10 Comments

1. Thank you so much for this amazing post. I think it will help investors and lovers of crypto a long way in getting aware of what’s is going on in the cryptocurrency world. I think the polymath Partnership with tzero is a good one considering the experience of the polymath advisors, and they have been successful in this field ever since they are been around. 

   Reply

   • Hi Clement,

     t0 (“tZERO”), the blockchain focused Overstock.com subsidary announced January 11th, 2018 a partnership with security token specialists Polymath in an advisory capacity. Polymath will advise on the design, distribution and economic model of t0’s security token, to be issued with applicable securities laws. Proceeds from the upcoming t0 ICO, beginning February 16th and targeting accredited US investors, will help fund a regulated trading platform for security tokens.

     Trevor Koverko, CEO of Polymath, said in a statement, “tZERO is on the precipice of disrupting Wall Street as we know it. Our goals are similar—to create a thriving security token industry and allow companies and investors greater access, transparency and efficiency to an emerging token economy. We are excited to work with tZERO to provide ongoing consultation and support to the build out and distribution of the tZERO token, which will be a preferred equity token for tZERO.”

     Reply

2.  Security token launch pads like Polymath sounds like tzero might be trust worthy after all. Any company that takes a look at know your customer and anti laundering seems to be a company that is in it for the long haul. tzero might just be the crypto to take a better look at for investing.

   Reply

   • Hi Cathy,

     Polymath is a new protocol being developed to make it easier to create security tokens. Security tokens are just as they sound – it is a token which is a security. This is in contrast to utility tokens which is what practically all current ICOs are.

     A security token is designed to comply with a specified jurisdiction’s regulatory requirements for securities and KYC is baked into the token itself so that only whitelisted, authorized investors can hold the token. Unlike a utility token, security tokens are bought with the expectation of profit and are meant to work within the confines of the law for whatever region they are issued in.

     This is particularly timely as in the second half of 2017, we began seeing a global crackdown of ICOs, or utility tokens, all the way from strict governments like China to much looser regulatory environments like Switzerland. Couple that with an increased focus on ICOs by the SEC in the United States and we’re seeing a serious uptick in the number of entities interested in launching security tokens.

     This is where Polymath comes in. Polymath is a protocol designed to connect security token issuers, legal professionals, developers and investors on one platform so that both the supply side and demand-side is accounted for and to create a network effect that is unstoppable.

     Long-term, the vision for Polymath is to do more than just enable brand new security token issuances; In other words, Polymath wants to enable all current securities to move over to the blockchain as they view this as the ultimate future. As such, they claim the total addressable market is massive, in the trillions, and that Polymath could do for securities what Ethereum did for ICOs and utility tokens.

     That’s the pitch Polymath provides – now let’s talk about why I claim Polymath to be a “complete joke,” which admittedly is a bit harsh because I think there are legitimate people working there, but there are enough red flags that I don’t feel too uncomfortable making that statement.

     First and foremost, let’s talk about the CEO: Trevor Koverko. If there was ever an example of a figurehead, this guy is it. His sole purpose is to get the plankton excited (AKA us) and to raise capital from seed investors.

     You might be wondering what led to me this conclusion – he seems like a nice enough guy and he’s plenty charismatic.

     First, the guy is effectively a walking pitch deck. He almost never gives an answer that isn’t pre-constructed from the slides he presents on at multiple conferences. Here are just a FEW examples (trust me, there are many more) of him during an AMA where he probably would have just been better off presenting the Polymath pitch deck rather than fielding questions from an audience (clips are shown at this point in video).

     Now you could argue the guy is just prepared or he just has certain stories he likes to tell, that’s all and I should stop looking so much into it. But if you actually listen to all his talks in succession like I have, you’ll quickly realize he’s practically a cassette tape even in more casual conversations, at least when it comes to anything that’s material to Polymath. In other words, he hardly brings anything original to the table – and I heavily doubt he’s the brains behind this operation.

     He’s also the guy who says over and over and over again that one of the reasons that security tokens aren’t launched today is due to a lack of liquidity – no exchanges will list them so you effectively, in his words, become a “zombie coin.”
     Now a normal person would expect based off this statement that Polymath is aiming to provide a liquid platform where you could exchange these tokens easily, but nope – you’d be wrong – sort of at least.

     See, Polymath doesn’t want to have to deal with the legality concerns of becoming a broker dealer or a securities exchange itself, as they mention themselves in their whitepaper, so instead they want to outsource that risk to either:

     Other exchanges that partner with the platform, like T-Zero. Of course, those quote-on-quote “exchanges” also face the same problem of not wanting to be considered securities exchanges, so they then go and say that Polymath is the exchange.

     Decentralized exchanges

     What’s ironic about this is that the whole point of Polymath is to stop trying to find legal loopholes and to fit within the confines of the law. This is practically the mantra of their whitepaper, yet here they are trying to avoid being labeled a securities exchange because they know the SEC and most other regulatory agencies would shut that down the second it became serious.

     I would also like to note that Trevor himself claims that there are currently no exchanges that support securities tokens, as if Polymath will be the first even though they specifically state: “Polymath itself is not an exchange or a broker-dealer. It is a protocol that resides on top of Ethereum that allows issuers to restrict access to tokenized securities.”

     I would also like to note that in an earlier version of the investor deck, which Trevor graciously pointed out was the wrong deck while presenting on it, there was a slide that noted the ultimate goal for Polymath was to move to its own Proof-of-Stake blockchain and that the ERC20 POLY tokens initially issued would interact with this new chain. I haven’t seen this mentioned in their whitepaper or in any blog posts since, so I guess they just casually scrapped that idea unless any of you have any info that I happened to have missed.

