to build robust APIs. Over 20 tokenization platforms are now enabling their clients to issue ERC-3643 tokens and provide APIs for seamless integration with legacy systems.

As the original creator of the ERC-3643 token protocol, Tokeny has been developing robust and secure APIs since the protocol's inception, ensuring reliable and efficient integration capabilities.