Bridging Realms: Swarm’s Innovation in Tokenizing Real-World Assets and Driving Compliant DeFi

Swarm is a pioneering fintech company focused on providing clients with the ability to trade blockchain-based tokens (including security tokens) securely and cost-effectively in a regulated environment while maintaining DeFi’s core benefits of self-custody, on-chain transparency and networked liquidity. To ensure consumer protection and offer new investment products in the DeFi ecosystem, Swarm has introduced an on-chain compliance layer and operates under various regulatory licenses. Currently, Swarm’s focus is on the tokenization of real world assets (RWAs). They were the first organization in the world to successfully offer tokenized US Treasury Bills and public equities tradable on a regulated, decentralized platform.

Authors: Hannes Detlefsen, Valentin Kalinov, Philipp Pieper

In one of our recent articles, we discussed the field of tokenization of Real World Assets (RWAs). Tokenization is the process of representing property rights in the form of digital tokens and enabling them to be traded on a blockchain or DLT. These tokenized assets can be, among others, physical assets or digital rights. Examples of physical assets would be public or private securities, real estate or art, while digital rights can include licensing or access rights, as well as rights to future revenue.

However, there are two core problems:

1/ First, the problem with RWAs is the need for intermediaries to enable us to map these assets on the blockchain. This means that we are faced with an off-chain component that cannot be maintained by code and decentralized consensus alone.

One approach is asset-referenced tokens. To get around the off-chain component, in the DeFi context, we have seen the development of projects like Synthetix that create derivatives that are backed by a collateral token — often the project’s own utility token. This form of RWA thus creates derivative fictitious assets, but the underlying asset is only the payment claim against the liquidity providers in the form of utility tokens. The backing does not happen by the corresponding underlying asset, which bears the risk of asset-liability mismatches. In this model, highly material aspects of the securities, such as voting rights, dividend distributions and more, do not apply, and the users operate in an unregulated environment, which offers the opportunity to participate in the price development of previously inaccessible assets.

A variation of the above is a contract for differences (CFD), which is a financial contract that pays the differences in the settlement price between the open and closing trades. A considerable risk here is market risk, as CFD trading is designed to pay the difference between the opening price and the closing price of the underlying asset. CFDs are traded on margin, which amplifies risk and reward via leverage. The risk is that the issuer of the tokens guarantees these contractual obligations, which represents a counterparty risk.

An alternative to this model are asset-backed tokens, where the underlying asset is physically stored in the custody of a regulated custodian, which issues the token in a centralized manner and then makes it tradable on the blockchain. The token becomes then claimable against the underlying asset and therefore is a representation of its full value. A regulated custodian holds the underlying in custody for the entire time the token is in circulation, which means that the token is usually traded at the price of the underlying asset — and possibly at a premium e.g. due to better fungibility. Projects that issue tokens with a certain backing are likely to attract the attention of the relevant authorities and are usually required to comply with certain regulatory requirements. In order to comply with regulations such as know-your-customer (KYC) and anti-money laundering (AML), two main concepts have prevailed in the past, utilizing the efficiency advantages of blockchain and, at the same time, meeting the regulatory requirements. The first approach is simply allowing only certain people to access the blockchain on which the token is issued. Users usually have to undergo a KYC process in which certain attributes are requested to ensure that the respective user is, in fact allowed to use this service and to invest in the token. The second option is using a public blockchain and binding access to the project and the associated token itself to certain rules. For example, rules that only allow users with certain characteristics to interact with the smart contract of the respective token.In order to look at the two approaches, we first discuss the characteristics of the underlying blockchain and then look at Compliant DeFi and Compliant Tokenisation at the project level on a public permissionless blockchain.

In the past, many tokenization projects were carried out on blockchains that are neither public nor permissionless and thus largely deviate from the basic idea of decentralized finance. The respective companies use this type of blockchain in order to meet compliance requirements and to retain control over the underlying protocol. By choosing this type of blockchain, characteristics such as censorship resistance and free access to decentralized finance are being lost.

