05 Mar Polymath wants to flip regulation upside down with Security Tokens
Polymath is building a platform to help companies issue securities on the blockchain.
Companies will use the Polymath Network to legally tokenize financial assets and give more access and liquidity to investors.
To guide venture capital firms, investment funds, and public companies through the complex technological and legal processes of a successful token launch.
The Need for Regulation
The token sale process is complicated and requires guidance to avoid legal and financial issues. Regulators are actively pursuing startups who take the “ask forgiveness, not permission” approach to disrupting regulated industries.
In the cryptocurrency world there are no shortage of shady ICO tokens (a.k.a. scam coins) currently trading on the market. The regulatory hammer will come down on these inevitably.
Startups need to launch their token sales by doing the right things from the very inception.
How Polymath wants to flip regulation upside down
Instead of a central regulatory body ruling from afar, Polymath will involve attorneys and government officials from the beginning of the process for each security token.
This will theoretically eliminate the need for an agency like the SEC to get involved and ultimately lead to a more legitimate blockchain and cryptocurrency market.
Legal Agreements for Tokenized Securities
Polymath has partnered with Agrello, an Estonian legal technology company that offers blockchain-based smart contract agreements.
“A partnership with Polymath will allow us to showcase Agrello’s cutting-edge KYC and digital signature services in the highly regulated financial industry.”
– Agrello CEO and Co-Founder, Hando Rand.
Smart contracts have the potential to change how people interact with each other, as well as legal authorities. Polymath and Agrello have a shared vision of successfully implementing smart contracts in heavily regulated environments.
Issuers and investors on the Polymath platform are able to execute agreements with Agrello’s legally binding smart contracts.
How Legal Compliance works on Polymath
- Issuer creates security tokens and uploads issuance details to be reviewed by Polymath Legal Delegates.
- Legal Delegates propose compliance templates to the issuer.
- issuer selects the template and applies it to the security token with the required documents to upload for verification.
- Once verified, the Legal Delegate approves the securities token for initial offering on the polymath network.
- Investors request access to a security token.
- Polymath gives KYC requirements to the investor based on the compliance template.
- Investors submit KYC requirements for verification.
- Polymath approves investor to participate.
The ST-20 Standardized Securities Token Protocol
Polymath’s ST-20 Protocol embeds regulatory requirements into the tokens themselves.
Polymath facilitates compliance at the legal layer and the app layer. Compliance is baked into the token itself, as shown in this illustration of the POLY stack:
It verifies each wallet address to ensure only authorized investors that meet the criteria for each particular security token offering are able to transact with that token.
This is an important consideration because decentralized exchanges, also known as DEX’s are the future for cryptocurrrency markets. DEX’s will be able to facilitate trading with POLY tokens, because the they can only go to authorized participants.
Launching a Security Token
Polymath asks for the following information to create a ST20 standard security token.
- Legal Name:
- Legal Entity Type:
- Type of Security:
- Project Description:
- TOKEN CHARACTERISTICS
- Voting Rights:
- Dividend Frequency:
- Corporate Governance:
- Governance Integration Partner:
- Additional Features:
- TOKEN ALLOCATION
- Tokens to Create:
- Percentage of Tokens Held by Company:
- Percentage of Company Equity Distributed With Tokens:
- Price per Token in USD:
- LEGAL DETAILS
- Issuing Jurisdiction:
- Offering Security To:
- Investors Must be Accredited:
- Investor KYC Needed:
- KYC Integration Partner:
- Tokens Freely Tradable:
- CONTACT DETAILS
- Contact Name:
- Position at Company:
- Contact Phone Number:
- Contact Email:
- Permit Contact from Polymath:
Choosing a Legal Delegate
After creating a new token, a legal delegate must confirm “that the steps have been completed for the token to be issued.”
