By
Mayowa Adebajo
December 6th, 2023
Security token platform Polymath has teamed up with Loopring to trial peer-to-peer trading of security tokens on a decentralized exchange.
It seems that this Security Token Platform decided to upgrade their existing capital markets infrastructure in order to take advantage of blockchain technology’s benefits.
In order to make this upgrade possible, they said that they are aware that there are needs to be a standard for security tokens that utilizes these benefits while satisfying regulations.
They wrote:
“With a standard in place, security token issuers, investors, exchanges, wallets, custody providers, and regulators can become comfortable with this technology, interoperability becomes easier, and adoption can be widespread. Similar to how the ERC-20 standard enabled the boom in utility tokens on the Ethereum blockchain, there needs to be a standard for security tokens.”
The standard they have built at Polymath is ST-20. ST-20 is an extension of ERC-20 that introduces the ability to restrict transfers of blockchain tokens. ERC-20 tokens do not have any transfer restrictions and therefore can be freely traded by anyone.
When dealing with securities, all securities holders must be KYC/AML verified, and there are many additional restrictions on the distribution and trading of securities. ST-20 is the solution to this problem. It allows security token issuers to maintain regulatory compliance through transfer restrictions.
It is also backward compatible with ERC-20 making it interoperable with much of the existing blockchain infrastructure available today.
Certain Criteria Have to Be Met
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. Polymath said:
“They can only be held and traded if certain criteria are met.”
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 and an unauthorized one failing to transfer.
Polymath vice president for marketing Graeme Moore said 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.”
Polymath also explains that, whenever a trade is attempted, the token asks for external validation from what is referred to as its transfer manager module.
If this module goes on to validate the transaction, the STO is added to a whitelist to see whether or not the buyer/seller are allowed to complete a trade of this kind of token. This can only be executed if there is an affirmative from the manager module.
Moore concludes:
“This is how tokens are able to maintain compliance in the secondary market throughout the entire life-cycle of the token.”
Adam Dossa, the director of technology for Polymath said that 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.
Bear in mind that in January this year, Polymath announced that they will be locking up around $9 million worth of its tokens for the next five years. This means that up to 75 million of its POLY tokens, which is 7.5% of the total supply, will be unavailable to issuers for the foreseeable future.
Also, in June last year, the leading trading platform for alternative asset, OpenFinance Network (OFN), has reached an agreement with Polymath, according to which the Polymath-powered security tokens will soon be added to the OFN’s offerings.
* We’ve created most comprehensive guide, which will help you figure out what STO is, how it works, and what’s hidden behind this industry’s disrupter. You can also check the latest Security Token Offerings (STOs) in Coinspeaker’s STO Calendar.