Custody Exchange in STO World
STO is heavily regulated, not only for compliance, but also in current landscape, certain works must be done by certain licensed intermediaries. For exchange:
1. It must be operated by a licensed entity (ATS licensed entity)
2. Investors in it buy and sell through a broker-dealer
3. Clearing and custody done by a licensed clearing business entity
4. Licensed transfer agent
(Dinosaur Financial Group, a subscriber to PRO, will serve as broker-dealer. Trades can only be placed through a digital securities brokerage account at Dinosaur. Additionally, clearing and custody will be provided by Electronic Transaction Clearing, and Computershare will act as transfer agent.) 
All these regulatory arrangements are necessarily unavoidable for the operation of an STO exchange. In another word, security token will have to be exchanged in a traditional custody, brokerage accounted exchange. Or at least, from business instead of regulatory aspect, if it wants to utilize the existing resources in current financial world, STO must adapt itself into this old pattern. The question is how.
One thought is to keep the old world untouched:
1. brokerage account is completely independent of digital identity
2. Transaction inside exchange has nothing to do with ST smart contract and ownership not reflected by it.
This kind of traditional custodian exchange for ST is completely outside the world of all the infrastructure that is vital and convenient in peer to peer exchange scenario. We have two parallel world images for one existence. Information have to be redundancy and kept synchronized between them, between identity(claim) and brokerage account, between ST smart contract and another place that is responsible for collecting segregated ownership information, between almost everything. This is not simply technological hardship; this reduces the solemn promise STO makes to nothing.
We must figure out a methodology to put the new STO technology into this traditional regulated exchange-ecosystem.
1. The identity and claim infrastructure and brokerage account are linked, in their setup, updating and claim management
2. Ownership completely reflected by the one and only one ST smart contract. The database of cap table is this ST smart contract itself and nothing else. This is vital
3. Transaction logic of the custody exchange has great independence of the on-chain ST transaction. This keeps the core structure of the exchange untouched, it can choose to have its own asset pool, its own ledger, uninfluenced by the existence of blockchain, just run as with traditional securities. All old technology, business model, legacy system is valid. this also is vital.
4. Totally speaking, STO keeps its core promise while it is easy to fit into old world.
The big picture
1. From an external and regulatory point of view, the exchange that is STO enabled is still a traditional custodian exchange: investors needs to sign up and sign in an account, transaction is done and managed by its own engine and its own ledger, clearing and transfer also happens as typically: done by licensed clearing entity and transfer agent.
2. Regulatory requirement is perfectly accorded. All parties do their job as required by government institutions.
3. But this exchange is supported by and integrated to the ST infrastructure
Identity, claim and brokerage account
1. Investors can setup their identity and claim and then sign up brokerage account by an interaction between the identity wallet and the account management web function, a qr-code scan process. Or on the contrary they can sign up first and extract their identity likewise.
2. but in both cases mentioned above, investors MUST have identity set up before any transaction in this exchange. This is the key difference with old world.
3. The exchange can choose to redundantly store and update claim and personal information or use the off-chain information service and on-chain claim registry just in need. This is its own choice.
About the identity infrastructure please refer to 
1. Exchange has a ledger that is completely independent of the ST smart contract, so it is called internal. Buy and sell inside the exchange is remembered and traced by this internal ledger
2. Transaction logic is “almost” dependent of the ST infrastructure, only that it will invoke the compliance system of ST infrastructure layer.
3. Transaction logic can compute the real amount and transfer amount parameter by read ST smart contract and trace internal transaction in its internal ledger. This means that investors can have account on multiple exchange and each exchange has the capability to know its total asset ownership which is vital for compliance check.
4. Happily, all access to on-chain infrastructure is pure view and cause zero cost.
Clearing and transfer: Database for cap table
1. Transfer will happen directly on ST smart contract
2. Transfer will happen by the custodian ownership mechanism on ST smart contract — allowance and approve , and needs no present user wallet signature. This is what custody exchange means and different with peer to peer.
3. Cap table service provider will base their engine completely on the sole data source: the ST smart contract and its transaction history and event history. They can listen to transaction and event and transform data to their own unified database format, but avoided the heavy and almost impossible task of collecting data from all exchanges. This is why ST means something.
1. Fit into the old word with a non-invasion way while keeping both sides satisfactory.
2. Exchanges have internal ledger and logic, but global view of ownership.
3. ST infrastructure provider does not do cap table themselves, but to provide single on-chain data source to cap table service provider
4. Never, ever think anything that store ownership in someplace other than the ST smart contract itself. This will contrary to the most essential promise STO has made.