POLYCON18 — HISTORY IN THE MAKING?

Every good breakthrough should involve a pool party

As Polymath hosted their first Polycon in the Bahamas, the security token offering (STO) movement has gained further momentum. Did the pool parties, cocktails and presentations from the great and the good of the crypto world, roadmap the future for securities on the blockchain?

Let’s rewind to June 1994 and swap the Bahamas for Palm Beach, Florida. It’s an off site for a leading investment bank to discuss how to drive the growth of their derivatives business. Along with plenty of drinking games, hijacking of golf carts and even a senior executive getting his nose ‘accidentally’ broken, an intellectual breakthrough was made. The swaps department of JP Morgan, already some of the best in the business, could rightly claim to have ‘invented’ credit derivatives. With guile and cunning, they brought the regulators along for the ride and made a shed load of money. The usual suspects jumped on board and rode the train all the way to 2007.

We kind of know what happens next and if you don’t, I’d recommend you read The Big Short by Michael Lewis or better still, watch the movie for Steve ‘run that by me again’ Carell. Credit derivatives morphed from a tool used to drastically reduce risk into a tool in which to magnify it (by hiding it). My own firm at the time, Salomon Brothers, was right there at the coal face, ‘innovating’ new ways to offset risk (read earn more fees). I’d joined Salomon blissfully unaware of their role in the evolution of a global financial crisis. I went because I’d read, in the author’s own words, the best recruitment manual Salomon had, Michael Lewis’s Liar’s Poker. I joined the programme and whilst not quite the Wolf of Wall Street, I had some pretty exciting times.

Back to the present and financial innovation now goes by the name of financial disruption. Everything is migrating onto the blockchain and the big financial institutions are running scared. Or are they? We all know that Jamie Dimon has admonished crypto previously. I’d love to say that there is no irony lost here, since his own firm could be traced back to the early roots of the 2007/8 financial crisis. He wasn’t with JP Morgan back then, but instead the intellect and canny deal making behind the rise of Sandy Weill. They could perhaps, be accused of being the reason the Glass Steagall Act was abolished, needing its convenient removal to enable Weill to buy Citibank and merge it with his Travelers Group. Another moment in time that seemed innocuous enough but would have massive ramifications.

The investment banks, perhaps Goldman aside, seem to operate like container ships that need a lot of time to change direction. That is why the disruption to their space has been met with a lot of negativity, a lot of FUD. Goldman seem to write their own rules of the game in many cases also own the game. Their Circle led acquisition of crypto exchange Poloniex, shows that the big boys club is sitting up and taking notice.

So what does that mean for the likes of Polymath and the eco system that is evolving around them? Will they be the ones to make the intellectual breakthrough needed to ensure that the next wave in crypto, the migration of securities onto the blockchain, becomes a reality and not just in the hands of the very firms that created the previous financial crisis? The signs are promising. Some great companies were announced as partners at the recent Polycon18. A notable mention goes to Lexit seeking to disrupt M&A by enabling anyone to buy and sell assets, IP, copyrights, patents etc, on the blockchain. Etherparty have an automated smart contract platform that offers a crisp UI that means you don’t have to know anything about how to code a token yourself. Self Key and Agrello both offering the all important regulatory tick box, KYC and AML facilities to enable investors to white list. If it can all be packaged up nicely so that anyone can issue a regulatory compliant token, sell it, get it exchange listed and traded, it has to be a game changing moment.

Whilst the deal pipeline is still waiting in the wings, as soon as the process has been locked down and the regulators seem happy (read happy with answers back on the eighty subpoenas recently issued), expect to see security tokens dominate the second half of 2018. Thereafter, you may very well see Wall Street banks buying up crypto exchanges, issuers and the grass roots ecosystem being built at the moment. The SEC might rattle a few cages but they weren’t absent back when credit derivatives were evolving. They just got gamed by the banks. This won’t be allowed to happen as crypto security tokens start getting issued and traded on secondary exchanges. In part, this is due to the likes of Polymath developing ways to pre-bake regulation into tokens themselves. Gaming the regulators is unlikely to happen in such a decentralized environment.

Will Polycon18 be viewed in nearly a quarter of a century as the divergence of a concept, great minds, technology, money and the will to make better financial markets? Could it represent a new paradigm in finance and one with a mission not to repeat the mistakes of the past? One thing is certain, the movement is unstoppable. Let the stampede begin.

Acknowledgements to Gillian Tett for Fool’s Gold, a great analysis of JP Morgan and credit derivatives. Also to Michael Lewis who sat on a trading desk in Salomon’s NY office and pretended to know what he was doing. I did very much the same on their London desk for many years.