Understand what the T-REX protocol is and why the protocol is needed to issue security tokens.
The main goal of the Token for Regulated EXchanges (T-REX) standard is to create a set of global tools, fully based on blockchain technologies, to allow for the frictionless and compliant issuance and use of tokenized securities on a peer to peer basis or through marketplaces. These tokens are issued in full compliance with regulations and issuers requirements, as control mechanisms are embedded in the tokens themselves. The T-REX involves a “Compliance by Design” approach where it is simply impossible for an investor to buy a security without being compliant. The regulator itself can verify the compliance of the Issuer through the auditing of smart contracts that support the Security Token life cycle.
The management of compliant transactions through T-REX backed permission tokens will be based on 3 main pillars creating a decentralized Validator:
- A blockchain based identity management system, allowing for the creation of a globally accessible identity for every stakeholder.
- A set of validation certificates (technically speaking, these certificates are the claims, described in the ERC-725 and ERC-735 standards, that will be described further in the document. For a better understanding, we will name these as certificates in this introductory section as it has more semantical sense.) emitted by trusted third parties and signed on-chain, each of them linked to a single identity.
- A transfer manager whose role is to act as a filter of all the transactions of tokenized securities and will check the validation certificates of the stakeholders .Essentially, the transfer manager will check that the receiver has the rights to receive the tokens following the specific compliance rules and issuer requirements applicable for this specific asset. The transfer manager will block the transaction if the receiver misses a mandatory certificate and will notify him about the reason of the failure.
These 3 key elements allow issuers to use a decentralized Validator to control transfers and enforce compliance on the holders of the security token. The Validator includes rules for the whole offering (e.g. managing the max number of holders allowed in a specific markets, when such rule apply), and rules for each investors (e.g. KYC or issuer-defined eligibility criteria) thanks to the identity management system.