Ravencoin — Restricted Asset SEC Compliance How To
Ravencoin is designed to carry statements of truth about who owns what assets. For many assets, the buyer and seller identity are irrelevant, but there are also assets for which the identity of the buyer is a critical consideration. Perhaps you don’t want your assets to go to an untagged burn address, or you need to keep the total number of asset owners below a certain threshold, or maybe you only ever intend for people named Steve to hold #STEVES/UNITE.
To promote the free flow of assets and ownership, in either case, Ravencoin will allow for appending externally-validated trust from interested parties such as regulators, through intermediate Qualifiers such as KYC/AML provider consortia, down to individual addresses. Issuers of assets can leverage these tags to manage how their assets can move about the chain. In this way, affirmation of an address’ status (such as KYC/AML compliant, accredited investor, or current subscriber) is possible without exposing or replicating the addressee’s Personally Identifiable Information (PII), and where the burden of establishing and maintaining trust in these qualifying tags is borne primarily by the regulated entities and regulators that require such information in the first place.
In order for Security Tokens to move from address to address, the system must ensure that KYC/AML rules are followed. The KYC rules came from the Bank Secrecy Act in 1970 and were amped up by Title III of the Patriot Act. Additional checks are made to ensure the participant is not a known terrorist or from a sanctioned country, etc.
The solution Ravencoin Restricted Assets provides is limiting the Restricted Asset to only be able to be deposited into addresses for which a regulated entity has done the necessary due diligence, stored the data, and tagged the address. For example: Ravencoin address RAbcNz7nUNo5hPRJnK3F5bqnUr5ry7g2kV belongs to a specific person who provides their passport, and is run through the necessary checks, and can get a #US_KYC tag sent to the address by a Qualifier. This is just an example as the Ravencoin protocol is completely unaware that #US_KYC means anything since it is just a made up text string, but the Restricted Asset that gets issued can be told to honor a tag with that name.
KYC/AML — Transitivity
Because of the current state of the Bank Secrecy Act rules and the strengthening of the same by Title III of the PATRIOT Act, there’s a misperception that every Broker Dealer must independently KYC every customer instead of relying on KYC of others. It’s understandable that Compliance Officers don’t want to trust others and require replication of KYC/AML to ensure due diligence compliance, but for the safety of Personally Identifiable Information (PII), it would be better and safer for the entire system to allow transitivity between licensed and self-regulated (FINRA) organizations.
The acceptance of KYC Tags from similarly regulated entities is an elegant solution that allows transparency and auditability for regulators without the replication and redundant storage of PII.
If, however, the combination of the rules and risk assessment forces every BD to duplicate KYC, a permissioned PII replication solution is possible using Ravencoin Tags. The solution is to provide a standard REST call that authenticates using a request signed by the Ravencoin Tag holder’s private key to request the PII information from the Tag issuer. This allows the second BD to automatically get the PII information and do its own due diligence. This would be more automated than the current state of the industry, but still a terrible idea because of the dangers of replicating and storing PII. Neither private industry nor government has done a good job of preventing theft of PII.
This is an important rule to be aware of in terms of privately held securities. This rule provides the most commonly used exemption for holders to sell restricted securities (Note: For context, a restricted security is a security sold in an exempt offering, except for Reg A+). The general idea is that you can publicly resell your “restricted” (privately sold) securities only when the restricted legend is removed.
The solution Ravencoin Restricted Assets provides is the ability for the issuer to Freeze the asset in the holders account. The qty will be visible, and the frozen status will be visible. The meta-data for a Freeze can specify 144_Restricted. Only the issuer can Unfreeze to release the 144 restriction.
According to US law, stock can be represented as certificated or uncertificated. “Certificated” shares are represented with a certificate (paper or electronic), and “uncertificated” shares are simply entries recorded on an official ledger (like debits and credits to a bank account). Certificated shares can act as bearer instruments and trade peer-to-peer within the addresses that have been Tagged with Tags acceptable to the Restricted Asset being traded. There isn’t a large body of legal precedent for this because peer-to-peer movement of assets is only a few years old.
For “certificated” shares it shouldn’t be necessary to use Ravencoin Restricted Assets, as the regular Ravencoin assets can act as proof-of-ownership and peer-to-peer exchange could be done similar to bearer shares with the private key bearer as the owner.
If the ledger records the holders of record and the assets need to be restricted to certain Tagged holders for which KYC information has been obtained, then Ravencoin Restricted Assets should be used.
The process of turning “certificated” paper shares into electronic record shares on a cap table is “dematerialization” or “demat” for short. This term is particularly bad now that we have new technology that is technically an electronic ledger entry on a tamper-proof blockchain, with the instrument acting like a “materialized” paper “certificated” bearer instrument, because only the bearer of the private key is able to effect a transfer. Perhaps we need new terms like “decentralized certificated shares” and “centralized shares” with the difference being whether the share entry is held on a public, decentralized, tamper-proof, auditable ledger like Ravencoin, or held as most private shares are today on a central spreadsheet, or database ledger that doesn’t self-audit, and can be changed by a single company or individual (usually without a public audit trail).
Rule 12(g) of 1934 Exchange Act — Investor Number Thresholds
Issuers are required to become a “reporting company” with the SEC (and lose exemption status) if a company has > $10.0 M in assets and a class of equity securities (e.g. common stock) are held of record by 2,000 persons or 500 non-accredited persons.
Tags could be used here to restrict the number of holders of record. By tagging each address with #ATOKEN_2000 tags, the Ravencoin Restricted Asset would only move among those tagged addresses. A secondary layer could easily be added to re-assign these tags when the Restricted Asset is transferred out of the address.
There may be exceptions, or occasional mistakes by KYC providers, or individuals mistakenly put on a terrorist list, or another country sanctioned by the US government.
For these exceptions, the issuer can Freeze the asset in place, and indicate in the meta-data the reason such as “Failed OFAC”. These assets can then be exempted from Dividend payments, or other rights afforded to the asset holders.
Issuer — The entity issuing the Restricted Asset.
Qualifier — An entity that can do KYC/AML, and/or check for accredited status.
Restricted Assets — Tokens on Ravencoin that start with $, and can only be sent to the tagged addresses.
Tags — Tags sent (usually by qualifiers) to Ravencoin addresses with meta-data specifying the location of qualification (KYC) data, but not the data itself.
Restriction Logic — The specified tags (and logic) which a Restricted Asset will follow before allowing transfer TO an address.
Tag Admin — A token that starts with # and ends with !. The holder of this asset can tag addresses. Example: Only the holder of #KYC! can send #KYC tags to an address.
Restricted Asset Admin — An asset that starts with $ and ends with !. The holder of this asset can freeze the Restricted Assets of the same name. Example: Holder of $ATOKEN! can freeze any $ATOKEN in place. This is usually held by the issuer.
Freeze — The ability for an issuer to freeze an address, restricting a particular Restricted Asset from being transferred from that address until an unfreeze.
Unfreeze — The ability for an issuer to unfreeze an address, allowing a particular Restricted Asset to be once again transferable (tagged addresses).
PII — Personally Identifiable Information — People’s name, address, phone number, SSN, EIN, etc.
OFAC — Office of Foreign Assets Control administers and enforces economic and trade sanctions.
 I am not a lawyer. Please seek your own legal advice.