Security token offering (STO) is getting more popular in the crypto and blockchain community. However, without a well defined standard, it is hard for token issuers and regulators to follow.
Thomas Borrel, Chief Product Officer of Polymath, told CoinsNetwork that either with or without too many security token standards would hurdle the market growth, hoping the newly developed security token standard, ERC1400, can meet the market demand and ensure everything falls under compliance.
Borrel stated that exchanges need to understand the structure behind when they list security tokens and be compatible with different protocols. ‘We would create unnecessary friction by applying multiple standards,’ he said.
Polymath invited different stakeholders, from both traditional and emerging markets, including exchanges, KYC providers, custodians, and one of the co-authors of ERC-20, from the Ethereum community, figuring out what the standard looks like and developing the standard, ‘and that’s how ERC1400 was born.’
The Ethereum ERC-20 standard is now the mainstream, allowing anyone to transact freely with no restrictions. Nonetheless, because issuers need to ensure that buyers are screened and approved by KYC and AML process, it is not compatible with STO.
As a result, Polymath extended the ERC-20 interface by introducing a transfer verification system that ensures transfers can only be executed by users who are on the whitelist and vetted through a KYC and AML process. On the other hand, users that are not on the whitelist are not able to transact.
Regulation trend can’t be changed with its rapid development. That’s also the pain point which needs to be addressed by ERC1400. Polymath went from a very modular approach, as new regulation introduced would either change the setting module or create module associated with an existing token, making sure the refinement of standard can evolve with the regulation as well.
There are a few months away for the adoption of ERC1400, Polymath will continue to gather feedback from communities and institutional investors so as to further build and improve the standard.
When estimating the potential market for tokenization, “We’re going to look at a couple of things”, Borrel said, “the new products available for investors to buy, and of course, the ones existed but not available to invest before. For example, REITs and private placement, which are extremely difficult to trade. But the intrinsic value is definitely enormous.”
In 2017, there was $1.7 trillion USD raised in private placement the in USA, which is nearly 10 times comparing to the value of IPO ($165 billion USD); and for REITs, the real estate market debts worth $350 trillion USD in reserve, “When we look at the market opportunity for security token, I think we can’t necessary look at where it started, but where it can go, so the easy answer would be that $350 trillion USD,” Borrel said.
But Borrel mentioned, “It’s not gonna get there overnight.” It must go through the process of how some new products created and how existing products are converted into security tokens.
He cited the example of recent tokenization of Andy Warhol’s artwork which raised $1.7 million USD and was valued at $5.6 million USD, as a clue of new product entering the current security market, and opportunity to transform traditional security into a digital version, which brings more transparency and simplify transaction process.
The future of security is quite vivid because of the enormous issuance of bespoke token for every product. However, Borrel thinks that in order to have a promised market growth, the market should have only “a small set of standard…it’s always better than 10,000 (standards).” It is always difficult for implementation when there are too many sets of standard available. The competition for standardization will eventually get there. When the time comes, the market itself will decide which standard is the most appropriate, and compatible to issuers and investors.
Thomas Borrel will participate at the ‘Hong Kong Blockchain Summit 2018’organized by CoinsNetwork, Bloomberg Businessweek/ Chinese Edition and Hong Kong blockchain consultant and investment company BlackHorse Group on December 12 this year. He will share more about the new trend of STO, along with other renowned speakers at the conference to share the latest trends in the blockchain industry.