ICOs have become both incredibly attractive and incredibly risky.
While early investors in new blockchain projects have the opportunity to see their investments increase by 100% or even 10,000%, they have an equal opportunity to see their investments go to $0 when the project dies, or even worse the developers simply disappear with the ICO funds.
Let’s be honest, with roughly half of all the 2017 ICOs already failures, this is a pretty risky space.
There are also the legal ramifications to consider. Many of the current ICOs are in violation of U.S. securities laws in one way or another, and while they might not be regulated now, if they do become regulated this could pose a definite long-term risk.
Possibly worst of all, they threaten to bring more scrutiny to cryptocurrencies from government agencies and regulators.
Polymath is looking to be the cure to the ICO sickness. It was developed to help issue securities tokens in a safe and blockchain regulated manner. And they’ll do so while also providing incentives to bring new financial products to market on the blockchain, while also keeping regulators happy and at bay.
As an additional security measure, only verified buyers will be able to purchase or trade POLY coins.
It seems like an ideal scenario. Companies get easy access to capital, there’s increased transparency, no need for onerous regulations and paperwork, increased liquidity, greater visibility, and an incentive to create financial products.
Let’s take a deeper look and see if Polymath really will be good for cryptocurrencies, or if there’s a fatal flaw in the plan to created a securities blockchain.
Image via polymath.network
Polymath came to my attention on the recommendation of a friend who said I should check it out. He knew I had recently been studying Ethereum smart contracts. These smart contracts can be used to create an escrow, allowing added trust, fluidity and security to financial transactions.
This is a good thing, but too many new ERC-20 tokens are scammy or fraudulent, and this has increased attention on the space, but in a negative way. When ICOs raised just $300 million they remained off the radar. But when they raise in excess of $3 billion (and nearly $7 billion already in 2018) regulators are going to notice. Especially when many of these ICOs may already be breaking securities laws.
The beginning of May 2018 saw rumors of the SEC looking into Ethereum as a security, although there was no truth to the rumor, and in February 2018 the International Monetary Fund chief Christine Lagarde said cryptocurrency regulation is “inevitable.”
All of this had me searching on the growing threat of regulation, which led to coins which encourage transparency, and Polymath kept coming up as a security token that would increase transparency and avoid government regulation for digital securities projects.
Polymath is actually trying to do for security tokens what Ethereum did for ICOs. They’ve even created a standard already – the ST20 standard – for these new securities tokens.
What is Polymath?
Bitcoin, Ethereum and most cryptocurrencies are application or utility tokens on unregulated, decentralized networks. Security tokens, which make up a miniscule portion of cryptocurrency market cap, are similar to traditional assets like stocks or bonds, which are typically regulated.
While the securities token market is currently very small, Polymath aims to flip that statistic on its head, making securities tokens more than 10x the size of the app token market. There are several reasons they believe that this can happen, including:
- Security tokens are more secure
- Security tokens will increase liquidity
- Their ST20 standard provides nearly instantaneous transactions
- And there will be a 24/7 low fee trading environment.
The Polymath team seeks to garner acceptance for security tokens through the use of smart contracts to apply restrictions from the ground up, rather than having them imposed after the fact with a top-down regulatory enforcement model.
Polymath Seeks a New Model
Image via polymath.network
Traditionally, financial markets are overseen by a central agency who provides regulations and enforcement of non-compliance. This is how stock, bond and commodities markets work today.
The regulatory agencies create laws and regulations that get pushed down to all the investors and companies involved in listing or trading, and they all have to follow these regulations or get banned from the markets, or worse, face legal actions.
That’s exactly the type of regulation that cryptocurrency markets will get if an alternative isn’t found.
Polymath seeks to turn that process upside down by involving government officials and attorneys at the beginning of the token creation process.
If this is set-up properly it could do away with the need for a regulatory body to get involved later in the process. It could even create a more legitimate blockchain based market that will reach mainstream faster than following the traditional route.
Under this set-up any new security tokens issued would be regulatory compliant right from their issuance.
Checks and Balances
This process also assumes some checks and balances would be rolled up into process. One such would be the use of a “template” for token creation, and all new security tokens would have to adhere to this template.
This would allow each token to have its own transparency and history, allowing investors to get full information about the token before investing. And since it all occurs on the blockchain it will be transparent and do away with the need for multiple unreliable channels to disseminate information.
There would be two very positive outcomes from this.
- It would help police any bad actors.
- It would allow investment rules to be added for individual security tokens.
Currently there is something known as an Accredited Investor classification that the SEC uses to restrict the purchase of certain assets and asset classes. The idea behind this is that those who receive Accredited Investor classification are more sophisticated investors and less likely to fall for scams. They are also more able to assess risk and take on a high-risk high-return investment.
By using this model in the security token market the same outcome can be achieved, but without the need for the SEC and regulations.
How Does Polymath Work?
Polymath will use the POLY token to run the entire network, and will incentivize developers and lawyers to participate by awarding them POLY. Those issuing assets on the blockchain, and those investing in the assets will pay fees in POLY to keep the network running smoothly.
