The first form of crowd-funding for blockchain platforms was the ICO, so far raising over $20 billion in its two-year history. As interest in utility tokens wanes and regulators push for more accountability, Polymath is introducing the next step: security token offerings. Polymath is a securities platform that enables participants to invest and create financial products transparently on the blockchain.
Follow this deep dive to understand how the Polymath platform is opening the floodgates for security token offerings and how this will usher in a new wave of interest to the cryptocurrency market.
The Difference Between Security Tokens and Utility Tokens
Utility tokens offer participants access to a network, service, or platform. Utility tokens make up the overwhelming majority of use cases in the current crypto-ecosystem.
These tokens don’t give participants rights or ownership in a company, and they don’t offer dividend payouts. These tokens are akin to a subscription and are exempt from the Securities Act of 1933, given that they don’t constitute an investment contract.
In contrast to utility tokens, security tokens give participants voting rights and part ownership of a company or product. Securities offer dividend payouts and backed by tangible assets, profits, and revenue of the company.
Security tokens act as a claim to the wealth generated by a company or represent an equity stake in a business. Furthermore, these tokens are governed strictly by securities laws and organizations such as the SEC.
Opening The Door to a Multi-Trillion Dollar Market
Polymath aims to open a whole new market with security tokens, similarly how Ethereum opened the doors for utility tokens and ICOs. By creating a secure platform that lowers the barrier to enter, Polychain is building a marketplace for token creators and investors to connect via security token offerings.
Above all, as the traditional multi-trillion dollar securities industry moves into the blockchain space, Polymath’s platform acts as the bridge to tokenize asset-ownership.
The native coin that powers the Polychain network is POLY. The ERC-20 standard token is the underlying economic unit of the system. Although the Polymath platform enables users to create and trade securities tokens, the POLY token acts as a utility token.
Issuers of security tokens offer legal delegates and developers bounties in POLY tokens. Legal delegates provide services to keep the STO in regulatory compliance according to the given jurisdictions’ laws. The higher the complexity of the security offering, the higher the bounty will be. As bounties of POLY grow, more delegates and developers will bid to win the contract.
Developers earn POLY by creating smart contracts for STOs. These tokens freeze for three months after the STO ends to incentivize developers. As STOs become widely popularized, large amounts of POLY tokens will be locked away in smart contracts.
The Polymath network requires KYC providers to pay a fee in POLY. These providers work with issuers to ensure individuals that make a purchase have the legal right under their respective laws. KYC providers verify all investors and charge a fee in POLY to further incentivize their work.
Investors may use POLY to pay for security tokens. Once a verified investor acquires security tokens, they’re eligible to trade on a supported exchange. Each security token is embedded with the investor’s information and bound to their specific Ethereum address to impede fraudulent activity.
Lastly, legal delegates earn POLY by bidding for security token issuance contracts and by taking responsibility for the issuance to guarantee compliance.
How POLY Will Satisfy Regulatory Compliance
The new STO approach will disappoint many retail investors due to their exclusion. Whereas many investors have been easily able to purchase tokens in ICOs without documentation, the new STO model will require strict compliance or even proof of accreditation.
STO investors will need to undergo verification by a KYC provider in any security offering they participate in. Each STO may implement their specific requirements regarding who can and can’t attend. This is because the company is legally at stake to guarantee authorities that they distribute shares to only those that they allow to join.
Currently, the majority of crypto exchanges don’t list security tokens to avoid regulatory enforcement. As a result, it’s uncommon to see a security token listing on a large exchange. How will issuer’s protect their company from regulators if their security tokens enter into the decentralized marketplace where anyone can trade?
Polymath came up with the solution to bake-in the necessary code that enables companies to take control of their equity issuance. This programmable code means that the ST20 token is self-regulating. As a result, this self-regulation makes it impossible for those who don’t meet the requirements to trade or buy.
Security tokens and STOs offer much more then ICOs because they enable participants to own part of a company, asset, or commodity. They serve as fractional ownership which opens a new era of participation on the blockchain. The value from the securities industry eclipses that of the total cryptocurrency market capitalization many times over. We believe that our readers should pay close attention to Polymath and the upcoming trend of security tokens.