     This is also kind of funny because one of Trevor’s favorite slides is the one where he shows how Ethereum started the utility token revolution, but Polymath has the potential to start the security token revolution with a total addressable market of $10 trillion by 2020. I guess Polymath will launch that revolution on top of Ethereum now rather than having its own blockchain like what appeared to be originally planned. Naturally you might wonder whether or not Polymath can scale on Ethereum, but perhaps there is a more important question you should be asking which is… Will it need to scale?

     For the total addressable market to be in the trillions, regular securities would have to move to the blockchain using Polymath which, if you recall from earlier, is Polymath’s long-term goal. Yet without Polymath being a registered securities exchange for these more traditional tokenized securities to trade on, do you really think the likes of the New York Stock Exchange is going to list these tokenized securities?

     And the answer of course … is no. There are far too many uncertainties as it relates to custodianship, security, governance, and the legality of such securities as dictated by the SEC. And for those who are shaking their head saying that the world is larger than the US, you’re going to find the same concerns are valid in almost any region in the world where securities are traded and regulated.

     Now you might argue that if all Polymath outsourced was the regulatory risk associated with becoming a securities exchange or broker-dealer, that’s really not all that bad. First I’d disagree with you because they did more than just outsource the risk – they also manipulated investors by representing themselves as a liquidity provider in their presentations and blogs when they really aren’t according to their lesser-read white paper.

     But even if you disregard that, the reality is they are outsourcing everything, even the most important portion of the network which is the legal professionals. The Polymath protocol is designed to match issuers with developers who can help them create a token … and legal delegates which can help have the token comply with a local jurisdiction’s regulatory framework for securities.

     Now Polymath argues that legal delegates will join the platform as they will be rewarded in POLY to create legitimate legal templates. The idea is that over time, different templates will be identified that work in different jurisdictions, therefore easing the security token creation process and rewarding legal delegates who create these templates.

     One huge assumption here is the notion that there will be legal delegates who actually know how to make a token compliant with securities laws in the first place (ESPECIALLY when you consider it’s through coding of all things) and, furthermore, who aren’t already occupied with another blockchain related company given the ridiculous demand for such lawyers.

     There’s an even worse concern than this though because the entire platform is based on an even larger assumption which is that you can actually create a security token without involving a much more sophisticated process with the SEC or relevant regulatory authority. In other words, it’s very unlikely at this stage that even the best lawyers could create a template that works consistently or even at all.

     Now Polymath’s big technical claim to fame is baking KYC into the tokens themselves, hence only allowing whitelisted Ethereum addresses with verified identities to participate in securities offerings. Of course, it’s worth noting they’ve also outsourced this responsibility to KYC providers as well.

     However, what I really want to note about this is that Trevor and Polymath consistently reiterate the fact that KYC will be integrated into the tokens as if this in of itself creates security tokens. Now obviously they don’t really believe that, given the discussion in their whitepaper about creating legal templates for offering security tokens, but it’s what they focus on in their blogs and conferences. Do you know why they focus on KYC?

     It’s because it’s what we all understand and are familiar with. We’ve heard KYC and AML many times as it is an important requirement for most exchanges – that familiarity makes us feel comfortable with the idea that KYC will go a long way to creating security tokens. Is it any surprise, then, that they also decided to name their token standards ST20, after ERC20? Again, it’s all about creating a feeling of familiarity which provides investors comfort.

     However, KYC being baked into the tokens really doesn’t do much aside from possibly limit who can hold the tokens to accredited investors only. This would be useful if the purpose of Polymath was to issue security-exempt tokens, but then it wouldn’t be too different from other ICOs which have attempted to satisfy regulation D or regulation A requirements. This is clearly not the focus of Polymath either given their goal of wanting to tokenize existing public securities which are obviously already registered.

     There are a dozen other red flags with Polymath as well. For example, Trevor constantly boasts about the size of Polymath’s Telegram which hit the 50k cap prior to Telegram boosting it to 75k. From my understanding, and I will preface this by saying I am by no means a Telegram expert, but I’m fairly certain to get all the info related to the airdrop, you had to sign up to their Telegram. In other words, people just signed up for free tokens so the growth wasn’t organic, yet Polymath talks about it all the time.

     Then you have the fact that the distribution of the tokens is … questionable to say the least. 1% is distributed out via the airdrop, with the remaining 99% being held by presale purchasers, founders, advisors or in “reserve” which I’m still not totally sure what that’s all about. Trevor has mentioned the reserve in passing a few times, but it’s generally obscure language so I’d love if anyone had any sources out there on what Polymath plans on doing with this overwhelmingly large portion of the supply.

     Moving on, Trevor has mentioned repeatedly how easy Polymath wants to make the process of creating a security token, which is complete stupidity as creating securities is a serious endeavor that shouldn’t be taken lightly or be easy to do. Seriously, some of the barriers that exist now are very welcome because it prevents complete boneheads from creating securities – a feature that clearly DOESN’T exist when it comes to creating utility tokens given the magnitude and volume of stupid ICOs.

     It’s also completely false because the process of creating a security will never be easy for as long as regulations exist, and Polymath has ZERO control over that. They make it sound like it will be easy to create legal templates for security tokens, but I guarantee you that this will NOT be the case… and yeah that’s right, I used the G word.

     There’s also some less significant warning signs like the fact that Tai Lopez (of all people) is going to be at their Polycon event in the Bahamas. Then there’s the fact that the project is supposedly just under a year old and really seems to have only ramped up conveniently after the global crackdown on ICOs last year. If you look at their team, it looks like they have far more in-house resources in management than they do in developers for example. These are all things that concern me, but by themselves might not be that substantial. It’s really only once you start adding it up with all the other factors that it becomes rather concerning.

     If you’ve survived to this point in the video, you might be wondering why in the world I’d ever buy Polymath and the answer is simple: It is brilliantly marketed and right on time. That’s it, that’s all there is to it. It will fool the plankton, it will fool the VCs, it will fool the angel investors, it will even fool many developers and lawyers because it all sounds incredible on paper. It’s not until you start delving into the reality that this pipeline dream falls apart, but fortunately the crypto space hasn’t grown smart enough yet to pick apart projects like this because it’s too focused on who’s who and very idealistic visions.

