Security token platform Polymath has teamed up with Loopring to trial peer-to-peer trading of security tokens on a decentralized exchange.

Revealing the news exclusively to CoinDesk on Wednesday, Polymath said that the “successful” tests – which used smart contracts on Loopring’s DEX protocol – demonstrated that only authorized trades of ST-20 security tokens were able to execute, while unauthorized trades could not.

The ST-20 security token standard created by Polymath is an extension of the more generalized ERC-1400 standard that introduces the ability to restrict transfers of blockchain tokens. “They can only be held and traded if certain criteria are met,” Polymath said.

Giving the details of the test, Polymath said that it traded a cryptocurrency called “wrapped ETH” with an ST-20 token named Cammazol, with an authorized transfer for the token succeeding (see it here) and an unauthorized one failing to transfer (see it here).

Polymath vice president for marketing Graeme Moore told CoinDesk that the two firms carried out the tests to demonstrate that security tokens can be traded in a compliant manner, even on decentralized exchanges.

Moore said:

“What we are showcasing here is that decentralized exchanges and security token issuers have the ability to maintain compliance through the standardized protocols that Polymath and others have built. And, in fact, security tokens make it easier for issuers to follow regulations, when compared with the legacy capital markets system using paper share certificates.”

Detailing how it works, Polymath said that every time a trade is attempted, the token calls its transfer manager module and effectively asks, “Can this trade be executed?” The transfer manager then checks a whitelist (controlled by the token issuer) to see if the buyer and the seller are allowed to trade the token. Only if the answer is yes is the trade executed.

“This is how tokens are able to maintain compliance in the secondary market throughout the entire life-cycle of the token,” Moore said.

“Loopring’s focus on user experience with their protocol was a great match for Polymath powered ST20 tokens which support an enhanced feature set on top of ERC20 to allow transfers to be fully validated before execution,” Adam Dossa, director of technology at Polymath, told CoinDesk.

Polymath image via CoinDesk archives