SECURITY TOKEN OFFERINGS ON LIQUID NETWORK FOR CONFIDENTIAL TRANSACTIONS AND RAPID SETTLEMENT

SECURITY TOKEN OFFERINGS ON LIQUID NETWORK

At STOKR, we are all about providing you with the opportunity to use tokenized digital securities (security tokens) for investments. This type of digital investing is rapidly growing; so along with that comes needs for increased security, privacy and anonymity, all while keeping the process transparent and efficient.

Liquid Network, a Bitcoin sidechain developed by Blockstream, is a key player in this field facilitating all of the above. This article will give you a quick rundown on how it all Liquid Network works, what are the key advantages of using security tokens on Liquid Network, how we tie it in to our services and its relevance in the world of trading.

Security tokens - a refresher

Let’s revisit the basics. Security tokens are blockchain-based tokens that qualify as ‘transferable securities’ (specific to EU classification of securities). In security token offerings (STO), ventures sell tokenized financial instruments, like equity, debt, profit sharing rights or any other instruments in the form of a cryptographic token.

On STOKR, you can participate in a company’s initial “security token offering” or “STO” using digital currency or cash and receive a ‘security token’ that represents the equity rights in the company. This token entails you the ownership of your equity rights and allows you to keep, trade or sell. 

Enter the Liquid Network. So, what exactly is Liquid Network?

The Liquid Network is a Bitcoin ‘sidechain’ technology that allows quick, secure digital asset trading between and within trading platforms. Technically speaking Liquid Network is a layer 2 network of Bitcoin blockchain.

The term sidechain is important because this is the foundation of Liquid Network. A sidechain is a secondary blockchain layer. The idea is to have a blockchain that runs in parallel to the main blockchain. It allows users to move Bitcoins and other digital assets from the main blockchain to the side chain and vice-versa. You can think of them as extensions to existing blockchains that can increase their functionality.

IMAGE: COINDESK, 2016

Due to how congested the blockchains can get, scalability has always been the main issue for using the Bitcoin blockchain. Transactions can take up to 24 hours and come with fees. Liquid Network uses a series of trusted, federated nodes connecting through Tor to facilitate rapid, near-instant confidential transactions. These transactions are finalised within two minutes and are potentially most useful for market-makers, brokers, inter-exchange transactions & arbitrage. A holy grail for the payment and investment industry. 

Liquid Securities enable efficient management of the security tokens 

Liquid Network opens up its advantages for the capital market industry by a feature called Liquid Securities. Liquid Securities provides the platform for businesses to issue and manage security tokens on the Liquid Network. It is built as an API that can be hosted on any token issuing platform (such as STOKR). Companies can leverage Liquid Securities to issue, reissue and track security tokens during the entire life cycle. 

Security tokens are issued as an ‘Issued Assets’ under Liquid Securities. Issued Assets can represent any existing financial instruments like tokenized fiat, crypto assets, attested assets (e.g. gold coins), or completely new asset classes. 

Thanks to this unique architecture, rules for such Issued Assets (security tokens) do not have to be written at the smart contract level, as is the case with Ethereum. Such assets can be easily adjusted via the Liquid Securities control panel to allow issuers to adapt to fast-evolving digital asset regulations while giving them a clear view of how these assets have moved since their issuance.

Liquid Securities store the necessary information to record relevant transfer details, such as amounts and destinations. This enables issuers to produce reports, such as ‘proof of transfer’ and ‘proof of balance’, to auditors or regulators. Moreover, the issuers and the investors can view transfer past history, activities and even ownership of these tokens.

Liquid Securities also ensure that the security tokens are issued, traded and negotiated between allowed parties for compliance and regulatory reasons. Liquid Securities primarily apply transfer restrictions through the use of ‘whitelist’ categories. In simple sense as an investor, one has to get their Green Wallet (blockchain wallet for holding security tokens on Liquid Securities) whitelisted with the issuer of the securities token. 

In case an investor loses access to their Green Wallet, the Issuer can ‘blacklist’ the unusable Green Wallet and reissue the exact number of security tokens to the investors. This reissuance function is only enabled to the ‘issued assets’ that have enabled a ‘reissuance’ function. On STOKR, to enable this type of recovery, the investor has to go through additional compliance checks to avoid fraud. This gives the investors a claim to their lost tokens.

Why Liquid Securities will be important for the securities market

• Privacy - Liquid Securities ensure confidential transactions for the security tokens. Both the security token receiver’s address and the security token amount are hidden from observers. Only those directly involved in the transaction (and those they share it with) know of the details of the security token transaction. 

• Advanced auditing - Security tokens issued on Liquid Securities can be verified and audited for ownership legitimacy. You still can’t see who holds the security tokens or the asset type, but you can absolutely verify and prove that it’s real and issued by a real entity.
• Improved efficiency - As mentioned above, the sidechain technology operates independently of blockchain technology - so it is an all around faster exchange of goods and capital between traders. Transfers can be near-instantaneous between investors.
• Enhanced security - Liquid Network has been developed on the proven Bitcoin code base, a framework that has proven to be very difficult for hackers to get around. 

Finally, if you are interested in issuing security tokens on Liquid Securities and want end-to-end support in the issuance and management of security tokens, STOKR is here to assist. 

On STOKR, companies can issue security tokens using the Liquid Securities as per the EU capital market rules. For the investors, as long as you have the Liquid’s Green Wallet and the same is whitelisted on STOKR, you can hold such security tokens and can manage your rights. 

To Wrap Up

Layer 2 Bitcoin solutions like Liquid Network are well positioned for the security token industry. Added levels of privacy, quicker processing times, and more dynamic utility, traders will begin to move to this new way of investing. STOKR proudly offers support for Liquid Securities networks.

Key Takeaways

• Liquid Network, a Bitcoin sidechain developed by Blockstream is a key technology for issuing and managing security tokens. Liquid Securities is the platform that enables issuance and management of security tokens on the Liquid Network.
• Security tokens are issued as an ‘Issued Assets’ under Liquid Securities. Issued Assets are programmable digital securities. These Issued Assets can automatise the compliance process at the security token level. 
• Issued Assets under Liquid Securities are enabled with confidential transaction capabilities. This added layer of privacy enables traders to do business without exposing their trading strategies or otherwise confidential information that could be taken advantage of. As more and more institutional investors and exchanges will enter the security token space, the demand for confidentiality in transactions will increase. Liquid Securities are ahead of the race in this field. 
• From helping investors to recover their lost security tokens to adjusting different permission levels based on investor category, Liquid Securities provide flexibility to the companies to issue security tokens based on local capital markets rules. 
• Liquid Securities ensure transaction finality under two minutes. Improved efficiency and enhanced security are two big benefits of Liquid Securities.
• STOKR enables simple interaction with Liquid Securities through our venture dashboard and investor dashboard. 

Did learning about STOs on Liquid catch your eye? Are you interested in using an STO platform, like STOKR? To invest in innovative companies or raise investments, click here. 

BY DIAMAAN GUEYE