Trevor Koverko, the founder of the Polymath Network, a decentralized protocol for raising capital and creating security tokens, has explained what the limitations are of Ethereum’s ERC-20 compliant tokens.
According to Polymath Network’s Crunchbase profile, the protocol’s developers have launched the Security Token Standard, ERC-1400, which “embeds regulatory requirements into the tokens themselves.” This allows the protocol to “restrict trading to verified participants only.”
The Polymath Network has also been designed to “simplify the complex technical challenges of creating a security,” the protocol’s developers note.
In an exclusive interview with Crypto Insider, Koverko stated that “there is nothing in the ERC-20 token standard that deals with transfer restrictions, or securities functionality. So, if a security issuer distributes ERC-20 tokens to its investors, there is no way to restrict who can hold that token.”
ST-20: Controlling Transfer Restrictions, Issuing Dividend Payments
He added: “This is not acceptable from a regulatory standpoint. That is why we created ST-20; a new standard that allows the issuer to control transfer restrictions, and perform other functionality such as dividend payments.”
In response to a question about why Polymath has placed a lot of emphasis on regulatory processes, including know-your-customer (KYC) / anti-money laundering (AML) checks, Koverko remarked: “We are focused on building a more efficient and transparent financial system for the creation, management, and trading of securities.”
A Massive, Global Financial System Shouldn’t Break Securities Laws
He went on to explain: “We do not foresee a massive, global, widely used financial system that continuously breaks securities laws, and are therefore building this solution with existing laws and regulations in mind. Decentralized does not mean illegal. Decentralized does not mean every person on Earth can always participate in every single function. For us, decentralized means that what we are building can exist outside of Polymath the entity, and can last until the end of time, even if Polymath does not.”
Difference Between STOs And ICOs
Commenting on how security token offerings (STOs) are different from initial coin offerings (ICOs), and the unique role that Polymath has in this regard, Koverko noted: “STOs and ICOs are different in almost every single way. They are similar in that STOs and ICOs both utilize blockchain technology because it is a faster, more transparent, and more efficient tool for capital formation and record keeping, providing the additional benefits of programmability.”
ICOs Sell Tokens That Don’t Have A Claim To Anything
He also mentioned: “However, that is where the similarities end. ICOs represent an entity selling a token that does not have a claim to anything, whereas in an STO, the security token being offered for sale is a regulated, financial instrument. These security tokens are used to represent things like equity in a company; shares in a fund; ownership of a fixed asset; corporate bonds; etc.”
Elaborating on how the security token creation network manages transactions in a compliant manner, Koverko said: “The Polymath platform makes it easy to create and manage security tokens, where the security tokens have built-in transfer restrictions. Transfer restrictions are a necessary feature in the world of regulated financial instruments, and we’ve built an easy-to-use application that allows security issuers to remain in complete control of who can hold their securities at all times.”
When asked why Polymath has partnered with companies including BitGo, PrimeTrust, and tZero, Koverko stated: “We have close relationships with trading venues like tZero and OpenFinance, because we want the tokens created through Polymath to have a path to liquidity in secondary markets. The great thing about tokens created through Polymath is that they are created through a standardized process.”
Working Closely With BitGo, PrimeTrust
He added: “Therefore, once an exchange does their technical due diligence on one token created through Polymath, they should be comfortable with all tokens created through Polymath (on a technical level). We are also working closely with custodial agents such as BitGo and PrimeTrust that can provide an extra level of security for issuers. We have a number of KYC/AML partners as well.”
Koverko continued: “Many companies reach out to tokenize. Given that it’s such a new frontier, we help them through any technical issues they may encounter. We’re excited about making it easy for ALL businesses to create security tokens using the Polymath Token Studio in a completely self-serve manner. To date, there have been 111 tokens created on the platform”
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