To clarify the terminology of permissioned/permissionless and public/private blockchains:

While the terms “permissioned” and “permissionless” refer to the access rights to the blockchain, the terms “public” and “private” refer to the visibility and availability of the entries within the blockchain itself. Examples of permissionless blockchains are the Bitcoin blockchain or the Ethereum blockchain. They allow pseudo-anonymous users to carry out transactions, participate in the consensus mechanism, and so forth, without the need for authorization by an authoritative entity. New nodes, thus, are always free to integrate into the system and become part of the decentralized network. This type of blockchain is particularly suitable for applications that require a high degree of decentralization, such as decentralized finance. In contrast, permissioned blockchains, such as Hyperledger Fabric, require a user to be authorized by an administrator or an authorized entity in order to access the blockchain and carry out transactions. Access to the blockchain is thus restricted to a certain group of users and nodes cannot easily become part of the system, which leads to negative consequences regarding decentralization. Permissioned blockchains are, therefore, suitable if a higher level of control is required within the system.

Public blockchains such as the Bitcoin blockchain or the Ethereum blockchain are also transparent to everyone. The entire transaction history is stored in the form of blocks that are linked together and can be traced at any time. Transparency is one of the fundamental properties that a system should fulfill if decentralized consensus is relevant — Zero-Knowledge Proofs (ZKPs) will be excluded here! Private blockchains, such as Hyperledger Fabric, are, in general, not publicly visible and considerably less transparent than their public counterparts. However, this also offers the possibility of introducing an additional layer of privacy within the system. For example, the network can be designed in such a way that only certain nodes within the system have access to the full transaction data, or that transactions are only stored on the nodes participating in the respective transactions.

Broadly speaking, the public permissionless space is showing greater momentum, as every internet user can participate in the creation of new protocols, in securing the network, and in adding greater value. The private permissioned counterparts, however, continue to lose relevance and ambitious visions of joint DLT systems are gradually failing. One explanation may be that the technology is used in an environment in which none of the basic attributes (decentralization, openness, transparency, etc.) of blockchains is necessary.

We can easily see the trade-offs associated with the choice of the underlying blockchain by looking at the degree of decentralization of a system:

Cetralized vs. Decentralized Systems and their properties
Figure 1: Centralized vs decentralized systems

The permissioned forks of smart-contract capable Layer1 blockchains are scalable and cheap, but lack decentralization, as they usually only have a few nodes, let alone a decentralized consensus mechanism. In order for users to interact with such systems, the first step is usually to identify themselves (KYC) to determine whether they should be granted or denied access to the blockchain. However, due to the often small number of validators and the fact that many of these protocols are only secured by validators of one company, there is a single point of failure at the protocol level, which in turn requires a high level of trust. In contrast to public permissionless blockchains, where a tamper-proof transaction history is created through cryptocurrency economic incentives, private permissioned blockchains are basically centralized databases where one party records the transactions and then adjusts the transaction history. This approach results in the loss of several advantages, such as composability (also known as “Money Lego”) or the increased liquidity and tradeability of assets that are available on public permissionless blockchains.

A better-targeted approach is using a public, permissionless blockchain like Ethereum that enables the creation of dApps with built-in security features at the project level, making blockchain-based RWAs tradable.

2/ The second problem for asset-referenced or -backed tokens is that the secondary markets and trading falls under regulatory restrictions.

Asset-backed tokens can be security tokens, depending on the underlying assets, or become security tokens (derivatives) when introduced to on-chain trading concepts. As the name suggests, these tokens are securities and are subject to securities regulations in most jurisdictions. These regulations govern the issuance, sale, and trading of securities, including secondary markets. Compliance with these regulations can be complex and costly, and failure to comply can result in legal consequences. This involves requirements around investor protection (e.g. financial or risk disclosures, investor protection measures, KYC/AML procedures), or market Integrity (e.g. to prevent fraudulent activities, market manipulation, and insider trading), complexity to cross-border trading and more. In the past, the regulatory landscape for security tokens and secondary markets was fluid and evolving. And only very recently there have been viable approaches presented, that allow for full on-chain trading of security tokens.

Below are several examples that apply the principles of decentralized finance while ensuring KYC and AML compliance.

