Why Smartlands Network
Over the past three years, the Smartlands team has engaged in in-depth R&D and business development of products for companies and investors in the areas of equity tokenization, regulated assets, investment banking, securities trading, and related processes.
Started in the UK market, the Smartlands team was the first in the EU to offer digital shares of the tokenized real estate on the public Stellar Network blockchain and available to purchase by retail investors worldwide.
Today, we better understand professional participants’ needs in financial markets to enable those ready to implement blockchain solutions under certain conditions and requirements.
It is also important to note that investment banks, asset managers, exchanges, and custodians of regulated assets primarily focus on affordable solutions. They are interested in the options to implement on public networks that are adept in terms of regulation, parameters, and most importantly – prevalence among customers, a vast ecosystem of already adopted products, easy access to investors, etc.
Working with market participants and partners who accompany transactions, we concluded that it is of crucial importance to be able to provide end-to-end tailored solutions with maximum flexibility to broad classes of potential investors (users).
Public fundraising is one of our key competencies. We believe that public blockchain is very well suited for it; consequently, we develop our ecosystem to encompass the multi-chain world, including private chains.
In the long run, we envision Smartlands Network to be a worldwide blockchain-agnostic ecosystem of Asset-Backed Tokens, bringing together profitable real economy assets, institutional and retail investors in multiple jurisdictions worldwide.
The design solutions for public blockchain networks should provide different oversight levels as warranted or required for the asset type under various regulations. Digital assets will range from tokens issued on the Smartlands Alternative Investment Platform to regulated financial instruments (utility tokens, digital securities, GDR) issued by partners using the white-label solution.
Based on the public Stellar Network, the solution we provide to classical financial firms and banks that embrace distributed ledger technology will enable them to benefit from worldwide, extremely fast transaction settlement, ultimate liquidity, and cost savings. Afterwards, it will be possible to transfer assets issued in Stellar Network to Smartlands-powered public Network and other public blockchains that may be supported in the future.
Liquidity and infrastructure are the key factors of success for digital assets. Therefore, we consider multi-chain interoperability a key feature to unlock liquidity by transferring assets to other blockchains such as those popular for digital securities and digital assets in general; namely, we consider Ethereum, Stellar, and Tezos as the most important networks. Transfer to other networks is planned to be introduced through anchoring. Should cross-network atomic swaps become possible, they are likely to be implemented.
Having thoroughly analyzed market opportunities, we decided to start our global journey by implementing the comprehensive end-to-end alternative investment platform in the country with the high demand for alternative investments and a friendly regulatory framework for digital assets.
Partnered with a local investment bank, asset owners, and institutional investors, we are launching the market-first alternative investment vehicle in Ukraine, where we see the spotlight towards the comprehensive economy transformation on the digital rails, led by the government.
Initially, blockchain technology was praised for (pseudo) anonymity and the ability to build trustless solutions. In theory, it works perfectly, but in practice, real-world inputs needed for basically any application require trust towards those who provide such inputs. Moreover, anonymity in the case of financial applications provides many capabilities to commit financial crimes. Yet this doesn’t imply that blockchain technology does not meet the needs of the financial industry. Actually, it is vice versa, and the immutability of blocks of the blockchain provides a lot of opportunities for improvements of operations in the financial sector. Specifically, the creation of confirmed identities may be one of the most important ones.
Obviously, recording personal data in a blockchain is not a practical solution and would obviously violate the regulation on the protection of personal data. Our goal was to create a framework that provides
- anonymity from a public perspective
- reusability of KYC
- transparency and accountability for regulatory purposes
- limitation of data provided to other participants within the required limits.
Anonymity from a public perspective is an obvious concern due to the requirement for the protection of personal data. KYC data will be collected and controlled by KYC oracles. Hashes of the data will be stored on the blockchain to provide proof of the immutability of data stored by the KYC oracle. This will be discussed later on in more detail.
