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Five Major Challenges Hindering Security Token Adoption On Ethereum Polymath 2021
Five Major Challenges Hindering Security Token Adoption On Ethereum Polymath 2021
hindering security
token adoption on
Ethereum
Identity | Compliance | Confidentiality
Governance | Finality
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Five major challenges hindering security token adoption on Ethereum
This document is prepared by Polymath to show how Polymath technology and the Polymath
blockchain can be used.
This document does not constitute, nor shall it be construed as, a recommendation or an offer or
solicitation to sell or acquire any security or investment in any jurisdiction including any investment in
or purchase of securities of PingAsset. Polymath is not a broker-dealer, investment advisor or
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or assets.
The information in this document does not purport to be complete and has not been independently
verified. Polymath gives no undertaking, and is under no obligation, to update this document or provide
any additional information or to correct any inaccuracies which may become apparent.
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Five major challenges hindering security token adoption on Ethereum
Executive summary
Security token standards, and ERC 1400 in particular, go a long way
towards making security tokens more viable. They eliminate the need for
technical due diligence and provide securities-specific features on
general-purpose blockchains.
However, it’s become clear as the industry with the requirements of modern capital
has evolved that five keystone issues with markets. To address these gaps, Polymath
asset tokenization on general-purpose has spearheaded the creation of Polymesh, an
blockchains need to be addressed in order institutional-grade permissioned blockchain
to align the functioning of the blockchain built specifically for regulated assets.
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2 4
Confidentiality
Compliance Governance
1 Five Major
Challenges 5
Identity Finality
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Five major challenges hindering security token adoption on Ethereum
1. Identity
Securities issuance and transfer require a
known identity, but most chains are built for
pseudonymity. Polymesh uses a customer
due diligence process to ensure all actors
on the chain are verified and transactions
are authored by permissioned entities.
2. Compliance
Solutions built on top of general-purpose
blockchains struggle with processing the
complex logic needed to comply with
regulations. Polymesh builds compliance
into the chain, enabling faster processing
and lower protocol fees that can scale as
demand and complexity of regulation grows.
3. Confidentiality
Most market participants need their
position and trades to remain confidential,
but anyone can see holdings on general-
purpose blockchains. Polymesh has
engineered a secure asset management
protocol that enables confidential asset
issuance and transfers.
4. Governance
Contentious forks in the chain present
significant legal and tax challenges for
tokens backed by real assets. Polymesh
uses an industry-led governance model to
prevent hard forks and guide the evolution
of the chain.
5. Finality
Ethereum's probabilistic finality prevents
the blockchain from serving as a golden
record for asset ownership. By creating
assets at the protocol layer, Polymesh is
able to provide a simplified approach to
transfers and deterministic finality.
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Five major challenges hindering security token adoption on Ethereum
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Five major challenges hindering security token adoption on Ethereum
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Five major challenges hindering security token adoption on Ethereum
#1 Identity
Challenge Solution
Securities issuance and Polymesh uses a customer
transfer requires a known due diligence process to
identity, but most chains ensure all actors on the
are built for pseudonymity. chain are verified.
Regulation dictates that securities must be Before interacting with the chain, every
associated with an identity. However, user must validate their identity. Polymesh
general-purpose blockchains were built for streamlines this process by creating a single
censorship resistance and pseudo- identity on the chain for each real-world
anonymity. This ethos makes it very difficult individual or organization and then attaching
to meet compliance requirements around attestations to their identity as needed. This
identity verification and to fulfill modular two-stage approach to identity
Know-Your-Customer (KYC) obligations. verification allows for efficient onboarding as
well as specific checks.
General-purpose
Stage 1 - Onboarding
blockchains were
Firstly, every user validates their identity
built for censorship through a basic customer due diligence
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Five major challenges hindering security token adoption on Ethereum
#2 Compliance
Challenge Solution
Security tokens are subject Polymesh builds compliance
to a growing number of into the chain, enabling
regulations, but general- faster processing and lower
purpose blockchains protocol fees that can scale
struggle with the complex as demand and complexity
logic needed to comply. of regulation grows.