Swarm Markets

One protocol that exemplifies this approach in the DeFi space is Swarm:

Currently, Swarm’s focus is on the tokenization of real world assets (RWAs). They were the first organization in the world to successfully offer tokenized US Treasury Bills and public equities tradable on a regulated, decentralized platform. The platform targets both retail investors and institutional clients such as banks, hedge funds, broker-dealers and asset managers. Even traditional DeFi players such as MakerDAO or other protocols have the option to hedge their treasury reserves with conventional assets such as bonds to partially mitigate the volatility of the crypto sector.

The tokens are issued by the issuing entity SwarmX based in Germany, which acquires publicly traded securities and transfers them to institutional custodians for safekeeping. These assets are then tokenized and made available for investment on the platform. The tokens can be redeemed at any time for the value of the underlying asset, and monthly reports on the reserved assets are made publicly available.

Swarm’s innovative approach enables a bridge between the traditional financial world and the decentralized realm of the blockchain and opens up new opportunities for investors, ensures compliance with regulatory standards and provides transparency in an otherwise complex ecosystem.

The process of tokenizing a conventional security
Figure 2: The process of tokenizing a conventional security

The business model is that the protocol generates revenue through fees that accrue as soon as a user interacts with the project. For example, in the case of Compliant Liquidity Pools, which we will discuss in more detail later, Swarm receives 25% of the swap fees or 0.1% of the exchanged assets, whichever is higher. Originally launched on Ethereum, Swarm has expanded its operations to Polygon to enable faster and cheaper trading of different asset classes and remove the constraints of transaction costs.

In addition to tokenized equities and bonds, Swarm offers an infrastructure for regulated liquid staking, a concept that has seen increasing interest since the Ethereum Merge, as well as compliant DeFi services such as swapping, liquidity provisioning, over-the-counter services and more. In order to gain access to the licensed DeFi System, users will have to create a passport prior to interacting with Swarm. This passport contains personal information, verifications, trading permissions, linked addresses and other important account information. The whole verification process can be done entirely online and is completed in a matter of minutes:

Initially, the user connects their wallet, for example, Metamask, to the dApp and signs a message in their wallet to confirm ownership. In the actual KYC process, personal data is then requested, an ID document is uploaded and a face scan is performed. Automatic and manual checks are then carried out in the background to also comply with anti-money laundering (AML) and counter-terrorist financing (FATF) requirements, as stipulated by Swarm’s banking license regulations. In Germany, customers also have the option to confirm their identity via their online bank account information. The final step of the verification process is to confirm the email address to avoid duplicates and fraudulent accounts.

For businesses, the verification process is similar, in this case, talking about KYB (Know-Your-Business) and additionally providing documents of the participating company.

While DeFi enthusiasts may be critical of the loss of anonymity, it seems inevitable in the long term to meet regulatory requirements and prepare parts of the decentralized financial system for a potential future with trillions of US dollars of capital.

Swarm Liquidity Pools:

Liquidity pools are a fundamental part of decentralized finance and play an important role in the context of decentralized exchanges. However, one challenge, especially for institutional investors, is that any user can provide liquidity without ruling out that these tokens come from dubious sources and may violate AML (anti-money laundering) guidelines. The Swarm AMM (Automated Market Maker) is a fork of the Balancer protocol and enables the provision of two-sided as well as one-sided liquidity. The difference to the traditional balancer protocol is that the Swarm compliance protocol and the associated passport are used to allow only qualified users to interact with the liquidity pool. Although, in this case, the anonymity of the users is lost, such a concept offers the possibility to provide institutional investors with the assurance that they can act in compliance with existing regulations and, at the same time, benefit from the innovative opportunities.

Swarm decentralized Over-The-Counter trading (dOTC)

Institutional investors often face the problem that transactions are so large in volume that the limited liquidity of exchanges leads to significant slippage effects. Therefore, it is common to settle such transactions over-the-counter (OTC). In OTC trading, buyers and sellers don’t meet on an exchange, but conclude the transaction outside the regular market. In this case, it can happen, for example, that the tokens are transferred from the seller to the buyer, but the payment is made outside the blockchain in fiat currency. This isolates the large trading volumes from price fluctuations and allows the buyer to acquire at a better price.