KYC procedures are tedious and costly, so the ability to reuse data that have already been provided/collected is a huge increase in user experience and cost-efficiency. Users will be able to provide instruction to KYC oracle that has collected the KYC data to any other recipient that requires it. Such instructions themselves may be performed as a technical transaction in the network.
As mentioned above, financial crimes are a persistent concern for any financial services, so competent authorities must be able to access the data about all the transactions and people that have performed them. Blockchain itself provides records of the transactions, while KYC oracles provide identities in case of an appropriate request from such authorities.
Unfortunately, data leaks do happen as even banks sometimes become victims of hacker attacks; therefore, any participant should have limited information about identities. It would be possible to generate an unlimited number of accounts and provide data to Compliance oracles (that monitor and approve all the transactions with a certain asset) only about the accounts that will hold that asset, while information about all the other accounts is not provided to such oracle. Consequently, a data leak of one of the Compliance oracles will disclose only a limited amount of information. This design is essential given the global ambition of Smartlands Platform and a large number of Compliance oracles from different countries that are planned to be introduced.
Assets and Compliance
The use of distributed ledger technology does not undo requirements for compliance with regulation related to financial instruments, even if it is a digital asset. Nevertheless, digital assets could be of a totally different nature, starting from a token that represents loyalty bonuses or a prepaid cup of coffee to fully regulated securities. A blockchain token is just a container that represents an asset, but compliance requirements depend on the represented asset and may vary from no regulation whatsoever, e.g., cup-of-сoffee token, to analysis of each transaction for security tokens.
Our solution for this issue is Compliance oracles that will perform all the required checks for assets that require them, if any. Tokens that do not require any compliance check will be issued without any Compliance oracle. It will be the responsibility of an issuer to determine if an issued asset requires any compliance checks. Issuing an asset will require passing the KYC procedure and will have some costs.
Compliance oracles are the optimal solution given the current development level of infrastructure for securities issued on the blockchain. They provide high flexibility, could be easily comprehended and approved by financial authorities, and make the technical solutions simple, clean, and reliable.
Smartlands Network blockchain-agnostic ecosystem architecture uses a different innovative approach to avoid multisig, introduce a flexible trust structure, and unlock unlimited potential for self-custody of the assets, while still maintaining full compliance with securities regulations in all legislations.
The Oracles concept was selected as the main architecture approach for the implementation of the regulated assets on the Ledger.
Within this concept, all the regulations rules required to meet different legislations for digital securities are ensured by introducing the Compliance oracles entities. We expect that in most of the cases, Compliance oracles will be operated by licensed entities, such as broker-dealers and custodian in Ukraine, TVTG service provider in Liechtenstein, Crowdfunding Platform in the UK or EU, broker-dealer, bank, fund, E-money operator, payment provider, agriculture commodities exchange, etc.
In order for a transaction to be considered valid and be finally settled in the ledger, the Blockchain Network validators will require every compliance oracle associated with the assets involved in the transaction to explicitly approve the transaction with a digital signature. These digital signatures will be collected by the Wallet software and attached to the transaction prior to its submission to Network validators.
To meet strict AML/CTF requirements, the Network also introduces KYC & AML oracles entities. These oracles themselves won’t be licensed entities as in the general scope. They are responsible for verifying and keeping the personal data of investors and sharing them securely with compliance oracles when they receive the request. KYC & AML oracles are also responsible for complying with appropriate data protection regulations (e.g., GDPR).
When the asset is created (and prior to the tokens to be issued), the issuer can specify a governance configuration for the newly created token. In general, the Network supports governance overseen by a particular compliance oracle, set of KYC & AML oracles, or neither Compliance nor KYC & AML oracle. Compliance oracles on their end specify which KYC & AML oracles they trust.