     The point is, this project will persuade many people – and what I like about it most is that it will even convince rich and powerful people … who are the ones that actually matter. This is the kind of project that gets posted on Reddit over & over for a month because quote: “The opportunity is massive and it will change a trillion-plus dollar industry.” This is the kind of project that stirs up community leaders and gets them excited because they all see the writing on the wall for ICOs and Polymath is right on cue. You don’t think that’s a coincidence do you?

     The management team at Polymath seems to know all the right people in all the right places, and they are working hard on using that network resource to belt out as many heavyweights as possible. Honestly I think this makes the quality of the project worse, not better, because it usually pulls projects into gridlock and dilutes the overall vision, but most crypto investors LOVE a team and advisor board with great resumes and Polymath delivers on that.

     They’re also utilizing their network to create as many partnerships as possible and if you are familiar with the previous altcoin boom, you know that the word “partnership” was enough to send any crypto flying the same way the word “blockchain” would send any company’s stock flying. It’s a common metric by crypto investors on the success of a project and Polymath can easily deliver on that front, especially given the quality of the partnerships rarely matter.

     The key to mitigating risk with a project like Polymath is to keep a close eye on their vesting schedule as detailed in their Github so you don’t get backhanded by supply surges when tokens are released. Furthermore, you generally want to limit your exposure to tokens that claim they’re the next revolution in xyz industry because that’s usually a sign of going to the moon … or much more frequently, complete and utter failure.

     I would also consider not allocating 100% of your desired position size all at once in a project like this because even if you miss out by not doing so, you’ll feel a lot better if it goes down and you can buy more rather than having to be stuck with expensive bags. Always remember the pain of a loss has twice the effect as the pleasure of a gain.

     Lastly, I want to briefly mention that at this time, there are limited options for where to get Polymath so if you don’t feel technically comfortable with joining a new exchange and the steps involved with securing your tokens, I would stay clear of this. Trust me on that.
     If you do plan on opening a gold IRA, don’t put too much of your money into it, especially if you’re nearing retirement age. Most experts recommend only having 10% or less of your retirement portfolio in gold to minimize the risk of losing your investment. It is worth the seeds you sow. Look at the top 10 Gold IRA options that are worth for the Gold IRA investment. These companies will definitely give you more than you invest in. http://bestiraoptions.com/

     Reply

3. What an extremely informative article. Why was the concept of the security tokens not heard of until recently? And how will the transitioning from ICO’S to STO’s change the way we sell and trade? The two projects sound like they have fantastic motivation and will hopefully prove how they will help the market as a whole.

   Reply

   • Hi Alisha,

     Thanks for your praise. ICO’s have been a new trend in the market and are gaining pace but are really beneficial. Security Tokens are the talk of the town. If you are into cryptocurrency, you must have been living under a rock if you haven’t heard talk of them in the last few months.

     But what are they are why should you be interested in them?

     I will attempt to explain the difference between traditional cryptocurrency tokens and security tokens in a brief and simple way as well as what I think security tokens bring to the market.

     Traditional Tokens

     Until recently, there have been Payment Tokens such as Bitcoin, Litecoin and Bitcoin Cash etc as well as Utility Tokens. Utility tokens are produced with the sole intent to provide access to the platform or service for which they are created. Their value is derived from the platform/service itself or their value on exchanges. With utility tokens, you the token holder play no active role in the company. You have no rights or right of reply. You merely own a token that will either increase or decrease in value over time. In fact, it is common practice for token holders to get banned from Telegram Groups and other social media platforms when questioning the project’s performance. In some cases, you could view it as buying a product from a shop that has no warranty and the worst customer service. Whilst the vast majority of projects that function using utility tokens are legitimate and above-board, there are many that taint the image for the rest.

     Security Tokens

     Tokenized securities merge the technological advantages of the block chain with the backing and safety that comes with traditional finance. They can be viewed as an investment contract. This combination goes a long way to meeting regulatory requirements to enable both retail and institutional investors to enter the crypto markets.

     Financial instruments such as Stocks, Bonds, Venture Capital, Private Equity, Pensions, Real Estate and others can be made available via the block chain through the use of security tokens. It is widely believed that bridging the gap between the finance and crypto markets will be a monumental moment for both markets and the future of investment in general.

     Prior to security tokens, when ICOs (Initial Coin Offerings) were the only options to get in at ground level, ‘some’ ICOs had a lack of transparency and accountability required by those willing to invest and many that did invest reported scams, financial losses and other unsavory experiences.

     SEC and Regulation

     The SEC (Securities and Exchange Commission) in the United States has made it illegal to invest in ICOs unless they are approved/accredited. Their view being that most utility tokens are securities that fall short of any regulatory compliance. This process of complying and becoming accredited by the SEC is complicated and expensive and has lead to most ICOs not bothering. The end result is that such a large market sector has been, and continues to be excluded from investing in new projects.

     In fact it doesn’t stop there. Since March 2018, the U.S. SEC has been looking to apply securities laws to all things crypto, from cryptocurrency exchanges to digital asset storage companies. By using the Howey Test as the benchmark to categorize cryptocurrencies, the SEC are able to question and subsequently judge a few factors including:

     • Does the transaction represent an investment contract?
     • Is the value of a cryptocurrency dependent upon other’s work?
     • Is the buyer investing in a speculative enterprise?
     • What voting rights does the token holder have?
     • What happens if tokens are stolen?

     If these or other questions from the Howey Test confirm to the SEC that the token is a security, it is expected that it should conform to SEC regulatory standards and regulations. The fact that they don’t renders the majority of tokens unlawful in the eyes of the SEC.

