The early industry
The ERC 20 standard was established during the early days of tokenization and remains the foundation of most tokens to this day. Yet the ERC 20 was simply not designed for security tokens, ultimately creating a number of problems. For one thing, organizations couldn’t rely on ERC 20 to enforce KYC for secondary trades, which does not bode well for ownership certainty, an up-to-date cap table, or a recovery mechanism in the event of a lost private key.
Numerous entities tried to overcome these issues with proprietary standards. Implementations included the DS protocol from Securitize, R-Token from Harbor, T-Rex from Tokeny and ST20 from Polymath. However, this multitude of implementations ultimately created friction for the rest of the industry, particularly as custodians, exchanges, and other participants were needing to perform extensive due diligence on the code associated with the tokens themselves, in addition to their normal business due diligence. Security tokens were intended to bring efficiency and reduce complexity, and adding this additional barrier was counterproductive.
You can see a comparison of standards here.
The move towards standards
To tackle this problem, Polymath – the company which would later engineer Polymesh – brought together 25 companies composed of key industry professionals to propose a unified standard for security tokens on Ethereum. The goal was to ensure that the token’s code met specific requirements in order to allow organizations to integrate it without costly and time-consuming technical due diligence. This standard, ERC 1400, has since been adopted by organizations including ConsenSys and BNP Paribas.
About ERC 1400
The ERC 1400 aims to ensure the token’s code meets specific requirements to allow organizations to integrate it without costly and time-consuming technical due diligence. It acts as an umbrella of standards and addresses requirements specific to the management of securities, including the ability to conserve UBO rights for custodied assets. It also resolves some challenges surrounding security token management by automating transfer control (including the need for KYC verification) and corporate actions (including capital distribution or voting). Designed to be modular, the ERC 1400 also permits new functionality to be added as required.