Instead of risky off-chain transactions, Swarm’s solution called dOTC offers a way to settle such OTC trades on a smart contract basis. Similar to an escrow account, assets held through the smart contract are only redeemed into a crypto wallet when all conditions are met. The smart contract thereby eliminates the need for financial intermediaries, which are common in complex and costly OTC trading arrangements in traditional financial markets. Since all users are verified with their “passport” on Swarm, the counterparty risk is also reduced in this case. Initially, Swarm provides certain ERC-20 tokens for OTC trading in this context, with ERC-721 and ERC-1155 tokens to follow in the future. By implementing dOTC, Swarm is creating a safe and efficient alternative to traditional OTC trading that meets the needs of institutional investors.

Swarm Liquid Staking:

Another product in Swarm’s portfolio is Liquid Staking. Staking is used in blockchains that use proof-of-stake as a consensus mechanism. Here, in contrast to proof-of-work, capital rather than computing power is used to secure the network. Validators, therefore, lock their capital and validate blocks to receive rewards. However, in the case of malicious behavior, parts or all of the staked amount can be deducted. A disadvantage of staking is, in many cases, that the tokens are locked over a long period of time and investors cannot use the capital elsewhere during this time. Liquid Staking Derivatives (LSDs) have emerged to solve this problem, attempting to overcome capital inefficiency.

Swarm users have the opportunity to purchase Liquid Staking Tokens and thus own a derivative that represents the staked token. Alternatively, their own tokens can be staked and represented as LSDs. By tokenizing the assets used, token holders participate in the value of the underlying asset as well as in the income from validation fees. They can also contribute their tokens to liquidity pools on Swarm’s DEX, earning additional rewards. Tokens can be combined with and traded against other assets in the DeFi ecosystem, which gives users flexibility if they want to liquidate their position.

Another advantage of Swarm is that LSDs can be traded on a single blockchain, regardless of the underlying blockchain. An example of this would be a derivative of SOL used within the Solana blockchain, which is tradable on the Ethereum blockchain via Swarm. This brings benefits in terms of liquidity and user experience. By creating a liquid market for Liquid Staking Derivatives, Swarm facilitates access to this innovative financial strategy and promotes the development of a robust DeFi ecosystem.

The Swarm Token (SMT)

The SMT token is the backbone of the Swarm Markets protocol. Based on ERC20, SMT facilitates simplified transactions and provides a discount and reward mechanism for the Swarm platform. SMT is integrated with Swarm Markets; a licensed Decentralized Finance (DeFi) exchange for securities and crypto. SMT performs the essential function of aligning the interests of all stakeholders and can be used for rewarding activities which benefit the platform as a whole:

  • Liquidity Provision: Liquidity providers are rewarded with SMT tokens.
  • Reduced Protocol Fees: Traders can get 50% reduced protocol fees when they choose to pay using SMT.
  • Loyalty Rewards: These rewards are paid to SMT token holders according to the ratio of SMT to other crypto assets in their wallet.
  • Strategic partnerships: Swarm is also rewarding contributors with SMT tokens.

The classification of Maker (SMT) according to the ITC

The International Token Classification (ITC) is a multi-dimensional, expandable framework for the classification of tokens. In this example we will classify the SMT token according to the latest version of our ITC.

Figure: SMT Tokenbase entry (

Economic Purpose (EEP): SMT is listed as a Settlement Token and Access Token (EEP22TU02) due to its design.

Industry Type (EIN): The issuer of SMT is active in the field of Decentralized Exchanges, Markets and Market Making (EIN06DF01).

Technological Setup (TTS): SMT is listed as Ethereum ERC-20 Standard Token (TTS42ET01).

Legal Clam (LLC): SMT does not entitle its holder to any legal claim or rights against the issuing organization, therefore, it is listed as a No-Claim Token (LLC31).

Issuer Type (LIT): The dimension “Issuer Type” provides information on the nature of the issuer of the token. The Issuer Type for SMT is a Private Sector Legal Entity (LIT61PV).

Regulatory Framework (EU) (REU): The dimension “Regulatory Status EU” provides information of the potential classification of a token according to the European Commission’s proposal for a Regulation on Markets in Crypto Assets (MiCA, Regulation Proposal COM/2020/593 final). SMT qualifies as a Utility Token (REU52) according to the definition provided in Article 3 (5) of Regulation Proposal COM/2020/593 final.

