What is Polymath (POLY)? The Security Token Blockchain
Polymath has made many contributions to the crypto space with a more regulated approach to raising funds through security tokens.
When a company needs to raise funds, one of the ways in which they can do so is through an initial public offering, or IPO for short. This is where the company offers shares of equity (or company debt) to public investors in exchange for cash.
In the crypto world, a company or organisation can issue and sell tokens in a so-called initial coin offering (ICO), and these are usually sold in a decentralised exchange, such as Uniswap. The ICO process is often more efficient in terms of time, among other constraints.
However, as ICOs are decentralised financing activities, they are not regulated and could land the entity into some trouble. Enter Polymath, which applies Ethereum’s blockchain technology to make regulated IPOs possible on a decentralised network such as Ethereum.
Polymath is more than just an application for minting security tokens. As an organisation, Polymath has made immense contributions to the crypto world, and has pushed for a more regulated approach to raising funds through security tokens.
What is Polymath (POLY)?
Polymath is the name for both the organisation and its proprietary technology for creating, issuing, and managing digital securities on the Ethereum blockchain.
Part of the process of creating the security token is total compliance with securities regulators that are unique to each jurisdiction.
However, Polymath makes compliance easy, with the help of a standard but flexible framework that any developer and/or companies can use to fulfill legal requirements.
In addition, specific rules for each security token are verifiable in Polymath’s open-source smart contracts, which are also auditable by regulators and other related parties. Polymath initially helped create tokens using its own standard token architecture — the ST20 standard.
After 2018, it is more common to find security tokens using the ERC1400 standard, which you will learn more about in the next section. So far, over 200 security tokens have been deployed using Polymath’s Ethereum-based application and have been very successful at attracting companies to use the platform.
Rather than helping to create ERC20 tokens for ICO sales, Polymath helps companies sell representations of equities on the blockchain in the safest, most efficient way possible. The sale of shares is, after all, a time-proven and well-regulated model for financing.
It’s also good to note that Polymath can help companies issue bonds and derivatives, such as futures contracts.
Learn more: What are smart contracts?
What is the cryptocurrency POLY?
Nearly all blockchain-based applications have their own utility token that is used to incentivise network participants to follow the protocol and act honestly. Polymath is no exception, and POLY is used by all parties involved in issuing security tokens.
On the issuer side, POLY is used to pay for fees associated with the creation, distribution, and management of security tokens, dividends, and liquidation methods.
POLY is also used by investors to pay for KYC/AML verifications. Finally, network nodes earn POLY for keeping the network secure by performing blockchain data verifications.
When creating a security token, issuers must hire “legal delegates”, who are part of the Polymath network. Keep note that they are not paid employees of Polymath, but work independently as lawyers in the real world.
The legal delegates will help verify the company’s identity and accreditation status, and collect other data in order to register the company with the securities regulator.
As mentioned before, investors looking to own equities or other types of security must pay in POLY to verify their identity using standard KYC and AML protocols. Accredited and verified investors can buy and sell securities from each other, but not from unaccredited investors.
POLY was created as an ERC-20 token, so any Ethereum wallet can securely store POLY tokens. Using POLY, developers can create ST20 security tokens using the Polymath software.
The total supply of POLY is 1 billion tokens; 240 million (24%) were airdropped to Polymath participants who registered by 10 January 2018.
The remaining supplies are retained by Polymath’s founding team. Being true to their principles, there never was an ICO for POLY tokens.
Learn more: Beginners Guide to Crypto Airdrops
What are ERC1400 tokens?
It’s noteworthy that Polymath has actually introduced a new ERC1400 standard to the Ethereum ecosystem in 2018, which builds off of the ST20 standard.
This was part of the effort to standardise security tokens across all Ethereum applications. Apart from Polymath, other networks have their own standard. For example, the Harbor platform gave rise to the R-Token.
With the new ERC1400 standard, the Ethereum community can create security tokens that will always enforce the involvement of securities regulators as part of the requirement for token creation. Polymath still uses the name “ST20”, but in reality, the tokens were made as a ERC1400 token (they’re just different terminologies of the same object).
Why would a company issue security tokens?
