Decentralizing the Issuance and the Exchange of Tokenized Securities on the Ethereum Blockchain

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Journal Title

Journal ISSN

Volume Title

Perustieteiden korkeakoulu | Master's thesis

Authors

Date

2019-01-28

Department

Major/Subject

Cloud Computing and Services / ICT Innovation

Mcode

SCI3081

Degree programme

Master's Programme in ICT Innovation

Language

en

Pages

95+14

Series

Abstract

Since Bitcoin was introduced in 2008, blockchains have established as a tool for speculation as well as decentralized applications. In 2014, Ethereum, a so-called second-generation blockchain, introduced the concept of smart contracts, which allows the decentralization and disintermediation of a wide range of use cases and industries. In the context of financial instruments or securities, smart contracts allow increased transparency, liquidity, availability, and auditability, while significantly reducing the barrier to entry for potential investors. In recent months, numerous projects and standard proposals have aimed to facilitate the tokenization of securities. However, regulatory compliance imposes a major challenge for security token platforms. Current realizations of legally required user verifications lack scalability, flexibility, and reusability. Furthermore, potential investors are confronted with tedious redundant processes to disclose private data per investment opportunity. We address these challenges by proposing a smart contract architecture that generally solves legal compliance. Immutable logic, the upgradability of compliances, as well as structuring evaluation logic in hierarchies allow the realization of arbitrary regulatory clauses. Our design addresses both the primary and secondary market, and can easily be extended, e.g. to allow secondary offerings or legal enforcement. Furthermore, we envision a network of trust realized via identity management on the blockchain. Hereby, conventions between platforms, regulators, and exchanges fully automate legal checks throughout atomic transactions on the Ethereum blockchain. Furthermore, we use so-called oracles to bridge blockchain-based logic with regulatory definitions, e.g. investment limits in Euro. We compare our proposal to existing implementations and extensively discuss design decisions. Furthermore, we evaluate our proposal with exemplary use cases. Specifically, we fully implement a fictive compliance to demonstrate general concepts, as well as evaluate real-world challenges derived from legal frameworks. Our work aims to complement existing work related to security token in order to accelerate the adoption of asset tokenization.

Description

Supervisor

Nurminen, Jukka

Thesis advisor

Wandmacher, Ralf

Keywords

blockchain, ethereum, security token, regulatory compliance

Other note

Citation

Permanent link to this item

https://urn.fi/URN:NBN:fi:aalto-201902031528

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[dipl] Perustieteiden korkeakoulu / SCI