Security tokens are subject to a myriad of Compliance requirements are constantly
regulations and we expect these to grow in evolving, and they vary depending on the
number and complexity. Many capital markets jurisdiction and asset in question. Polymesh
participants have implemented proprietary gives issuers the flexibility to set rules around
solutions, but they require manual intervention ownership and transfer requirements based
and are yet to deliver the end-to-end on their specific needs. This includes token-
automation that’s necessary for automated based criteria (i.e. buy or sell lockups tied to
compliance. when a token was issued) as well as identity-
based criteria (i.e. residency).
Polymesh gives issuers
Once the issuer inputs preferences and
the flexibility to restrictions, Polymath’s technology automates
set rules around their enforcement. In short, before permitting
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Five major challenges hindering security token adoption on Ethereum
#3 Confidentiality
Challenge This is done through MERCAT, which stands for
Mediated, Encrypted, SeCure Asset Transfers,
Most market participants and represents a new protocol for securely
need their position managing assets in a confidential and auditable
and trades to remain way by using a hybrid design approach
that combines zero-knowledge proofs with
confidential, but anyone restrictions enforced by trusted mediators,
can see holdings on general- such as the asset issuer or exchanges.
#4 Governance
Challenge Solution
Contentious forks in the Polymesh uses an industry-
chain present significant led governance model to
legal and tax challenges for prevent hard forks and guide
tokens that are backed by the evolution of the chain.
real assets. Polymesh addresses the challenges general
Governance can be a difficult topic for any purpose blockchains face with governance
blockchain, but this is especially true for by building it into the core of the blockchain.
security tokens, where the chain is not only This comes to life through the approach to
the source of truth for potentially billions of upgrades and on-chain governance.
dollars, but must also allow investors, issuers,
and capital markets participants to fulfill their Upgrades
regulatory obligations. Normally, blockchains are susceptible to
forks during upgrades. Polymesh is built
Because of its decentralised nature, when on Substrate Framework, which provides
there is a disagreement, a blockchain can be Forkless Runtime Upgrades. Unlike other
split into two separate chains—known as a frameworks, this allows for seamless
fork—which can expose major legal and tax upgrades on the chain to avoid the risk
challenges for tokens backed by real assets. of hard forks. Without getting into the
technical details, this means the ability
If an investor owns one ounce of tokenised
to upgrade Polymesh is a feature of the
gold, they will not get a second ounce of gold
blockchain itself, with any changes to the
when the blockchain forks and the asset is
chain recorded directly on the chain itself.
duplicated, because the extra gold doesn’t
exist in the real world. As a result, a blockchain
for securities must have a governance process Governing Council
that can mitigate contentious forks. In addition, Polymesh relies on a council
of key stakeholders to review Polymesh
Improvement Proposals (PIP) submitted
Polymesh addresses by committees or token holders, find
consensus, and chart a path forward for its
the challenges general future development. The ability to direct
purpose blockchains the evolution of mission-critical software
presents a major leg up over a traditional
face with governance ‘vendor’ relationship and provides a means
by building it into of steering the chain past potential issues
or disagreements.
the core of the
blockchain. Details on Polymesh governance can be found here.
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Five major challenges hindering security token adoption on Ethereum
#5 Finality
Challenge In essence, settlement finality is possible
on Polymesh because of how identity,
Ethereum’s use of compliance, and governance are woven
probabilistic finality together in the core of the chain.
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Five major challenges hindering security token adoption on Ethereum
Conclusion
When it comes to creating and managing
digital securities, Polymesh’s specificity
gives it (and the applications built on it) a
distinct advantage over general-purpose
blockchains.
Mike Kessler,
CEO and Founder
Tokenise
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polymath.network
About Polymath
Polymath makes it easy to create, issue, and manage security tokens on
the blockchain. Over 200 tokens have been deployed using our Ethereum-
based solution and we are now in the midst of launching Polymesh, an
institutional-grade blockchain built specifically for regulated assets. It
streamlines antiquated processes and opens the door to new financial
instruments by solving the inherent challenges with public infrastructure
around identity, compliance, confidentiality, and governance.
Learn more