     The U.S aren’t the only country with such laws. Many other countries have imposed restrictions. It is however difficult for these to be imposed considering that the blockchain is decentralized and to a certain degree invisible to authorities. The restrictions do however, hinder market growth and potential investment and many investors are scared away.

     Token classes

     There are two distinctive classes of tokens:

     I) Utility tokens

     They serve as a (future) access to a product or service and can be best compared to a gift card or software license.

     II) Security tokens

     These tokens constitute an investment contract, where the main use-case, and the reason for the contributors to buy the tokens, is the anticipation of future profits in form of dividends, revenue share or (most commonly) price appreciation.

     Some token offerings are also structured as a donation (i.e. Tezos), whereby those who contribute bitcoin or ether in exchange for tokens are deemed to have charitably contributed to a foundation or non-profit entity. But it is unlikely that this structure is going to be a best-practice solution in the future as it doesn’t provide any legal protection on the investor’s side.

     Security or utility token?
     The SEC has its flexible test to determine when something qualifies as a security called the Howey Test (which was already established 1946). In a cryptocurrency environment, the Howey Test roughly boils down to two questions which both need to answered with “yes” for the token to qualify as a security.

     Is the token being sold as an investment?

     One needs to identify whether the token is desirable because buyers anticipate future profits or price appreciation or if the token is being bought because it provides some sort of use-value to the buyer. Therefore we need to look at the token as a black box, where money goes into them and out comes either more money or some sort of product/service.

     Is there a person upon whom investors rely?

     We need to check whether a network of people/entities creates the value of the token or if it’s a single entity or small group of entities. The latter can be compared with Amazon which is mostly responsible as a single entity / company for the product “cloud storage” to work. In contrast there exists decentralized cloud storage (i.e. our client Storj), which relies on many different parties to store files, check access permissions, etc.

     According to the two questions above, all tokens can be plotted on a graph, whereas tokens in the upper-right quadrant or close to it, have high chances qualifying as an security. It’s important to note that tokens can change their position on the graph over time. Especially when tokens are being sold prior to having a product / utility in place but develop this use-value at a later point. This actually applies to most pre-product ICO’s that are currently being launched, which might aim to achieve being a utility token but are in fact an investment contract during the time of issuance.

     Substance over form

     The truth may be that most token buyers are holding tokens as an investment, not because they intend to use them personally. While there are utility tokens that are successfully structured to have no investment characteristics, they are actually quite rare.

     This is because the SEC goes by the philosophy of “substance over form”, so the commission looks at tokens according to the way they are actually used rather than the way they were intended to be used. This might lead to many projects being classified as securities even though they initially setup their tokens as a utility, just because the economic reality is that the contributors invest primarily because of anticipation of profits.

     If a token has a significant utility in the operation of the application, it may be less likely to be considered a security (since this characteristic may help the token to fail the Howey test, as discussed above). But, the reality is that utility tokens can indeed be considered a security under the definitions set forth in Section 2(a)(1) of the Securities Act of 1933 (1933 Act) and Section 3(a)(1) of the Securities Exchange Act of 1934 (1934 Act). If this wouldn’t be the case, every investment contract could just escape securities law jurisdiction simply by building in a trivial utility to the token. Imagine a tokenized share of stock, except the token also enables you to redeem it for a cat GIF. Until the SEC delivers thorough guidance through, no one can say for certain that utility tokens are not securities.

     Benefits of a security token structure

     Issuing security tokens under regulatory frameworks such as Regulation D, Regulation S, Regulation A+, and Regulation Crowdfunding is significantly cheaper and faster than conducting an initial public offering structured as utility tokens, and it can significantly reduce legal risk.

     As the SEC ramps up investigations and enforcement actions, organizations that issue tokens in a compliant manner will have certainty that they will not suffer significant business interruptions from SEC enforcement actions and private litigation arising from unregistered securities offerings. Securities laws have been developed and continuously refined for decades. Security tokens would inherit a wealth of legal precedents that would illuminate token buyer rights, protections and expectations. Additionally, they would clarify duties and obligations of the issuer.

     If an organization acknowledges that its token is a security, then it can acknowledge it as an investment. The organization could provide token buyers with benefits like dividends, profit shares and voting rights which it would normally avoid if it wanted to avoid the security label. Its security token could still feature significant “utility” attributes; it could still be used in native transactions in an organization’s service or product. Moreover, the organization can be more transparent with buyers about token economics and how they intend to increase token value.

     Shortcomings of a security token structure

     Many of the organizations conducting an Initial Coin Offering (ICO) have been desperately trying to avoid having their tokens classified as securities. Mainly because a classification as a security automatically comes with many regulations and limitation on who can invest in these tokens and how they can be exchanged. Secondary trading and liquidity is greatly reduced for these kinds of tokens, as securities cannot be traded freely and are subject to many restrictions. This can limit or even destroy the network effects and the use of the tokens to build a widely adopted platform or protocol.

     Trading of security tokens

     The online retailer Overstock recently announced that its subsidiary tZERO will develop the first licensed security token trading platform. The tZERO tokens will be issued in accordance with SEC regulations, and Overstock CEO Patrick Byrne has stated that token holders will be entitled to quarterly dividends derived from the profits of the tZERO platform.

     The Resolution

     The more the crypto space can demonstrate its maturity and accountability, the more investment it will enjoy. From the retail to institutional investor, the possibilities are endless. Security tokens go some way to implementing the required regulatory compliance in some countries and in time it is envisaged that even the stringent requirements of the U.S SEC can be met. Security tokens will encourage mainstream adoption and remove the tarnished image that some ICOs have created in the past. Security tokens will also allow companies that may not have considered the block chain to tokenize their business and bring in additional investment.

