As a few of my blog posts this semester have focused on blockchain capital raising and security tokens, I’ve decided to go deeper into this topic and explore Polymath. Polymath’s basic premise is to be a platform for creating security tokens, which effectively serve as legally compliant tokens used in raising capital. The offerings of these tokens, known as STOs, are similar to ICOs however are known to be more secure due a KYC protocol and SEC compliance. Polymath’s long term vision is a world in which traditional finance no longer exists; shareholders become tokenholders and all securities are on the blockchain. This idea is centered around the security and speed that blockchain could provide to traditional financing, although it is certainly ambitious and would take centuries to happen.

Polymath is on the Ethereum blockchain, and uses smart contracts to uphold the regulatory structure required for security tokens. It allows any company to issues these tokens whose value is tied to the performance of the company, quite similar to how a traditional security works. As the ERC-20 token was the building block in Ethereum during the ICO boom, Polymath created their own new standard token for STOs called the ST-20. While based on the ERC-20 token, the ST-20 has a feature that allows for the restriction of users, this enforcing the whitelist. This is a critical feature because it prevents trading by random users. For the token to be considered a security, it must comply with KYC regulations to ensure that holders of the security are verified. A potential investor in one of Polymath’s security token sales would have to register with one of the KYC providers within Polymath’s network and then send some POLY tokens as an escrow payment until they are a verified investor in the specific new security token.

This development has potential to have a serious impact on both the blockchain and finance industries for a variety of reasons. All of the concerns and uncertainties around the security and integrity of ICOs are largely assuaged thanks to the legitimate regulation surrounding securities. Having a legitimate token market that is fully compliant with the SEC will create an investor base equally as powerful as the ones surrounding US equity and debt now. Polymath’s goal of completely replacing those markets is far-fetched in my opinion, however there is significant potential in the fact that putting a capital raising market on the blockchain opens doors to far more buyers than those in the US capital markets. Once STOs are user-friendly to investors (they may already be) and investors become comfortable investing in such tokens, there is no reason Polymath’s model can’t acquire a significant portion of a global capital market worth several quadrillion dollars.