Consensus Mechanism (TCM): The dimension describes the mechanism that is deployed to achieve consensus on the token’s distributed ledger. SMT transitioned is issued on top of the Ethereum blockchain; therefore, it is listed as Proof-of-Stake (TCM71PS).

Type of Maximum Supply (EMS): The dimension describes the token’s type of maximum supply. Currently SMT is listed as Fixed Supply token (EMS81).

Primary Mode of Origination (EMO): The Dimension Type of Maximum Supply forms part of the Economic Dimensions Group and describes the token’s type of maximum supply. The SMT token is listed in the Tokenbase as Sale (EMO92).

Taxes (RTA): One common distinction can be drawn between crypto-assets: those crypto-assets that resemble ‘conventional’ assets, like securities, and which are merely recorded on DLT systems (Conventional Asset Tokens DTA71), and those assets and activities that raise new regulatory challenges such as virtual currencies (New Asset Tokens DTA 72; OECD 2020). SMT is listed in the Tokenbase as a New Asset Token (RTA72).


The International Token Standardization Association (ITSA) e.V.

The International Token Standardization Association (ITSA) e.V. is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 international associated founding members from various interest groups. In order to increase transparency and safety on global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics. ITSA then adds the identified and classified token to the world’s largest register for tokens in our Tokenbase.

  • The International Token Identification Number (ITIN) is a 9-digit alphanumeric technical identifier for both fungible and non-fungible DLT-based tokens. Thanks to its underlying Uniform Token Locator (UTL), ITIN presents a unique and fork-resilient identification of tokens. The ITIN also allows for the connecting and matching of other media and data to the token, such as legal contracts or price data, and increases safety and operational transparency when handling these tokens.
  • The International Token Classification (ITC) is a multi-dimensional, expandable framework for the classification of tokens. Current dimensions include technological, economic, legal, and regulatory dimensions with multiple sub-dimensions. By mid-2021, there will be at least two new dimensions added, including a tax dimension. So far, our classification framework has been applied to 99% of the token market according to the market capitalization of classified tokens.
  • ITSA’s Tokenbase currently holds data on over 4000 tokens. Tokenbase is a holistic database for the analysis of tokens and combines our identification and classification data with market and blockchain data from external providers. Third-party data of several partners is already integrated, and API access is also in development.


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Hannes Detlefsen is a Community Manager at the International Token Standardization Association (ITSA) e.V. and has been active in the blockchain field for several years. Currently he is studying Business Administration at the Christian-Albrechts University in Kiel. Besides his experience in the field of digital assets, his main focus is on decentralized finance. You can contact him via and connect with him on LinkedIn.

Valentin Kalinov is an Executive Director at International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database, including a classification framework and unique token identifiers and locators. He has over five years of experience working at BlockchainHub Berlin in content creation and token analysis, as a project manager at the Research Institute for Cryptoeconomics at the Vienna University of Economics and token analyst at Token Kitchen. You can contact Valentin via and connect on Linkedin if you would like to further discuss ITSA e.V. or have any other open questions.

Philipp Pieper has a wealth of experience in the tech industry. Philipp began their career in 2003 as the Chief of Staff for Growth Markets at Allianz. In 2001, they Co-Founded Ingent Technologies and in 2006 they Founded and became CEO of Proximic. From 2013, they have acted as an Advisor and Angel Investor for Start-ups and Growth Companies. In 2015, they became a Mentor for Singularity University, a Mentor for StartX, and Owner of Lighthouse Interactive LLC. In 2016, they Co-Founded Loop Media, Inc. and in 2017 they Co-Founded Swarm Network. Since 2019, they have been a Co-Founder of Swarm. Philipp Pieper’s education history includes studying at the Aloisiuskolleg from 1989 to 1990, Heidelberg University from 1992 to 1994, Technische Universität Berlin from 1994 to 1998, and finally University of California, Berkeley from 1998 to 1998 where they received a degree in Business Administration.

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International Token Standardization Association

The International Token Standardization Association (ITSA) is a not for profit organization working on holistic market standards for the global token economy.