     Whilst there cannot be any guarantees that all projects will be genuine and succeed, the fact the stringent set of regulations must be adhered to will hopefully weed out most of the risk. With the recent emergence of Security Token Issuance companies, we now have professional and trusted platforms all offering similar benefits. Their aim is to make security token investment easy and legitimate for all parties involved from developers to investors. REGAL ASSETS and Polymath are two such platforms with different agendas, both offering services to assist with the adoption of security tokens.

     REGAL ASSETS are building a complete platform — one stop shop for security tokens. Based in Lithuania and governed by Lithuanian law, they will operate within the legal frameworks of the European Union and will also be regulated and supervised by the Bank of Lithuania, which is under the control of the European Central Bank. Unlike Polymath who will be creating a ‘protocol’ to issue tokens, REGAL ASSETS are creating a securities exchange and payment system within their platform. They are building a complete platform whereas Polymath are creating a protocol. Polymath are concentrating their efforts on tokenizing large funds such as pension, venture capital and real estate whereas REGAL ASSETS are aiming to assist startups in becoming tokenized securities and tradable.

     REGAL ASSETS bring the following benefits for investors to the market:

     Overall Benefits

     • Full legal compliance
     • Infrastructure for launching an ICO
     • European e-money license
     • Built-in exchange
     • Active community

     Benefits for Projects

     • Fundraising without any legal or reputational risk
     • All-in-one package: saving time and costs
     • High-quality smart-contract development and auditing
     • Direct access to a broad investor pool
     • Instant Liquidity on a regulated exchange

     Benefits Token Buyers

     • Investor protection based on existing securities laws
     • Early bird investor bonuses
     • ICO filtering for scams and illegal setups
     • ICO crowd sourced due diligence and ratings
     • A single user-friendly interface
     • Secondary market with no delays and liquidity

     In Summary, security tokens show a lot of promise and should ultimately assist the block chain with self-regulation and mass adoption. Bridging the gap between finance and the block chain offers huge potential. The reduction of risk and associated scams will bring a new found confidence to those who have held off until now. Security Issuance companies will allow existing companies who may not have considered the block chain to tokenize parts of their business, thus bringing new options in cryptocurrency and the easy to use platforms with built in exchanges and active communities will be welcomed by all.

     If you do plan on opening a gold IRA, don’t put too much of your money into it, especially if you’re nearing retirement age. Most experts recommend only having 10% or less of your retirement portfolio in gold to minimize the risk of losing your investment. It is worth the seeds you sow. Look at the top 10 Gold IRA options that are worth for the Gold IRA investment. These companies will definitely give you more than you invest in. http://bestiraoptions.com/

     Reply

4. Hi! Thank you very much for this overview and the potential opportunities that are ahead. But there is one thing I will greatly appreciate and it’s that you have listed the pros and cons of Polymath and Harbor. There are some basic facts in that list that I truly ignored, such as David Sacks being the Founder and Chairman of Harbor.

   Reply

   • Hi Henry,
     There is a lot of momentum behind securities token platforms: new players focusing exclusively on this space, established cryptocurrency exchanges that are moving to become SEC regulated, and also traditional exchanges that are moving into the cryptocurrency space. In the following, we are covering a few promising competitors in the first two categories.

     Coinbase

     Coinbase acquired three SEC-regulated entities, namely Keystone Capital Corp., Venovate Marketplace, Inc., and Digital Wealth LLC., which will enable it to provide secondary trading of security tokens, pending approval by federal authorities. The acquired entities between them, hold a range of federal licenses authorizing them to operate as broker-dealers (BD), registered investment advisors (RIA), and alternative trading systems (ATS).

     Harbor

     Harbor has raised more than USD 40m to create a compliance protocol embedded in securities tokens. This includes a USD 28m strategic round in April led by Founders Fund and joined by Andreessen Horowitz, Pantera Capital, and more. With Harbor, a white list of eligible owners is established by an outside law firm that takes responsibility, and Harbor’s smart contracts refuse to process an illegal sale. Harbor effectively bakes securities law compliance like know-your-customer and anti-fraud/money-laundering into the tokens themselves so trades can happen instantaneously without legal assistance on every sale.

     Neufund

     Neufund claims to let investors buy rights to a company that can be enforced through courts. All firms that use the Neufund platform will be well-established and have functioning business models, promising the dawn of “an era of legal and safe ICOs. However, Neufund’s business model hinges in part on the legal definition of the tokens it will issue. Neufund wants them to be categorized as an investment, but German financial regulator might well see them as securities. Neufund indicated it might immigrate to Malta in case of an adverse ruling.

     Open Finance Network

     The Open Finance Network is a protocol for the end to end processing of security token transaction. The initial focus of the platform has been the clearing and settlement process for security tokens acting as a broker between different market actors such as custodians, token issuers or transfer agents. The Open Finance Network has three main components: the ledger, the token and the adaptors. Those three components can be assembled in different ways to enable many relevant processes in security token transactions. The Open Finance Network contains a global registry of assets that are represented by security tokens as well as entities such as broker-dealers, transfer agents, custodians or escrow agents that can be used on different security token processes.

     Polymath

     In February 2018, Polymath raised nearly USD 59m from accredited investors in a private token sale that was registered with the SEC. While a large part of the funds raised will go towards building their own securities token platform, more recently the company has also made headlines for trying to close a transaction to acquire a large stake in the Barbados Stock Exchange and working on a deal with the alternative trading system tZero. The Polymath model is similar to Harbor, in that it has built a system that makes a whitelist of accounts that have gone through the know-your-customer, anti-money laundering (KYC/AML) and investor accreditation checks that make them viable to trade with.

     Securitize

     In June, Securitize announced the launch of the Digital Securities (DS) Protocol, an open source protocol built on Ethereum which will support third-party apps. The DS Protocol is designed to resolve liquidity and compliance issues facing issued security tokens for the entire token lifecycle, as they are traded on public and private exchanges. Originally developed for SPiCE VC’s ICO, the Securitize platform offers brands both the flexibility and robust back-end to manage all types of potential investors in a capital raise by the token issuer. With built-in KYC/AML, accreditation and high security standards including multiple audits for both the platform and the crypto wallets, Securitize is transforming the way funds and capital for companies and assets is raised and managed.