From the economic perspective, it is supposed that Compliance oracles will have data processing agreements signed with KYC & AML oracles and will pay them for identity verification (and to access the personal data). KYC & AML oracles will compete in the ecosystem to obtain and verify as many investors as possible, and at some point, we believe that every investor from every jurisdiction will be covered by at least one KYC & AML oracle.
It is also important to have not many different unrelated KYC & AML oracles in the ecosystem, as, otherwise, end-investors will have to pass identity checks in multiple business entities. The trust aspect is also mandatory since investors will likely not want to share the personal information with unknown/small KYC & AML oracles.
We also don’t expect that KYC & AML oracles will exchange the data between themselves – as it will put the bigger risk of data protection violations and will be against the competition model.
Noteworthy, when every oracle is created in the ecosystem, the substantial amount of SLT tokens is locked in blockchain and can be released up again only when the oracle is not required in the network anymore (in case it has no investor or token in circulation depending on the oracle’s decisions).
By design, oracles will be centralized off-chain applications controlling special accounts in the Blockchain Network. If an Oracle is compromised or liquidated, or in case of the appropriate court decision, the locked amount of SLTs for oracles acts as an insurance deposit – upon a consensus of Network participants, this amount can be seized and distributed to cover the loss of affected investors.
Supposed that Oracle’s operators will also run their own watcher nodes (they can also run PoS Validator nodes, but it’s not mandatory) and for their convenience Smartlands team will prepare a special set of modules allowing Oracles’ centralized system to get real-time notifications from their specially configured watcher nodes.
If Compliance oracle is responsible for the governance of the asset, the token will behave as a regulated digital security token, meaning that every transaction involving the asset should have to be mandatory approved by the oracle prior to being settled on the Ledger. Compliance oracles can decline the transaction execution upon their sole decision and are also able to forcibly move the tokens between wallets to overrule consequences of scams or to execute courts and authorities’ decisions (although additional security measures are applied to the process to make it less prone to oracles’ vulnerabilities or hacks).
In order to facilitate the development of wallets and exchanges running on the Network, Smartlands will prepare a set of protocols, special API methods, and comprehensive SDK allowing participants to request an exchange Compliance oracles’ approvals in a reliable manner.
If no oracles are assigned to handle the asset’s governance, the token will act as an unregulated utility token (similar to Stellar tokens or ERC-20 Ethereum standard) and will freely circulate in the network. Finally, in case a set of KYC & AML oracles are associated, a restricted utility token, where Proof of Identity (the Issuer specifies which types of Identities are suitable), will be required to allow an investor to hold and transact with the token.
Proof of Identity will be written to the blockchain in a special transaction and will be permanently associated with a wallet. Every investor is able to hold multiple proofs of identities (e.g., “Accredited Investor” status issued by “Verify Investor,” Verified USA citizen” status issued by Onfido, etc.). Investors are able to obtain Proof of Identity from KYC & AML oracles that verify in an anonymous fashion the fact the investor’s identity (as well as the AML/sanctions status and country of residence) is confirmed. Every Proof of Identity has an expiration timestamp, after which it should be reviewed.
The network itself will verify the validity and sufficiency of the Proof of Identity (match proof of Identity with a set of governance rules specified during the asset creation) when the investor submits the transaction with the restricted utility token.
The liquidity of digital tokens is one of the key features that bring value to investors; thus, Smartlands Network will support the secondary market in two forms. The well-understood secondary market in the form of exchange will be powered by Smartlands DEX. MTF license is required to operate an exchange for digital securities, even if it is a DEX. The Compliance oracles will be regulated entities overseeing trading on DEX, making it possible from a legal point of view.
Getting an MTF license is a time-consuming and costly process. Moreover, the listing of a security token on an MTF will impose a lot of restrictions and have a price tag, so it will raise the bar for those who can get listed. To fix this issue, investors will be able to trade their digital securities on a bulletin board.
Voting and governance
An important and mandatory aspect of certain classes of securities is the voting rights, and it is obvious that tokens representing these securities should grant these rights to their holders. Having the technology based on the scalable distributed ledger the efficient and transparent voting mechanism implementation in a truly decentralized way.
