Can Security Tokens be Made Compliant? Polymath Says Yes if They’re Placed on a DEX
According to Polymath, which operates as a security token platform, it has officially teamed up with Loopring with the ultimate aim of testing out a peer to peer trading system for security tokens and their viability within a decentralized exchange. According to the company, it had officially managed to undergo a number of successful tests – which hinged upon the application of smart contracts thanks to the DEX protocol provided by Loopring.
What this has demonstrated to the Polymath team is that only those ST-20 standard security tokens were successfully executed as trades, while not allowing unauthorized trades to take place.
The ST-20 security tokens were originally created by the Polymath team, and functions as a broader extension for the ERC-1400 asset standard. This features the potential to limit the transfer of specific blockchain tokens if they don't adhere to the kinds of criteria needed in order to be executed legally.
Polymath goes on to argue that this will allow for safer, more streamlined security token sales to take place:
“They can only be held and traded if certain criteria are met.”
Polymath went on to further disclose some of the details of the test, with the company saying that it conducted this test through trading Wrapped Ethereum (W-ETH) in exchange for Cammazol, one of the ST-20 security tokens, with the transfer succeeding, validating it as an authorized transfer, while another transfer registered as unauthorized, demonstrating how the system can work to safeguard potential security token investors.
Graeme Moore, the vice president of the marketing division for Polymath, disclosed that the two firms conducted these tests in order to demonstrate just how these validated security tokens can be traded in a way which allows them to be in complete compliance with current regulations, even when traded on decentralized exchanges.
Moore went on to state the following:
“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.”
Going into more depth into how the system would work for STO offerers as well as investors, Polymath explained 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 (which is managed by the token issuer) 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.
“This is how tokens are able to maintain compliance in the secondary market throughout the entire life-cycle of the token,” Moore concluded.
“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,” Adam Dossa, the director of technology for Polymath, went on to explain.