     Sharespost

     In June 2018, Sharespost closed a USD 15m Series C round led by LUN Partners and Kenetic Capital. The funding will be used to build out SharesPost’s Alternative Trading System (ATS) for private company shares and security tokens and to further expand its global reach into Asia. This was followed by an announcement of an investment by Huobi in August.

     SharesPost is both a broker/dealer as well as a fund for private company stocks. As a broker, they will match buyers with sellers. Sellers are typically employees who acquired their stock through exercising employee stock option grants or early investors. They announced a secondary trading platform for securities tokens to launch during H2 2018. Sharespost is already a FINRA-registered broker-dealer (BD), SEC registered Alternative Trading System (ATS) and Registered Investment Advisor (RIA).

     Templum

     Templum has raised USD 12.7m for a secondary trading platform, USD 2.7m from a seed round in October 2017, and USD 10m from Japanese giant SBI Holdings in April 2018. In February 2018, Templum acquired Liquid Markets Group’s broker-dealer (BD) and alternative trading system (ATS) Liquid M Capital LLC.acquired broker/dealer.

     tZero

     TZero, Overstock.com’s blockchain subsidiary, raised USD 134m (compared to a USD 250m target) in an initial coin offering (ICO) that ended in early August 2018, and that was designed to comply with SEC requirements. tZero is an alternative trading system for securities issued on a blockchain that launched in 2015. The company plans to use the funds to finalize its blockchain alternative trading system (ATS) and build similar platforms in jurisdictions around the world.

     Hong Kong-based GSR Capital had signed a repurchase agreement to acquire some tokens while investing in tZero equity of up to USD 270m at a post money valuation of USD 1.5bn. tZero expects to be trading their own security token later in 2018, perhaps becoming the first regulated exchange in the US to offer securities on blockchain. The company also expects to start on-boarding outside issuers beginning in Q4.

     U.S. exchange operator Nasdaq could gatecrash the crypto market with a new platform, according to people familiar with the situation. The firm, which is best-known for bringing technology companies such as Facebook and Tesla to market, is exploring a security token platform, the people said. Such platforms provide a way for firms to issue a token, which trades on a blockchain, as a way to raise funds. Security token offerings (STOs), unlike some initial coin offerings (ICOs), aim to fit into the parameters of existing U.S. securities law.

     Since last year, the ICO market exploded in popularity with billions of dollars raised across hundreds of projects. The market, which is known for its fair share of fraud and big dreams, has helped some startups raise millions in seconds, drawing scrutiny from regulators such as the SEC.

     Nasdaq is speaking with a number of firms as part of its efforts, including blockchain startup Symbiont. The people said the platform would issue tokenized securities as well as trade them. If such a platform were to successfully come to market it would join a number of firms offering such services including Polymath, tZero, and TrustToken. Nasdaq’s interest in issuing tokenized securities dates back to 2015, one person with knowledge of the platform said. Then, before the bitcoin bonanza of 2017, the firm partnered with Chain to complete and record its first securities transaction on blockchain technology.

     As noted by recent research by The Block, security tokens can help remedy a number of issues facing U.S. stocks. Instead of a single institution controlling shares and settling transactions, security tokens are built on blockchains operated by distributed miners and nodes (servers). If a miner or node ceases operating, the blockchain will continue to run as usual. The lack of centralization makes the settlement and transfer of securities more reliable. Thus, removing certain risks. Still, not everyone is convinced that blockchain will make a big difference in trading. Chris Concannon, the president of Cboe Global Markets, said recently at an industry conference he didn’t see blockchain “impacting the most liquid assets that we trade.”

     Nasdaq CEO’s nuanced view on crypto

     In October 2017, Nasdaq CEO Adena Friedman said the firm was not interested in ICOs, describing them as “bleeding edge.” “I have real concerns around the lack of process, the lack of oversight, the lack of transparency, the lack of accountability that these companies, or individuals, have as they’re going out and trying to raise capital through an ICO,” she said speaking at an industry conference in June 2018. Later in the interview, Friedman hinted at possibly conducting STOs, saying: “If you decide you want to do an ICO in a regulated manner then we’d be happy to figure out whether there is an opportunity to work with people to do that.”

     As for cryptocurrencies, like bitcoin, Friedman isn’t necessarily a hardcore believer or pure skeptic. “The concept of having a digital currency that does allow for transfer of money across borders, that really transcends the banking system, and allows for a seamless transfer, is really really fascinating and one that we have to assume will become a part of the ecosystem of the internet,” she said of digital currencies like bitcoin. As for Nasdaq, Friedman’s nuanced look at the market is reflected in the firm’s strategy. The firm powers a number of crypto markets with its surveillance technology, but has no plans to trade bitcoin or other cryptocurrencies on its marketplace anytime soon. Most notable, Gemini uses Nasdaq’s so-called SMARTs technology to monitor its venue for nefarious trading activity.

     In some respects, the firm has taken a more cautious approach to the crypto market relative to its competitors. ICE, the parent company of rival New York Stock Exchange, announced in August a crypto platform dubbed Bakkt. And derivatives exchanges Cboe and CME Group both have bitcoin futures markets. Nasdaq has yet to get a futures market off the ground.
     Security tokens are, quite simply, tokens that derive their value from some other underlying asset which is external to it and tradable. Given that they are tied to the value of this other asset (security), they are subject to federal security regulations. They are different from “utility tokens” in that utility tokens are not designed for investment purposes. They give the holder the ability to access a company’s future product or service. The scope for securitization and tokenization of any asset is quite vast. Theoretically, one could tokenize real estate, equity, commodities, or debt.

