The new ERC-3643 standard on Ethereum, “T-REX – Token for Regulated EXchanges”, is the first EVM-compatible tokenization standard to be approved by the Ethereum community.
On December 15, the Ethereum community gave the green light to the EIP-3643 improvement proposal, granting it the status of “final state”” to the new token standard, designed specifically for the tokenization of real-world assets or RWA.
This new token standard brings many new features to the tokenization ecosystem in general. Its creators, members of ERC3643 Association, explain that despite the success of other popular token standards on Ethereum, such as ERC-20 and ERC-721, these are not suitable for the tokenization of real-world assets, such as securities, because their characteristics do not allow for compliance on the blockchain.
Therefore, with the ERC-3643 standard, developers seek to integrate new features that ensure compliance with securities laws existing.
ERC-3643 represents An improvement to ERC-20 tokens, adding advanced features, which can track ownership and ensure that only eligible investors can hold tokens, as defined in the standard.
The Authorized Token Standard for Tokenizing Securities
Tokenization of real-world assets or RWA has been gaining traction in the world of finance, due to its numerous advantages for Improve liquidity, asset accessibility and transparency.
Currently, the market for tokenized assets on the blockchain amounts to about $ 120.000 million dollars, according to a report published by the firm 21.co in October. However, the growth potential of this market is enormous and could reach $10 trillion by 2030, according to estimates.
However, although tokenization is one of the fastest growing sectors within the crypto industry, until now there was no token standard that offered a solid, flexible and efficient framework for tokenizing assets, nor that allowed companies to interact with blockchain technology securely.
For this reason, the developers designed the ERC-3634 token standard, in order to address the challenges and diverse needs of asset tokenization.
“There is a need for a standard that supports the issuance and compliant management of permissioned tokens, suitable for representing a wide range of asset classes, including small businesses and real estate.”, the developers of the standard indicated.
Through the new standard, companies and institutions can to emit security tokens or tokenized securities adapted to securities laws, managing everything from minting to transferring assets between authorized investors. This standard allows institutions to ensure compliance at each stage of management of tokenized assets.
What is ERC-3643?
ERC-3643 is a institutional grade token standard, which allows entities to issue T-REX tokens (Token for Regulated EXchanges), which integrate specific functions that make compliance with legal and regulatory requirements possible. For example, institutions can issue tokens and dynamically verify the identity and eligibility of investors, using a self-sovereign identity (SSI) framework, with which they can ensure compliance through anonymous but verifiable credentials.
The ERC3643 Association team commented that:
“Each token transfer under this standard involves a compliance check to validate the transfer and the eligibility of the stakeholder identities.”.
On the other hand, institutions also have the power to pause or freeze tokens, based on specific regulatory requirements, through this new RWA tokenization standard.
Functions integrated into the ERC-3643 standard
For the issuance of T-REX tokens, certain requirements must be met, such as compatibility with the ERC-20 standard, the use of a self-sovereign identity system and the implementation of a recovery and restriction system. All of this in order to facilitate the recovery of private keys, in case of loss, and to allow the possibility of partially or totally freezing the assets, if necessary.
In addition to these requirements, the securities tokenization standard also requires the definition of an agent role and an owner role for the issuance of tokenized assets, and forces both transfers from an agent wallet and batch transfers, the latter in order to save on gas fees.
By integrating all these new features, ERC-3643 tokens allow owners to Proceed with a transfer only if the transaction is valid, which differs from the ERC-20 standard, in which users and token owners can transfer assets peer-to-peer (P2P) without permission.
The developers of the ERC3643 Association emphasized that:
“Authorized tokens may be transferred only to validated counterparties, in order to prevent tokens from being held in wallets or identity contracts of ineligible or unauthorized investors.”
Identity and compliance requirements
As securities are tokenized on the blockchain, one of the main functions of the new tokenization standard is to ensure that investors can legally access the assets. To do this, ERC-3643 establishes an identity registry, which links both an investor's wallet address, an identity smart contract and a country code, corresponding to the investor's country of residence. All this, with the aim of guaranteeing compliance with the corresponding regulations.
Each security token will have an identity record, which will be associated with a dynamic whitelist of identities, to check the validity and eligibility of investors. In turn, this whitelist of identities contains the identities or credentials of all investors who have been authorized to hold the token. This after having met the identity requirements established in systems Know Your Customer or KYC.
Finally, the ERC-3643 token standard integrates a compliance contract, which establishes all the rules for the security token offering. Thus, for example, this contract defines the maximum number of investors per country, the maximum number of tokens per investor, and the countries accepted for the circulation of the token, among other terms that can be defined absolutely before the issuance of the tokenized assets or that can be adapted, depending on the legal requirements.
An important milestone for Ethereum and the blockchain industry
Joachim Lebrum, technology lead of the ERC3643 Association, stated that the approval of this new token standard is a technical achievement for the entire Ethereum ecosystem and the blockchain industry in general, marking a turning point for the integration of blockchain into the corporate financial sector.
In May last year, the Royal Museum of Fine Arts Antwerp (KMSKA) partnered with digital asset infrastructure platform Tokeny Solutions to tokenize an artwork by painter James Ensor on the blockchain. As reported by this outlet, the work was not tokenized on the chain as an NFT, but rather as a security token, using the ERC-3643 standard.
Continue reading: Real World Assets (RWA): Tokenization of Real World Assets Could Boost DeFi TVL