With templates in place, an issuer can create their own security token quickly and easily through the use of smart contracts and a Create a Security Token wizard. This is already being tested and you can try it out for yourself at the Polymath website.
There are 29 fields that ask for basic company information, the type of investors you’re looking for, the location of investors, and whether investors must be accredited among other things.
Once the form is filled in completely you can submit it and it is reviewed by Polymath Legal Delegates. The Legal Delegates will look for regulatory compliance, and can make suggestions for which security token template would be a best fit.
Image Source: Polymath
The system brings together Protocol, Legal, Application, and Exchange layers, thus increasing compliance, transparency, and ultimately liquidity.
Polymath Seeing the Future
All of this becomes important now because it’s only a matter of time before our traditional securities end up on the blockchain. And while there are some downsides, the security, efficiency and transparency far outweigh these.
There are other blockchains looking at a solution for this, but none is taking the big picture approach that Polymath has taken. They are looking to involve not just the public, but also venture capital funds, private equity, and even derivatives in one platform that solves legal compliance, security, decentralization and liquidity issues.
And surprisingly, liquidity might just be the key.
Image Source: Polymath Deck
Current exchanges remain terrified of giving away too much information about new tokens that could cause increased regulatory investigations. This keeps ICOs in the potentially illegitimate category, and limits liquidity as investors remain hesitant to invest.
The Polymath solution makes for a regulatory friendly market, and removes the primary roadblock to liquidity. This should serve to help an active community of investors from all areas of finance grow in an organic fashion. If this proves true, Polymath will quickly grow to be not only the first security token exchange, but also the biggest and most developed by far. They would have an immense first mover advantage.
While this all sounds wonderful, some issues remain, although Polymath does seem to be working their way through them.
The SEC is correct in at least one huge risk with ICOs. Many issues are complicated by international trading, and a borderless, anonymous and opaque market only amplifies these issues. Consider the comments you see on Facebook posts. They can be funny, and even inflammatory, but there are no ramifications to them. And if your money were tied to them they might not be so funny anymore.
The SEC doesn’t want to get too caught up in cryptocurrencies yet, and this is why they’ve largely taken a “you’re on your own, so be careful” approach to the markets. This can’t last forever and already its changing in some corners of the world.
For example, Gibraltar recently announced the world’s first ICO regulations aimed at protecting their citizens from fraudulent ICOs. They are looking to require ICO projects to provide “adequate, accurate and balanced information to anyone buying tokens.” And the catalyst was the explosion of ICO funding in 2017.
The Polymath version of security tokens would already provide much of the information Gibraltar is seeking with its regulations, meaning with security tokens the regulations wouldn’t be necessary in the first place.
Image Source: Polymath Deck
When released earlier this year as an airdrop of 240 million coins, Polymath was priced at $0.79 a token, but quickly shot as high as $1.64 a token.
It retreated from those heights, no doubt in part due to the bear market across all cryptocurrencies in the first quarter of 2018. As of early May 2018 it trades around $0.77 a token, up around 20% against Bitcoin since the cryptocurrency recovery began.
Polymath also has several partnerships already working, as well as one with tZero, a subsidiary of Overstock. And despite being a relative newcomer there are more than 45,000 Telegram members, 25,000 Twitter followers, and 3,500 active Redditors all following the progress of Polymath.
One reason for the optimism is the CEO of Polymath, Trevor Koverko, who has been in the cryptocurrency space since early days and who was instrumental in bringing Bitcoin, Ethereum and ShapeShift to market.
Another reason is that users see the need for a transparent security token that will protect against anonymous and volatile ICO markets, and potentially negate the need for heavy-handed top-down regulations.
Sound good so far? Let’s see where to get Polymath.
How and Where to Buy Polymath
While it isn’t possible to buy POLY with fiat currencies yet, you can buy it from several large exchanges with Bitcoin. So, your first step is to get some Bitcoin if you don’t already have some. Once that’s done you can buy POLY from Bittrex, Upbit and KuCoin, among other exchanges.
Once you have POLY you can store it in any ERC-20 compliant wallet, such as MyEtherWallet or MetaMask.
The blockchain is here, and here to stay, and given the characteristics it has, it’s nearly impossible to imagine that our securities and assets won’t soon be on a blockchain. It’s just the most efficient and transparent method.
Add to that the massive potential that ICOs are showing for raising capital and it’s nearly a foregone conclusion.
However, if someone doesn’t develop an alternative, and soon, governments are also certain to step in to regulate these markets, in fact some have already begun. With so much capital at risk, and security laws being broken already by some ICOs, it’s almost surprising we haven’t already seen regulations popping up like mushrooms after a spring rain.
The solution is in front of us though in the form of the Polymask Network Security Token. Obviously Polymath is very new and untested, but it’s also off to a great start, has a solid team behind it, and has a working product. Once it goes live things could get very interesting indeed.
All Images via polymath.network