- Many companies launch utility tokens due to lack of clear regulations in regards to security tokens. However relatively large number of those tokens don’t make any sense and at best their utility functions are very weak.
- Utility tokens are much easier to launch than security tokens because they are not regulated. ICO company can do online marketing and offer their tokens to non-accredited investors and retail investors. They do not have to incur the heavy expenses typically associated with regulatory compliance.
- But this is all changing now. Year 2018 will be the year of security tokens.
Since the conference took place in the Bahamas, it didn’t take a lot of convincing to decide to go there.
In the end, the trip turned out to be well worth it and the rewards easily compensated for my red light ticket on my way to the airport and the loss of my winter jacket which I left in the taxicab in Nassau.
I guess my subconscious mind didn’t think I needed to deal with an unnecessary burden like a winter jacket in a place where the summer never ends.
Now let’s come to the point, as you are probably not that interested in my winter jacket anyway.
Almost everybody I met at the conference asked "what is this ST-20 security token?" and "how it will make it easier to finally safely and legally offer crypto-securities on the blockchain?".
I had an opportunity to study the app which can be found on the public GitHub and understand its mechanism before the conference.
Currently, if a startup wants to offer a security token, they have to figure out how they can do it within the existing legal framework in their jurisdiction, (mostly offering their tokens to accredited investors) and going through lots of paperwork, not to mention legal and third parties fees. Also — no crypto exchange today will list security tokens thus causing total lack of liquidity. One might want to list their tokens on exchanges like the NYSE or TSX, but then this becomes not much different than offering regular securities and then you will be going through the same hurdles as everybody else in the non-crypto world.
So what is the token worth which nobody will trade or will it take lots of time and upfront capital to make the offering?
The Polymath accepts the challenge of facilitating issuance of security tokens through appropriate blockchain driven platform and high level of alliances and partnerships with proper technology partners and influenceres.
Polymath CEO Trevor Koverko is definitely on the right track, and I have to give him full credit for a vision that is so brilliant, elegant and so obvious that many experienced entrepreneurs will be shaking their heads not seeing that before.
The question becomes how one convinces SEC to create a legal framework which will finally regulate the sale of securities on the blockchain and make money along the way?
What Trevor and his team have proposed is a platform which will create interfaces through software for all typically involved parties in the steps of running ICO. And no this is not just an ICO lunch token platform.
This is a system which offers 4 categories of participants and ensures that final token is a security token in the jurisdiction where it is offered.
You can see full demo at this url.
Issuers — is the party offering the token
Providers — is the party offering KYC service
Investors — are purchasers of tokens
Delegates — legal team which can offer their legal services
To get more specif about inner working visit their white paper
Now how this approach is going to help speed up mass adoption of this platform by the masses you may ask?
The answer is Incentives.
Everyone in this picture will be making money, possibly only investors occasionally will be losing money but this is not a new story.
The main strength of Polymath concept are two categories which existing ICO platforms have not fully automated yet.
These are KYC Providers and Delgates. And I want to stress that Delegates are the key here as we already have multiple KYC providers which are offering APIs to hook them up with the token offering systems.
Nobody has automated even close the process of offering legal advice and create the mechanisms to be involved by any legal adviser in any possible jurisdiction.
Now legal professionals will have the ability to offer their services to token issuers in the automated way and be rewarded through POLY, the native currency of Polymath. (Btw. POLY is a utility token by itself) Also Issuers, will have more than one option of legal advice available and they will be able to chose from those who are most established and knowledgeable in this space.
So as soon as an issuer specifies jurisdiction in which token will be offered and its parameters, legal professional can offer legal template and specify cost of it.
The issuer might get multiple template offers and choose the one which they believe is most appropriate for them and or most cost effective.
If you still don’t see how this will speed up mas adoption and speed up creation of legal framework, let me help you to see that.
Delegates (legal professionals) are the people who are the ones understanding legal implications of issuing security tokens in the jurisdiction where they are practicing.
They will now suddenly have an opportunity to offer their services to large numbers of issuers who will be attracted to the new platform. The templates they create will be appropriate for multiple issuers, and they will receive an income, each time someone accepts their service.
Incidentally several of the same legal professionals are also quite often involved in consulting proposals changing laws in jurisdictions where they reside.
So the same people will be now involved in providing their service to token issuers and legislators. It will be in their interests to steer the legislators to embrace new technologies as fast as possible as this will be working in their favor.
If platform and technology is ready and big players believe that all is in place, the legislators will follow.
In short if you build it, they will come.
It is much like miners are attracted to offer their computer power to maintain blockchain consensus, all 4 parties will have incentives to be part of this system and each will feed another. Any bad apple will be quickly discovered and avoided.
The token itself will be only tradable between the parties who through KYC and legal framework found themselves in the white list of the ST-20 security token smart contract.
So here are the typical steps of issuing and offering of security token ST-20.
- Issuer defines parameter of their token.
- Delegate proposes legal framework.
- Issuer choose legal template.
- KYC providers formulates technical interface and smart contract based on the legal framework from 2) and makes it available to the Issuer.
- Issuer makes token offering.
- Investor browses offering and decides to invest in that offering.
- In the process of purchasing the token, investor is asked to fill out KYC questionnaire.
- KYC provider white-lists or declines white-listing of the investor.
- In case investor is whitelisted, he/she can purchase tokens and trade them with other whitelisted investors.
To prove that conversation about security tokens in the legal circles is heating up is the fact that on Feb. 6, the United States’ two major financial regulatory authorities — the SEC and the Commodity Futures Trading Commission (CFTC) — held a dedicated hearing on virtual currencies.
CFTC Chairman J. Christopher Giancarlo said in testimony prepared for the hearing:
We are entering a new digital era in world financial markets. As we saw with the development of the Internet, we cannot put the technology genie back in the bottle. Virtual currencies mark a paradigm shift in how we think about payments, traditional financial processes, and engaging in economic activity. Ignoring these developments will not make them go away, nor is it a responsible regulatory response.
So be ready for crypto securities to be available this year.