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New Ethereum Standard Enables Restrictions For Securities Token Compliance

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A new token standard called ERC-1404 has been introduced by TokenSoft. This standard will allow developers to create Ethereum tokens with built-in restrictions, which will give them control over the amount of tokens that can be transferred under certain circumstances. The restrictions will also allow time limitations and other conditions to be built into the tokens.

Securities regulations and crackdowns have made the process of introducing an altcoin a risky business. As such, ICOs must closely monitor their investors and comply with regulations. TokenSoft claims that the new standard’s features will help token creators act in accordance with securities regulations:

“ERC-1404 is designed for security tokens, tokenized securities and other tokens that carry complex compliance requirements. [It] is a token standard developed with corporate governance, banking, and securities laws in mind.”

According to ERC-1404’s GitHub page, the standard’s restrictions could be used to create whitelists that allow tokens to be transferred only after an investor passes a KYC check. This is now a universal requirement for ICOs.

The standard could also facilitate token lock-ups. Lock-ups prevent early investors and internal teams from selling their allocated tokens and disrupting the coin’s value.

Suggested Reading Learn how Ethereum differs from IOTA here.

Approval Process

Ethereum is designed in such a way that anyone can make their own ERC-compliant token. However, there is no single Ethereum token standard, and anyone can propose a new standard.

ERC-20 was the original standard for Ethereum tokens, and it can be used to create fungible tokens — typical all-purpose altcoins. It accounts for the majority of Ethereum tokens, but other standards have since been introduced. One is the ERC-720 standard, which allows users to create cryptocollectibles. Another standard, ERC-1155, is intended for in-game items.

Since ERC-1404 is brand new, it will have to go through an approval process, as outlined here:

“Before becoming an standard, an ERC must be revised, commented and accepted by the community through an EIP (Ethereum Improvement Proposal). …An EIP may exist in four different states.”

Currently, the standard is in the draft stage: ERC-1404 was posted on GitHub nine days ago, and since then it has received some criticism. Some note that the token standard is similar to EIP 902, which can also put restrictions on a token. If this is true, the community may decide ERC-1404 is redundant.

ERC-1404 will, however, remain in the draft stage for some time. It may be accepted and moved into the final stage, but it can also be deferred or “put on hold.” Although the approval process is ongoing, anyone can currently download and use the standard, and the developers are actively seeking feedback.

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