Smartlands had developed such a protocol in 2018 and since then improved the mechanics to accommodate the evolution of the Stellar protocol and the long-term ecosystem vision.
Compliance oracles will be responsible for the initiation of the votings, as part of the oracle’s responsibility to enforce the rights of the holders. In addition, every holder of security tokens will be provided with the ability to initiate the voting proposal.
Once the voting is initiated, every holder will be able to vote within a certain period by sending the signed digital ballot to the oracle, and then the results of the voting are calculated automatically based on the ballots immutable stored in the blockchain ledger and the amount of voting power of the holder.
The reference implementation of the Smartlands Decentralized Voting System is available as part of the Smartlands Wallet. 3rd party wallet providers and exchanges will be able to implement the support for the voting system using the Smartlands open API.
Along with the voting for supported security tokens, the Decentralized Voting System is also used as an integral part of the Smartlands token economics by allowing holders to decide on the minimum value for the SLT staking.
An integral part of the Smartlands Ecosystem is the Smartlands Wallet – the reference implementation of the user interface to Smartlands Ecosystem. The wallet is developed with a strict focus to provide the best user experience and in connection with the Smartlands-powered Alternative Investment project, tied to the reference implementation of the KYC and Compliance Oracles.
Smartlands Wallet at the first stage will remain as a sole place to stake SLT and to vote on the governance proposals regarding SLT token.
Smartlands strives for cross-chain interoperability; therefore, Smartlands Wallet will be the first place for cross-chain security-token swaps, and at the beginning – it will be the place to integrate crypto assets outside of the Stellar blockchain (native USDC support and automated deposit with conversion to XLM via Changelly).
We envision that the development of the Smartlands Tokenization technology and Smartlands Network ecosystem for the coming couple of years will be closely tied to the Smartlands-powered products, such as our Alternative Investment Platform in Ukraine. The solution is also always available for partners, as our stake in JVs and potentially as a white-label software. In all cases, the SLT token remains the only possible vehicle to pay transaction fees.
Smartlands-developed KYC and Compliance oracles also serve as the reference implementation for the Smartlands ecosystem open API SDK.
The flexibility of the Smartlands technology for the regulated environment allows the Smartlands Network ecosystem and technology stack to be used in multiple applications besides investments, such as payment processing, various trade settlements, loans, etc.
We plan the following path to develop the Smartlands Network technology product; however, certain milestones can be reprioritized, or additional milestones added, considering the demand from the market:
- Staking implementation. Start of the fee pool distribution – Q2 (May)
- Secondary market launch – Q3
- Interoperability across the Stellar ecosystem. Support of 3rd party wallets and exchanges – Q4
- Mobile app launch – Q4
- Decentralized loans with security tokens as collateral – H1 2022
- Self-custodial AI-based auto-invest – H2 2022
- Multi-chain ecosystem, cross-chain swaps – end of 2023
Role of SLT in Smartlands Network Ecosystem
Staking and Fee Distribution
SLT is the native token of the Smartlands Network ecosystem, and all the transaction fees will be paid in SLT.
Every regulated transaction involving compliance oracles requires a certain fee to be paid, and by the ecosystem rules, every fee addressed to the oracle will be paid in the SLT. Oracles are obliged to devote ⅓ of the collected fee amount to the dedicated fee pool comprising the rewards to the SLT ecosystem by the ecosystem rules.
Smartlands will be reserving 1/3 of all fee income to be distributed to qualifying token holders, which will be paid out in SLT tokens. In order to understand how this will benefit holders, we need to explain in a bit more detail how the fee income will be generated in the first place.
