Polymath —Purchasing and trading securities on the blockchain

In June 2018, the crypto investment community gave a sigh of relief when the U.S. Securities and Exchange Commission confirmed that Bitcoin and Ethereum would not be classified as securities, and therefore not fall under the regulations of US securities laws.

Published in

Trivial.co

10 min readNov 13, 2018

These laws include measures such as KYC/AML and the Dodd-Frank Act, which govern how companies can operate, who can invest, and regulatory compliance requirements. The reason why BTC and ETH were not considered securities largely resulted from the fact that they have actual utility and can be used as currency, rather than solely serving as investment vehicles.

If a token is obtained by an investor strictly in the hopes of future profit, then it is considered a security. The Howey Test is commonly cited for this consideration. Major types of securities include stocks, debts, and derivatives. These securities make up the bulk of all investments today, accounting for trillions in the global market.

Polymath’s goal is to establish a platform for the tokenization of securities, so that standard securities such as company equity, debt notes, or derivatives become tokenized to be purchased, stored, and traded on the blockchain.

The benefits of tokenizing securities include the following:

Significant increase to liquidity, as tokens can be easily managed, governed, and traded unlike traditional assets. The key point for tokenization of securities is that it makes the assets much easier to control and flexible to transact with.
Much wider exposure to investors. Traditional securities on centralized platforms can have requirements and authorizations that can be confusing and difficult for the average investor to penetrate. Polymath and its competitors hope to ease the barrier of entry much like how the Ethereum platform has allowed for ease of investment into various ICO projects.
Efficiency through the use of smart contracts to settle trades. Current systems require significant amounts of work to be done manually. Smart contracts can allow for instant trades and settlements that have far less friction.

These tokens can also benefit from the general security afforded by blockchain technology

How it works

Polymath aims to establish a new token standard called ST20, which has now been formalized as ERC-1400. Under this standard, only authorized investors would be able to hold and trade such tokens.

The Polymath platform will integrate investors, token issuers, regulatory accreditation providers, and legal delegates into an easy to use system where would-be token issuers are connected to all the necessary legal and regulatory service providers to ensure their token is compliant.

From the investor’s standpoint, Polymath aims to link would-be investors with KYC/AML accreditation providers to ensure that investors fulfill all regulatory requirements and are given digital permissions to trade. Generally speaking, Polymath is working to provide a reliable and frictionless platform that allows traditional investors and asset issuers to enter the world of security token trading. The paths for investors and issuers will be described separately below.

The investor — An investor on the Polymath platform will first need to be validated by a KYC/AML accreditation provider. This provider will be a 3rd party affiliate of Polymath. The investor will undergo an approval process with this 3rd party that includes providing proof of wealth and background, much like how a regular investor would acquire accreditation. Once the 3rd party provider confirms the investor, the provider would then send confirmation to the token’s smart contract, upon which specific permissions are given to the investor to participate in ST20 token trading. It is important to note that Polymath itself does not directly provide accreditation.

The issuer — The issuer is some asset holder who is seeking investors via their asset’s tokens. Upon proposing a new security token on the Polymath platform, the issuer would undergo a similar process of confirmation and authorization as required by the law. First, the issuer would link up with a 3rd party legal delegate to confirm details of the token offering such as jurisdictions, types of offering, and hold times. Once this compliance process with the legal delegate is completed, the security token offering will establish a smart contract that allows trading of the token in accordance with the rules established during the approval process.

Now that both the investor’s and the token’s rules and limitations are established, the platform only needs to link up the two parties as the rules permit. It should be noted that Polymath seeks to embed permissions and restrictions on the token level, hence allowing traders to operate outside of the Polymath system without fear of violating securities law.

But how can investors be regulated if there is no core platform that monitors who is buying which tokens? Even if an investor is accredited in the United States, for example, that same investor may not be allowed to purchase a certain token that is based in China. This is conducted through the ST20 token smart contracts, which will govern white lists, investor caps, and other variables to self-regulate which investors are buying and how much. This would allow various secondary markets to open and allow ST20 token trading.

It should be noted that if these restrictions are controlled on a token level, it would remove the need for any centralized exchanges whatsoever! Even in a one-to-one exchange with no intermediary, the tokens would self-regulate through its smart contracts to ensure the purchaser is qualified. It should also be noted that the Polymath platform only focuses on the creation of these ST20 tokens and accreditation of investors, not the actual trading.

The POLY Token

One billion POLY tokens were minted, with no additional tokens created afterward. POLY tokens are used for the following:

As bounties by issuers to incentivize bidding from legal delegates and developers.
Developers will earn POLY for creating STO contracts. 20,500 POLY tokens have been cited as the cost to create an STO.
KYC providers will be required to pay POLY to join the network. POLY functions as collateral to ensure providers are incentivized to do good work.
Investors will pay POLY to become verified by the various regulatory 3rd parties.

Stats & Metrics*

*(as of 21 November 2018)

Marketcap — $43,518,000

Price Chart

Cost to join Vladimir Club (own 0.0001% of tokens): $4,352

Circulating Supply — 286,737,107

Total Supply — 1,000,000,000

Unique Addresses holding tokens — 86,007

Top 20 Addresses hold 88% of the Supply.

*Defined as “**distinct senders that sent the tokens using ERC20 transfer() method**”. NOTE — it only includes onchain transactions.

Roadmap — Where are we?

Polymath does not maintain a formal roadmap, with the team stating “we want to remain nimble and able to pivot on a dime if anything changes. Our next milestone/goal is issuing our first securities token…”

After six month of development, Polymath-core was deployed onto the Ethereum mainnet in February 2018. The team has stated that various hopeful delegates, issuers, and others are actively working with Polymath to become a part of the platform and establish ST20 tokens. In April 2018, the next major release of Polymath Core was released under the codename “Toro”. This release made the core platform more modular and easy-to-use, and included a sample STO module.

Team

Trevor Koverko — CEO & Co-Founder — Investor and executive who has been attached to various cryptocurrency-related projects throughout the years. In addition to Polymath, he currently serves as CEO to Digital Assets International, an investment firm specializing in cryptocurrency. He has been an investor in various cryptocurrency projects, including ShapeShift.io. Previous roles include President of Skyline Capital Management (real estate fund) & CEO of eProf Education Inc. He was the 147th draft pick for the New York Rangers ice hockey team. His education includes a business degree from University of Western Ontario.

Chris Housser — COO & Co-Founder — Lawyer with background as an associate at Bennett Best Burn LLP. Prior to working in law, he was in the Canadian Forces for twelve years. He holds a J.D. from the University of Western Ontario, with a BA in History from University of Victoria.

Pablo Ruiz — VP Engineering — Developer leading Polymath’s Solidity team as well as its front-end full stack developers team. Previously, he worked as a technical reviewer for Packt, a technology-based publisher. He holds a Computer Engineering degree from the Universidad Nacional de la Matanza.

Overall, Polymath has a team of ~40 employees, of which a third or so are developers. The rest of the team includes marketing, accounting, product development, and operations. It should be noted that the two co-founders appear to have limited technical backgrounds but strong industry experience, and the team does maintain a reasonable development team size.

https://polymath.network/team.html

Notable Partnerships

OpenFinance Network — A trading platform that hopes to offer tokenized securities amongst other alternative assets, currently in beta.

Trustroot — Blockchain protocol that verifies identities and reputations of various blockchain businesses. Trustroot hopes to integrate its security and reputation services into the Polymath platform for potential issuers.

IdentityMind — to bring KYC providers aboard.

SelfKey, a digital identity system, and BnkToTheFuture, another company associated with KYC, will partner with Polymath to provide thousands of accredited investors.

Corl Financial Technologies, SeriesX, and Ethereum Capital all plan to have securities tokens created on the Polymath platform.

