ERC-1400

ERC-1400 is a token standard (or protocol) in the Ethereum network that governs and protects security tokens on the blockchain. The prime purpose of this standard is to ensure compliance with existing securities regulations for better functioning of security tokens.

The development of this standard was led by blockchain developers Stephane Gosselin, Pablo Ruiz, Adam Dossa, and Fabian Vogelsteller. This protocol aims to authorize the usage of tokens as securities and is compatible with other standards like ERC-20 and ERC-777. It includes features for on-chain transfers, subject to compliance rules.

The ERC-1400 token standard is a widely used protocol on the Ethereum blockchain. It facilitates the trading of security tokens in a compliant and efficient manner, providing additional security and interoperability for these tokens. It acts as a standardized interface to validate and verify transactions involving security tokens. Before ERC-1400, such comprehensive compliance and security features were not integrated into a single token standard.

Before the creation of this protocol, the Ethereum blockchain utilized the ERC-20 token. In the later stages, different types of crypto tokens were released on the network. It included security tokens, stablecoins, altcoins, and other assets. Yet, ERC-20 needed to follow the securities compliances in relation to the security tokens. Therefore, the ERC-1400 standard was first created for these tokens. It is a combination of ERC-777 and ERC-20. Likewise, it is also known as the security token standard. 

The ERC-1400 implementation is visible in various sectors. However, it is more prevalent in the crypto and financial sectors. This standard has different components (or interfaces) for its functioning in the crypto ecosystem. It includes document management, controller operation, token issuance, token redemption, and transfer validity. Before processing a transaction, all the related documents and certificates get validated on an off-chain. Later, with the help of controller operation, the smart contracts are maintained. Besides, security tokens based on this standard get mined via smart contracts. Moreover, users can also redeem (or withdraw) tokens adhering to the ERC-1400. Plus, this token standard also allows transfer validity on the crypto exchange. 

In the later stages, ERC-1400 implementation can also occur on other blockchain networks. Crypto enthusiasts and developers may deploy this standard in their protocol. They can also ensure partial token transfers or freezing to restrict token movement.  

ERC-1400 tokens, such as those issued by platforms like Polymath, tZero, and Harbor, are designed for use in the crypto market and exchanges. This standard includes several essential features:

• Regulatory Compliance: One of the prime features of this standard is that security tokens receive a designation of security in the financial market. As a result, a certain level of transparency, trust, and position is developed in the real world. Users can seamlessly and legally trade these tokens. 
• Reversal Mechanism: With the help of this standard, it is possible to perform reverse crediting on the Ethereum chain. It means the tokens can be credited back to the investors. However, it was only possible after that time. However, the legal mandates and compliances ensure that the crypto firm should return the funds following this standard. 
• Partitioned Tokens: The standard allows tokens to be partially fungible, enabling restrictions on token transfers under specific conditions. This can include setting rules for the number of tokens a wallet can hold or freezing tokens to enhance security and prevent money laundering.
• Data Modification: ERC-1400 supports modifying metadata and parameters related to transactions both on-chain and off-chain. This capability allows for attaching metadata to a token holder's balance, providing additional information and compliance capabilities.

Let us look at some examples of the ERC-1400 Ethereum standard to understand the concept better:

Example #1

Suppose XYZ is a blockchain firm that issues security tokens (YUZ) in the market. It operates as the 5th market leader in terms of users and trades conducted. Typically, it functions on the Ethereum blockchain with a set of functions to ease transparency. However, some years later, a regulator filed a lawsuit against them for the excess funding accessed. The amount was as significant as $1.2 million, which is equivalent to the issuance of 10,000 YUZ tokens. After a few trials and hearings, the court announced a verdict that XYZ must credit the excess funds back to the token holders. Therefore, with the use of the ERC-1400 standard, the XYZ network performed reverse crediting. Thus, each investor received $12 as an incentive. 

Example #2

According to the recent crypto updates as of October 2, 2023, the digital asset platform Matrixdock has announced the migration of T-bills to Repos. The firm will perform a position trade of those bills maturing on September 28 with a worth of $10,239,000. Although the process may take a few days, it might affect the yield rate of the investment. Yet, they still aim to minimize the yield risk and enhance transparency. 

Matrixdock is an open-source platform that provides short-term treasury bill tokens (STBT) in a crypto form. They use the ERC-1400 token standard for their execution of trades in STBT. In contrast, Repos are repurchase agreements that are available as underlying assets on the platform. 

The ERC-1400 protocol is of utmost importance to the Ethereum network. It forms a base for the security tokens. However, it also plays a vital role in the blockchain architecture. Let us look at them:

• It helps the network participants manage the documents associated with the security tokens. 
• This standard provides an error signaling function on the platform. It acts as an indicator to detect any reasons for the failure of a transaction. 
• With the ERC-1400, the ecosystem can manage the total supply of tokens and permissions attached to it. 
• It is an umbrella to other standards like ERC-1410, ERC-1594, ERC-1643 and ERC-1644. However, some additional features are also included. 
• Users can identify the state of the transaction or transfer with the help of this standard.
• Along with easy integration and interoperability, the security tokens can be easily communicated across other blockchains.