ICO is actually an attractive way for projects to raise funds quickly, and reach a wider population of investors. Used with care, ICO is the best method for blockchain projects to gain market traction and to accelerate their growth.
Because monetary value is attached to the ICO token at launch, investors are more likely to value them for speculative trades. In fact, ICO tokens that have been sold by legitimate projects have seen a meteoric rise in the market, more often than not.
The problem is that not all projects are legitimate, and ICO investors can fall for exit scams, where the ICO issuer simply ran off with raised funds, rendering the tokens worthless. In the eyes of regulators, ICOs are regarded as illegitimate ways for businesses and other legal entities to raise funds, even if the ICO is not a scam.
One example is the US Securities and Exchange Commission lawsuit against Ripple Labs. The basis of the lawsuit is that XRP coins are being regarded as unregistered securities, and XRP qualifies as a security according to the Howey Test.
There are still debates over whether the Howey Test should apply to crypto assets. But most companies would rather not spend millions of dollars to try to prove the SEC wrong in a legal battle.
Bringing smart contracts to the human world
To bring the best of both the crypto and regulated world, Polymath ingeniously designed a way to use smart contracts in a legal setting. This means a Polymath’s security tokens’ legitimacy is not only backed by hard computer logic, but also by the seal of legal approval.
Companies that wish to sell equities, for example, must work with lawyers (backed by the rule of law) to verify the company’s financial condition and to register with the regulators. On the other hand, smart contracts work at the transactional level.
Backed by the immutable law of code, transactions of shares, sales revenue from an IPO, dividends, and trading at the secondary market can be done efficiently, and with few, if any, intermediaries.
However, it is important to note that the securities market is a regulated market, and a regulated broker can still send a signal to smart contracts to control trading activities, for example, to halt or temporarily suspend trading, when the situation calls for it.
What does Polymath offer to businesses?
As a company, Polymath offers white label security token creation services, where Polymath’s developers help companies create crypto assets on their behalf. Of course, as Polymath is an open-source software, any entity can create their own tokens without the white label service.
Token Studio is one of Polymath’s service that is described as “a self-service application that allows users to create, issue, and manage security tokens through a simple, intuitive interface.” Polymath is a full-stack platform, and allows developers with little technical know-how of blockchain technology to configure the rules and boundaries of the token to be issued.
Polymath Service Provider Marketplace is a marketplace where companies, legal services, broker-dealers, KYC/AML providers, and custodians meet and offer services for POLY tokens. These are the real-world regulated entities that will guide the securities issuer through the IPO (or other offerings) process.
What is the future of Polymath?
Taking a look at the Polymath Roadmap, the long-anticipated Polymesh blockchain network has finally been launched in a timely manner, on 21 September 2021. The Polymesh network is Polymath’s standalone blockchain network that is purpose-built to accommodate smart contracts and the transaction history of all the issued security tokens.
This is not surprising, as Ethereum is a general-purpose blockchain, where network activities from various decentralised services could compete for computational resources.
This results in high network fees that are not ideal for businesses, especially those that are sensitive to small price changes (i.e. brokers and exchanges).
The Polymesh blockchain further adds a layer to ensure regulatory compliance. Trading securities could only happen through approved and regulated brokers, so there is an element of centralised control in a decentralised network.
However, it also offers additional benefits such as confidentiality, KYC/AML-focus, decentralised governance, and a flexible framework that can be adopted across all jurisdictions.
Now that you have a sense of what Polymath (POLY) is, what are some key takeaways?
Polymath is a project with real-world value. Many blockchain-based projects sound appealing and have a high number of users, but many struggle to connect with the regulated world.
Despite seeing a few companies experiencing setbacks in a legal battle with securities regulators, companies are still looking forward to using services that are compliant.
The security token market is rapidly expanding. A report suggests that the market will expand to $1.5 trillion in Europe alone by 2024. It will become a huge market that cannot be ignored, but there is still time before then.
If you are feeling confident about Polymath, check out today’s POLY price on Easy Crypto!
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Disclaimer: Information is current as at the date of publication. This is general information only and is not intended to be advice. Crypto is volatile, carries risk and the value can go up and down. Past performance is not an indicator of future returns. Please do your own research.
Last updated August 30, 2022