In order to list an asset on the platform, a number of the upfront and ongoing fees will be paid by the asset owner as follows:
- A listing fee of Euro 5,000
- 5% of all capital raised
- An ongoing listing fee of Euro 1,500 to be paid annually
- There will be no commission charged for buyers in the secondary market, but sellers of asset tokens on the platform will be charged 1% of each sale.
In order to demonstrate how this will work in practice, we set out three examples below.
The owner of a multi-floor fully let office building valued at Euro 12mn with long-term business tenants needs to raise Euro 3mn to take advantage of other opportunities. In this case, a 25% equity stake in the building will be lodged with a custodian who will then issue tokens fully backed by the underlying equity. To keep things simple, let us say that 3mn tokens are issued at Euro 1.00 each and are then marketed to investors who buy the tokens.
In this example, the fees due to Smartlands as the token compliance operator would be as follows:
- Listing fee Euro 5,000
- 5% capital raising fee, Euro 150,000
- Total thus Euro 155,000
- Of which 33.33% or Euro 51,661.50 will be distributed to qualifying token holders
A property owner has acquired a fully let office building at a below-market price. He was able to move quickly, and the seller needed a quick sale because he had other urgent obligations he needed to apply the capital to. In this case, a building with a fair market value of Euro 1.1mn has been acquired for Euro 700,000. The new owner now has a theoretical profit of Euro 400,000 on his original investment based upon his purchase price versus the current market price. Still, he is, of course, unable to access this profit as it is tied up in the building. In this case, Smartlands can give the owner access to this marooned profit by arranging a listing of Euro 400,000 or 36.36% of the asset’s equity.
The fees that would apply to Smartlands in this instance would be as follows:
- Listing fee Euro 5,000
- 5% capital raising fee Euro 20,000
- Total thus Euro 25,000
- Of which Euro 8,332.50 will be distributed to qualifying token holders
The two examples above will produce Euro 180,000 in fees for Smartlands, which has to be paid in SLT. Obviously, it makes no sense to place a one-off order to buy Euro 180,000 of SLT straight into the market so the funds due as fees will sit in the client’s wallet where they will be blocked from withdrawal and using a buy bot will be used to buy SLT in the market over time creating an ongoing and real-world demand for SLT and helping to reduce to supply in the market. This will create upwards pressure on the SLT price, which will accelerate as more listings are arranged.
Outside of tokenizing real-world assets, the Smartlands platform and proven blockchain technology are proving attractive solutions to several potential partners. To date, we have only confirmed the agricultural platform Agroxy in this regard. Still, we are in advanced negotiations with a number of new partners and expect to be able to announce further joint ventures during Q1. Each of these partners will generate a large throughput of relatively small transactions across the Smartlands ecosystem, with Smartlands taking a small cut of each one.
In this case, the fees due to Smartlands will sit in the partner’s wallet, where they will be blocked until they have reached a predetermined amount, for example, Euro 50, which will then be used to buy SLT on the market. We would envisage there will be multiple small transactions such as this each day once each joint venture goes live. This entire process will be automated, and programmed buy bots will make the purchases. All fees generated by this example will also apply to the fee pool, and 33.33% of all fees received by Smartlands will accrue to qualifying SLT holders.
To become a qualifying token holder, it will be necessary to hold a minimum of Euro 1,000 of SLT.
SLT insurance pools
Staking of SLT will be required for the key Smartlands Network participants. The minimal required amounts may be adjusted later on by voting, while initial amounts are proposed as follows:
- KYC Oracle – 3000 SLT
- Compliance Oracle – 10000 SLT
These numbers of required SLTs for each participant may be adjusted at a later stage of Smartlands Network development.
SLT is a native token of Smartlands Network, and all the transaction fees will be paid in SLT.
It is limited to a maximum of 7.1mn tokens and runs on the Stellar open-source network.
Note that the SLT is a utility token originally issued by Smartlands Platform Foundation, a Cayman Islands incorporated entity that is independent of Smartlands Platform Ltd (UK).
To buy SLT, follow the links below to visit respective platforms: