Investor onboarding is a critical step in every STO. Most firms work with specialized onboarding platforms that can manage the entire process in a legally compliant manner.

The major difference between ICOs and STOs is that the latter have to comply with strict financial market regulations, including Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) rules. Issuers are required to enforce these rules, or they can be held legally responsible.

One of the most critical requirements for issuing a regulatory-compliant token is being able to control who can own that token at all times. Therefore, investors participating in an STO have to go through a so-called whitelisting process.

Most issuers outsource their client onboarding

The whitelisting process is relatively straight-forward. Investors register through the issuer’s website and create an account. Regardless of what jurisdiction they are in, they will have to provide documents to prove their identity and make certain clarifications regarding the source of their funds.

Retail investors mostly need to upload a copy of their ID and a document showing their proof of residence or other documentation as requested by the offering website. Institutional investors will be asked to upload incorporation documents to verify their institutional status.

To make sure this process is legally compliant and efficient, most issuers work with an external service provider. In Liechtenstein, Cryptoz Liechtenstein provides such an Onboarding-as-a-Service platform. It is fully digital and a preferred platform of Bank Frick AG.

Co-founder Eric Bade comments, “As more companies are coming to Liechtenstein to launch their STOs, we wanted to provide an onboarding service that is fully compliant with Liechtenstein law. Our system gives issuers the tools they need to cover compliance aspects of the whitelisting process in an efficient and compliant way.” 

KYC and AML compliance remains a requirement throughout the entire token lifecycle

Initially, the STO whitelisting process enables the issuer to ensure that only approved addresses can receive the tokenized asset. However, the exact requirements are specific to each STO and might differ depending on the stage of the STO. Requirements in a private pre-sale round can be significantly different from a public round.

Moreover, the whitelisting process is not just for the initial offering but also plays a role in subsequent secondary market trading. Investors that haven’t successfully gone through a KYC/AML process should not be able to buy tokens from the issuer during the initial offering, nor should they be able to buy or sell them to other parties unless they both have been cleared to do so.

The problem with existing token architectures on the Ethereum platform is that they don’t offer a built-in mechanism to prevent an account from transferring their token balance to another account. Thus, if the concept of whitelisting was only applied for the initial offering, once the tokens were out of the issuers’ hands, people were free to do as they pleased with their tokens.

Regulatory requirements will likely get stricter

Ultimately, whitelisting provides security token issuers with a tool to make sure only approved entities can hold and trade the token, thereby maintaining transparent regulatory compliance. Considering the increased scrutiny by regulatory authorities, this legal compliance will become even more critical in the future.

Just recently, the Financial Action Task Force (FATF) has declared digital exchanges will in future have to comply with the same KYC and AML rules that traditional exchanges must adhere to. Most national governments will enforce these rules by 2020, making a compliant whitelisting process compulsory for all digital exchanges.   

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