Issuers will receive several bids from legal delegates, lawyers, but it’s up to the issuer to perform due diligence and compare their fees. Once they choose a legal delegate, they send POLY to a smart contract and begin working with the lawyers through the compliance process with the necessary documents.
Part of the process entails delegates working with developers to build a smart contract specifically for your token. The smart contract enforces investor requirements such as jurisdiction of investors, type of offering, hold period before tokens can be resold, etc. After the necessary documents are sent and the smart contract completed, the legal delegate will set the address of your initial offering contract and then the token will be ready to trade.
POLY tokens are the fuel for the Polymath platform
Similarly to how ETH fuels the Ethereum platform, POLY will be used for Polymath smart contracts.
Four ways POLY tokens are used
An issuer can post a bounty in POLY tokens to encourage legal delegates and developers to bid on providing services. The more complex the security is legally, the more POLY you’ll probably need to pay.
Developers earn POLY for creating ST-20 smart contracts.
KYC providers pay with POLY to join the Polymath network and earn POLY by verifying investors.
Investors must pay KYC providers in POLY tokens to join early investor whitelists for security tokens.
Legal delegates earn POLY when they are selected to issue a new security token.
Three types of Securities Tokens
On the Polymath Github you can see that there will be 3 main types of securities tokens: Equities, Debts, and Units
An equity security represents ownership interest held by shareholders. Equity holders are typically not entitled to regular payments (although equities can pay out dividends), but they are able to profit from capital gains when they sell the securities.
A debt security represents money that is borrowed and must be repaid, with terms that stipulates the size of the loan, interest rate and maturity or renewal date.
With unit securities, holders own a stake in a trust/partnership, having right to the income generated by the trust/partnership. This trust/partnership could own multiple investments.
Polymath’s Trillion Dollar Opportunity
Let’s not under-emphasize the size of the prize the Polymath project is going after. Aside from a global currency, taking existing financial assets onto the blockchain is the biggest opportunity for blockchain technology.
Polymath is the first major blockchain project associated with securities tokens.
As Ethereum had the first mover advantage for decentralized applications, Polymath has the first-mover advantage locked in for securities tokens.
ICO’s vs. IPO’s
In 2017, ICO’s raised about $4 Billion USD. In comparison, Alibaba’s IPO alone raised over $20 Billion USD.
Global Financial Assets
There is a massive untapped potential of assets that can be tokenized.
According to the whitepaper, “the global securities market is composed of three major instrument types: equities, debt, and derivatives. In 2016, these three markets had total notional values of US $67 trillion, $99 trillion, and $1.2 quadrillion, respectively.”
These numbers of course do not consider all the private and illiquid assets that can also be tokenized. Securities Token Offerings for these assets alone represents a potential of trillions of USD.
Polymath believes the impact of the coming “stampede” of securities tokens will be felt more immediately in the small business sector.
As an investor, you don’t have a way use your localized knowledge to invest in small businesses without investing large sums or even buying entire businesses.
Let’s say, for example you like dining at indian restaurants. You try a new one and it’s the best indian dining experience you’ve ever had. As you finish your meal, you could decide right then to invest whatever amount you desire.
Securities tokens provide a new liquidity layer for small businesses who could never dream of going public with an IPO.
Just as much as the small businesses themselves, securities tokens are a huge benefit to investors. Investors will be able to access companies with the potential to grow quickly, which they can also directly impact.
Individuals will finally have the same access to investments as venture capitalists.
In the ideal scenario, all forms of securities become tokenized. Trillions of dollars of financial assets go flowing onto the Polymath platform once the “stampede” begins and a strong network is built where is makes sense for companies of all sizes to use the POLY network.
As a result, businesses of any size have access to capital and Investors would have access to transparent information to easily avoid scam coins. The big challenge ahead for Polymath is to bring investors into their ecosystem.
As the saying goes, “if they could just capture 1% of the market”, in this case trillions upon trillions of market capital, Polymath will be a huge success and one of the top cryptocurrencies.
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Hold on for dear life.