NFT

ACT: Authorized and Certified Tokens for Application Design in Regulated Financial Services Industry

2022/11/2

This article is written by PlatON CTO James QU; he co-founded Shanghai Jinnatech, worked at Morgan Stanley, UBS Securities, with nearly 30 years of experience in IT architecture, implementation, and management in global financial institutions, as well as over 20 years of research and operation experience in financial system business architecture and technical architecture, 15 years of overseas experience, managing multicultural teams from over 40 countries, and leading the construction of China's most advanced algorithmic trading platform. Review of the previous article: "Several Interesting Application Scenarios of Soul Bound Tokens"

Centralized and decentralized governance alternate in the cycle of history, depending on which governance is more effective and important at the time. In the tribal era of the Stone Age, people needed to cooperate closely to combat dangerous wild animals and natural disasters. Now, an individual can enjoy high-quality music and fine wines at home like a king a century ago. We live in an era suitable for decentralization, where people have more freedom and contribute more as individuals, while contributions as group members or corporate employees are relatively less.

In summary, when the legal environment or social consensus mechanisms in certain areas are not yet mature, we still need centralized models as a buffer for transformation. Traditional finance is one of them, creating huge profits for governments due to high regulation on investor protection, taxation, and governance purposes.

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ACT (Authorization and Certificate Token), based on NFT, is a hybrid of Soul Bound Tokens and Semi-Fungible Tokens designed specifically for regulated financial services on public chains.

This ACT framework is designed for data flow control, as we believe financial services such as transactions are a simplified form of data flow, which is why we chose the financial services industry.

Borrowing the financial service license structure of the Monetary Authority of Singapore, as shown below.

Basic License Elements

Appendix A defines different basic elements for different financial service categories. For example, there are five categories covering banking, capital markets, financial advisory, insurance, and payments. In the banking service category, we define nine basic elements (types or statuses) from B001 to B009, from local banks to financial holding companies (banking sector). The relationship is as shown in the following diagram:

Each of the above basic license elements should have a clear definition of service scope, especially for token-related financial services that we will introduce on public chains like PlatON.

For example, a local bank under B001 may be allowed to mint stablecoins anchored to fiat currency, while a currency broker under B007 may not be allowed to mint stablecoins and can only transact through exchange services.

For example, KYC, AML, CFT procedures, all financial institutions mentioned above must offline comply with standard regulatory procedures before onboarding any customers, and only after passing the procedure review, will the Soul Bound Tokens (SBT) issued by regulatory authorities be transferred to those qualified institutional wallets. We call it mandatory SBT.

Grouping of Basic License Elements - License Model based on SBT

Imagine obtaining a license from a certification authority at a government agency. First, verify mandatory SBTs, such as eligibility for all mandatory standards. Once confirmed, based on the application and evaluation, one or more license SBTs will be minted to the target institution's wallet. These financial service SBTs can be defined as a set of basic license elements. If the license has a time limit (expires after a specific time) or any other dynamic permission changes, semi-fungible tokens can also be considered SBTs.

As explained in the previous article, for financial license SBTs, government agencies (the issuers of SBTs) should have complete control.

1. <issuer, other, IC>: Issuer mints SBTs to others, issuer has complete control

A typical license may be as follows, granting a set of basic license elements as an SBT or multiple SBTs.

Here, control refers to minting, burning, and modification, such as extending the expiration date, etc. Consider using the extension SBT protocol method for owner-restricted extending the validity period here. An example is as follows (to be refined during implementation):

Institutions holding license SBTs can build customer service SBT structures

Institutions may aggregate similar structures. They can issue different types of SBTs to indicate:

KYC certification passed by customers
Overview of financial services
Level of risk analysis, etc.
Other information

Similarly, SBTs related to customer service have a completely different set of basic service elements, which should align with the granted license. For example, detailed explanation for broker trading services.

Over two years have passed, but the above process has not been fully implemented yet. We hope that community development teams will join the discussion and implementation. Additionally, we look forward to seeing better feasible designs.

Appendix A: Basic Elements of Financial License (Monetary Authority of Singapore Financial Institutions Directory)

Table of Contents

1. Banking