Competitors

Harbor — focuses on tackling the tokenization of securities via the “Regulated Token Standard”, which aims to embed compliance at token level, and checks all regulatory requirements prior to a trade. By embedding compliance into the token itself, the compliance would not be dependent on a specific exchange or centralized party. The R-Token is a permissioned ERC-20 smart contract that calls a Regulator Service that will to carry out various checks such as approved participants, trading permissions, and regulatory requirements. Harbor has no token of itself, rather, it would be implemented into ERC-20 tokens. Harbor has notable investors such as Vy Capital and Fifth Wall Ventures and is partnered with 0x. Harbor’s approach is similar to Polymath on many fronts, and has just launched its blockchain-based platform and compliance protocol.

Neufund — provides a system through which people (or smart contracts) can create and issue new tokens via a token sale or tokenize equity in off-chain assets. The platform also allows users to easily invest in a safe environment using either Euros or ETH, or become an economic co-owner of the platform itself through NEU tokens. Invesotrs have to comply with AML/KYc procedures. There is the possibility to claim dividends, vote on resolutions and liquidate through a secondary market. Neufund has signed up a handful of startups who will be offering tokenized equity, but the platform has as not yet opened fully for investors, despite a long time development.

Swarm Fund — hopes to tokenize various real-world assets which can then be traded, managed, and governed on the Swarm network. The team has already released the Swarm Fund platform, where its possible to invest in various assets through the SWM token, BTC, and ETH, in exchange for SRC-20 tokens that represent equity into the invested asset. While Polymath and Harbor aim to control compliance checks on the token level, Swarm aims to monitor it via the Swarm platform.

Securitize — aims to provide a turnkey solution for funds, companies and other assets to tokenize their assets for easy investment. Securitize manages the processing of the solicited investors from login to capital received, as well as the issuance and management of the security tokens throughout the lifetime of the asset.. Securitize appears to take a more centralized approach similar to Swarm Fund.

tZERO — is working on a Security Token Front-End to trade security tokens in an easy, compliant, and user-friendly manner, with features such as risk management software, an order management system, matching engine. However, there is not currently an operational platform as it is working through “technological, operation and legal requirements”.

More security platforms here: https://token.security/search/?type=token-issuer&sort=latest

Concerns

The distribution of responsibility — It makes sense that 3rd parties should be used for KYC/AML accreditation and legal delegation due to the complexities of securities law. However, this creates a difficult situation where the burden of legality and compliance is not clearly distributed. If an ST20 is proven to have been traded illegally, should the 3rd party be punished, or should the Polymath team? Even if only the 3rd party is to blame, shouldn’t the Polymath platform experience repercussions for allowing them into the platform in the first place? Additionally, how feasible is it that these kinds of issues can be properly handled across different borders and jurisdictions?

Necessity of the token — Competitors such as Harbor are working to solve the securities problem without introducing a native token. After all, the permission functions can be embedded into the token itself to allow secondary market trading, which is what Polymath is hoping to achieve as well. Polymath’s token usage largely focuses on being the currency during the on-boarding process. But requiring the usage of POLY tokens rather than Ether, may add unnecessary friction.

Difficulty of adoption — Securities trading is far more sensitive and scrutinized than the current ICO market, hence major players may be slow to adopt. The difficulties of regulation and compliance only adds to the conundrum, especially considering that regulation differs around the world and Polymath hopes to cater to various jurisdictions.

Summary

The tokenization of securities has tremendous potential due to the ease of record-keeping, security benefits, and high liquidity that blockchains can provide. The securities market is magnitudes larger than the current ICO market, and the success of cryptocurrency thus far shows that there is a growing appetite for transactions through this medium. On the other hand, securities come with intense scrutiny, sensitivity, and a high barrier to entry with respect to government regulation. Governments are not technology companies and would undoubtedly approach this type of technology with care and trepidation. It may take years of successful track record and education before regulatory agencies feel comfortable allowing security tokens to proliferate in the general market, no matter how sound the platform itself is. It is a concept that is very much in its infancy, and there is sure to be significant competition as well as roadblocks as it develops.

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I’ll try to update this review periodically to keep it relevant, but please feel free to help me by notifying me of any updates to the project, or offering any corrections/suggestions to improve the analysis!