How Will Polymath Impact the Future of Security Tokens?

Polymath intends to do for security tokens what Ethereum did for ICOs: create an open platform to issue legally compliant security tokens. In 2017, ICOs raised $6.2 billion, yet the majority of ICOs never registered as a security with the SEC. If a company is going to benefit from having a public offering whose investors are expecting a profit, the token needs to be licensed as a security in order to protect investors from scams. While registering as a security may discourage some ICOs, many ICOs cannot accept American contributions due to current regulatory uncertainty. If STOs (security token offerings) undergo proper US regulations, it may give them the opportunity to reach more US investors to fund their projects. Additionally, it can cost anywhere from 100k-200k to get an IPO listed on the New York Stock Exchange. Creating a security token can be a much cheaper way for firms to raise money.

In 2017, ICOs were advertised as the future of Venture Capital. However, there still needs to be a regulatory framework to legitimize the space. If an ICO appears to be an unregistered security, exchanges have an incentive to reject a listing proposal due to the potential legal implications. No exchange wants to list an unregulated security and suffer unnecessary consequences. This may be one of the reasons Coinbase has not listed XRP even though it has the third highest market cap of all coins on coinmarketcap.com.

Polymath’s value proposition appears promising, but their platform is still built on Ethereum and their coin is designated as an ERC20 token. Polymath wants to create the new standard for security tokens by creating ST20 tokens. Ethereum’s ERC20 tokens are efficient for initial coin offerings because they are unregulated and borderless, but there is a future risk that the ICO token will be ruled an unregistered security by the SEC. Unlike many ERC20 tokens, ST20 tokens are intended to be compliant with KYC & AML regulations. While ST20 tokens carry less risk, they may be available to fewer people because not everyone in the world can verify their identity in order to purchase the security token.

Firms looking to create a security token on the Polymath platform can choose from a variety of vendors who can provide guidance on legal compliance regulations and financial advisory. Also, Polymath’s platform allows any firm creating a security token to control many aspects of the STO such as who can own the token and how long they can hold it for. This level of control eliminates the fear associated with many unregulated ICOs.

Polymath is a series of smart contracts which allow international KYC & AML providers to interact with STOs in an ecosystem where a firm can issue a security token. Developers of a firm can create a security token within the ecosystem, then KYC or AML providers will ensure it has a proper legal framework to be publicly traded.

Security tokens are expected to bring a significant amount of disruption to traditional finance, but if all STOs are built on Ethereum, the network may never scale. In Ethereum’s last attempted hard fork Constantinople, a newly added feature would have broken part of the existing system if implemented. Ethereum’s block chain does not have formal verification, therefore every time a new feature is added, the risk of breaking another part of the system increases exponentially. For this reason, Ethereum has many obstacles to overcome and any project built on its platform is entirely reliant upon its ability to scale. If Polymath wants to be a platform where publicly traded securities are issued, it has to scale to millions of transactions per second to accommodate high-frequency trading algorithms which trade by the microsecond.

Polymath core smart contracts are relatively simple which makes them flexible. This way, if Ethereum fails to scale or a better network emerges, Polymath will be able to migrate with very little technical friction. Conversely, they may lose their network effect in the process. The drawback to having simplistic code is that any project can copy it and create their own platform with essentially zero barriers to entry. For example, TRON plagiarized a large portion of their white paper yet they continue to build a network effect through promotion and hype.

In order for the system to create a network effect, demand needs to exist within the Polymath ecosystem. There needs to be demand for KYC & AML providers to exist in the ecosystem as well as developers and firms who want to launch STOs on the platform. As of now, Polymath appears to be a high-risk high-reward investment, but overall the project is very unique.

Disclaimer: Nothing in this article should be taken as financial advice. Please do your research independently and make objective decisions. The author of the article holds 0 Polymath.