     A number of cryptocurrency projects are actively embracing the move to blockchain securities and creating their own protocols. One such project is the Polymath Network, which raised an ICO last year to become a platform for issuing a range of security tokens. They are working on a security token standard called the ST-20 standard — basically a security token counterpart to Ethereum’s ERC20 standard. “We’ve seen the benefits [security tokens] have over traditional forms of ownership like paper share certificates,” Polymath VP Graeme Moore told me. “With tokens, you can have markets open 24/7/365 (instead of being open weekdays 9:30am-4pm), trade fees that approach zero over time (instead of a minimum $5), instantaneous settlement (instead of t+2 or t+3), and you can make it much easier to raise capital.”

     Why is the Coinbase announcement important?

     Coinbase’s potential move into security tokens is significant because it is one of the most important exchanges in the cryptocurrency industry. To give you an idea of its, in May of this year, it had 20 million user accounts. That is about the size of Fidelity investments. It also has the largest cryptocurrency trading volume of any exchange in the U.S. Given this size, the potential for mass adoption of a token listed on Coinbase is immense. New token listings on Coinbase lead to massive rallies in the price. This happened last December with Bitcoin Cash and more recently with Ethereum Classic.

     Even the speculation of a potential listing could be enough to impact price. For example, Ripple’s XRP rallied at the beginning of the year on speculation it could be listed. “Coinbase listing security tokens would be amazing for the adoption of security tokens. With the amount of customers Coinbase has, coupled with their very simple and easy-to-use design, this would be huge for security tokens, and all of the players in the security token realm,” Polymath’s Graeme said.

     If you do plan on opening a gold IRA, don’t put too much of your money into it, especially if you’re nearing retirement age. Most experts recommend only having 10% or less of your retirement portfolio in gold to minimize the risk of losing your investment. It is worth the seeds you sow. Look at the top 10 Gold IRA options that are worth for the Gold IRA investment. These companies will definitely give you more than you invest in. http://bestiraoptions.com/

     Reply

5. I am going to preface this by saying that financial stuff is not my area, outside of the usual bank accounts we all have. So my knowledge of cryptocurrancy is pretty minimal. I have heard of it, but that’s about it. That said, I made a few goals this year  (that I actually made progress on), and one of those is understanding finance better. So I read your article, which is excellent by the way. It’s very informative. I am not about to invest in cryptocurrancy or anything just yet, but thank you for the  information!  

   Reply

   • Hi Selenity Jade,

     Thanks for the praise. Polymath, the first-ever security token launch pad, has today announced its partnership with Overstock.com, Inc.’s blockchain subsidiary, t0.com, Inc. (“tZERO”), in which Polymath is acting in an advisory role in connection with tZERO’s historic $250 million USD Initial Coin Offering (ICO). Polymath has provided advice to tZERO on the design, economic model, and distribution of tZERO’s security token, which is being issued in accordance with applicable securities laws. A portion of the proceeds of the ICO will be applied by tZERO toward the anticipated development of a regulated trading platform for securities tokens.

     CEO of Polymath Trevor Koverko said, “tZERO is on the precipice of disrupting Wall Street as we know it. Our goals are similar-to create a thriving security token industry and allow companies and investors greater access, transparency and efficiency to an emerging token economy. We are excited to work with tZERO to provide ongoing consultation and support to the build out and distribution of the tZERO token, which will be a preferred equity token for tZERO.”

     President of tZERO Joe Cammarata said, “We are doing something that has never been done before-creating the first ever preferred equity security token. Projects of such innovation require best-in-class partners, and so we are excited to bring Polymath on as advisors.”

     About tZERO

     t0.com, Inc. (“tZERO”) is a majority owned subsidiary of Overstock.com, focusing on the development and commercialization of financial technology (FinTech) based on cryptographically-secured, decentralized ledgers – more commonly known as block chain technologies. Since its inception, tZERO has pioneered the effort to bring greater efficiency and transparency to capital markets through the integration of block chain technology.

     About Polymath

     Polymath aims to be the industry first security token launch pad and disrupt the multi-trillion dollar securities industry by creating an open platform that gives global businesses access to the block chain, smart contracts and token creation technology. The platform helps to form the basis of security tokens. Polymath’s mission is to become the open-source standard for launching securities tokens.

     The question is at what cost to the current system will this have. At the conferences I got the sense of the following:

     VC’s want the public sales to go away
     All coins/tokens will be regulated as securities
     Securities token issuance will make this utility token “boom” look like a drop of water in the ocean.
     Let’s go through these

     First, ICO’s have democratized capital investment, something which has been under the control of a small group of wealthy people and funds. It has allowed many companies to raise money where they otherwise wouldn’t have. Whether this is a good thing, time will tell. But what has been shaken up is traditional VC funding. Anyone with a website, smart contract and some code can go out and try to raise a few million dollars. The bar for entry has been set pretty low and this REALLY irks a lot of VC’s. They want oversight and controlling interest in these projects.

     They want to be able to still through significant weight around and determine the fate of these ICO startups. In a lot of cases, its good, because they flesh out a lot of serious issues and hopefully set the team straight concerning governance and other issues. What I don’t like though is the way they feel they can close off the market to non-accredited investors. As the market gets more mature, it will be ever more difficult for smaller investors to see the returns that occurred during the first half of the decade with bitcoin and other crypto. Big players will matter more at this point. What they will try to do is fit ICO’s back into their old funding system.

     This means killing all public sales, or reducing them to a small%. Most VC’s I heard said they didn’t want companies to go through the PR debacle of an ICO. Look at Enigma, they could have raised the entire amount privately, however, they chose to go the public route and eventually were burned for it. Killing the public sales would protect VC investments MUCH more. So, if you are a regular investor, try to make money while you can now, because it will stop soon.

     Second, it’s naive to think that crypto will always be unregulated, easy to purchase and available for US citizens. In a strict sense, if the SEC wanted to, they could force all crypto in the US to be sold through a broker on licensed exchanges (we are going here). Tzero is doing this, but they are strictly limited to securities tokens. The SEC will probably rule that al crypto needs to be regulated, whether its a utility token or not, there is too much of a possibility for it to be misappropriated or fail to include KYC/AML. If crypto wants to get larger, we need these types of regulation.

     Third, the amount of money raised by securities tokens will be big. Well, that’s an understatement; it will be the largest shift of wealth ever in human history. Trillions of dollars of crypto securities will be issued in the next few years. Companies who want to IPO will just have a token issuance instead for their equity. Every major fund will be tokenized. The reason for this is the frictionless transfer of wealth that can occur on the blockchain. As long as everyone speaks the same language or a form of it, then data can be sold. Don’t be afraid of the coming securitization. It’s what takes us to the moon.

     Polymath aims to provide a network of legally compliant, regulated security tokens. Security tokens will streamline a legally compliant process for companies to tokenize stocks, bonds, and venture capital & private equity investments.

     Tokenizing securities will make them more secure, accessible & liquid
     Initial Coin Offerings (ICOs) have surpassed traditional venture capital in recent years, with the amount of money being raised through this non-traditional means increasing every year. The numbers are staggering – almost $3B raised through ICO’s last month alone (March 2018). Though money continues to pour into these ICO’s, almost none of them have registered with the SEC. They claim to be a utility token, thereby skirting the need to be compliant with SEC regulations.

     This poses a major problem for the SEC as one of their primary missions is to protect investors. For the majority of cryptocurrencies today, there could be an argument made for and against defining them as securities. Thus, there is great debate in the US Congress, and many other government agencies around the world, about how these cryptocurrencies should be classified, how they can be defined, how they should be regulated, and who should regulate them. These types of tokens remain in a gray area from a legal standpoint, at least for now .

     Traditional financial assets (real estate, stocks, LP shares, etc) have remained predominantly off the block chain to date. These are clearly defined as securities, regulated by the SEC & traded through traditional brokerages. This is all changing as we speak and 2018 looks to be the year for a whole new ecosystem of tokenized securities. Both Investors and issuers are chomping at the bit to see the benefits of block chain technology implemented in the traditional financial asset sector.

     Why would anyone want to tokenize a traditional financial security?

     The most apparent advantage for the issuers is that they will gain access to a much larger pool of investor capital. The investment denominations can feasibly be reduced to a fraction of what is considered today and investors will have access to participate in ventures which historically would have never been possible.

     Other advantages of tokenization include lower fees for fundraising, increased liquidity due to token structure, and better security. The icing on the cake is that a tokenized market is open 24/7 and completely global, creating the perfect blend of inclusion and accessibility.

     What is Polymath?

     In short, Polymath is a project that aims to simplify the process of creating, issuing, and trading security tokens. The Polymath network is comprised of four primary components –

     • participants
     • assets
     • market platform
     • processes

     Let’s break it down

     Participants

     Investors, Issuers, Legal Delgates, KYC Providers, Developers

     Polymath will provide a platform where investors (both individual and instiutional) can validate their identity and residency, allowing access to applicable investment opportunities on the platform. Investors will pay a fee to KYC Providers to review their credentials and validate their investor ID on the blockchain. Once complete, the network can ensure investor identity and accreditation status comply with pertinent laws regarding each individual security token offering (STO).

     Issuers will be linked up with developers who can assist with coding the desired security token. Each security token can have unique smart contracts embedded, allowing for dividend distribution, revenue sharing, asset ownership, restricted ownership by country, etc. The developers will provide secure code to create a token which meets all issuer requirements. Legal delegates will have the opportunity to bid on reviewing new token issuances, they will be responsible for ensuring the issuance complies with all applicable regulation before launch.

     Assets

     The assets in the ecosytem are the tradeable, tokenized financial securities. The tokens could represent ownership in a company (shares), the rights to a physical asset (real estate, artwork, precious metal, etc), the rights to future interest or dividends (notes, bonds, etc), or any other type of tokenized asset. Creating these tokenized assets in a compliant way and providing for legal sale, ownership & trading is the heart of Polymath’s mission statement.

     The ST-20 standard is essentially an ERC-20 token with an additional bit of code attached to it. The additional code will call a verifytransaction function which ensures both the buyer and seller comply with all legal & token-specific compliance requirements prior to allowing the transaction to be completed.

     Market Platform

     Once the tokens are created and distributed, there is a need for a marketplace so that they can be openly traded. Although the initial ICO appears to rise within the Polymath network, the team has set themselves up to outsource the secondary market. With a partnership with tZERO, it seems that it’s much more likely that tZERO will ultimately serve as the secondary market for the STO’s that are generated via the Polymath network.

     Processes

     The players have been identified, their arena has been created, the sport has been defined. Now, how about the rules & the strategy? This is where things get complicated & also where there is the least amount of tangible information available today. The solution will need to create processes which market the platform, attract talent to form a pool of developers & legal delegates, pair issuers with developers effectively, vet legal teams to ensure appropriate compliance, provide a user-friendly marketplace interface, integrate the KYC/AML aspects with SelfKey, and much more. Each of these components could pose monumental challenges and should not be taken lightly. The success of the project will heavily depends on the team’s ability to execute on creating efficient & effective processes.

     If you do plan on opening a gold IRA, don’t put too much of your money into it, especially if you’re nearing retirement age. Most experts recommend only having 10% or less of your retirement portfolio in gold to minimize the risk of losing your investment. It is worth the seeds you sow. Look at the top 10 Gold IRA options that are worth for the Gold IRA investment. These companies will definitely give you more than you invest in. http://bestiraoptions.com/

     Reply