Institutional Adoption In An Emerging Blockchain Ecosystem | Graeme Moore, Polymesh Network (DeFi Chat Ep 06)
DeFi Chat is a series of educational & informative interviews with world professionals in the Crypto / Blockchain / DeFi / Web3 communities. We aim to provide digestible content in multiple mediums such as video, audio (podcast), and written (blog) form!
Episode 06
Graeme Moore from Polymesh Network has shared a comprehensive overview of Polymesh and its mission in accelerating institutional blockchain adoption.
YOUTUBE VIDEO: https://youtu.be/U9tM6iW-XJw
Note: This transcript was automatically generated by artificial intelligence (AI) and therefore typos and grammatical errors may be present.
00:00 – 00:43: Introduction
Lachlan: Hey everyone, thank you for joining us again today. We’re super excited to have Graeme Moore here, the head of Tokenization for Polymesh Network. Graeme, how’s it going?
Graeme: It is good, Lachlan. Good to see you, thanks for having me up!
Lachlan: Thanks for joining, super good time to chat with you. Stably just announced a partnership with Polymesh, where we are gonna deploy US dollar-backed stablecoin USDS. Also, there is a lot of questions going on with regulation, so really good time to sort of connect and go over Polymesh
00:44 – 03:20: Basic information about Polymesh
Lachlan: Do you mind sort of just starting “How Polymesh came after the founding of Polymath and what you guys actually do?”
Graeme: Definitely! So back in 2017, two guys founded a company called Polymath. I joined them as the first employee back in September 2017, and the idea was how can we get regulated financial assets on blockchain.
Graeme: People had started creating these things called utility tokens. They were creating them mostly on the Ethereum blockchain. And people were starting to think about the idea of “We can create tokens”. What if these tokens represent ownership in actual securities, so stocks, bonds, derivatives, real estate, etc… And so we started as really the first company building compliance criteria on Ethereum for these assets.
Graeme: These assets have a lot of stringent requirements: (1) ensuring that the only people who can transact them have been KYC verified by the issuer or one of the issuers parties, like an exchange or a broker dealer, someone like that; (2) things like volume transfer restrictions, none of this existed on Ethereum until we built it back in 2017.
Graeme: We launched a product called Polymath Token Studio in 2018, where users, non-technical users could go, they could click some buttons and they could create a regulatory compliance, security, and manage that security on an ongoing basis. And we started to get some uptake, there’s been over 200 security tokens created using that platform.
Graeme: We spearheaded a standard called ERC 1400, which is an extension of ERC 20. Again, thinking about how you can comply, create a security and manage a security on a blockchain, and start to get some adoption. But we kept hearing the same problems over and over again from the world’s largest institutions. We kept hearing a few things, and the primary one of them was they did not like Ethereum. Specifically for these regulated assets.
Graeme: So in 2019, to solve some of these problems that we felt we were facing with adoption, we started building our own blockchain called Polymesh. So Polymesh lived in terms of its first block being created, just a little under a year ago. I am looking at this calendar right now, it was live on October, 2021. We have almost been live for one year, and we have seen almost 20 assets created on the blockchain. We have 16 regulated financial entities that are node operators on the blockchain, so that’s actually offering the nodes, and now we are finally getting a stablecoin, which we are really excited about, obviously with Stably and excited about the future of Polymesh customers.
Lachlan: That’s awesome. Congrats on all the hard work and you know, it is clearly paying off.
03:22 – 07:50: Current regulation in blockchain
Lachlan: Amazing, and I guess in terms of regulation that is like a question. There is a lot going on right now, there are a lot of lawsuits by the SEC, for unregistered securities tokens. When you think about the potential of tokenization, like this is huge, representing real world assets on the blockchain, such as real estate, stocks, bonds, etc. How is regulation playing right now? Is that like a huge barrier to adoption in the industry and what are you really seeing?
Graeme: Yeah, I would say the interesting thing about regulation is the regulations already exist for all of these things. You know, securities have existed for a very long time. There’s very clear rules and regulations around them, so it’s a lot different from the typical crypto market where people are really unsure about things.
Graeme: You know, what is a stablecoin? How should a stablecoin be regulated? Is a stablecoin a mutual fund instrument? Is it a money market instrument? Do people need to be banks to issue stablecoin? Do they need to be an MSB or something like that? All of that stuff, a lot of question marks around it from regulators, but with securities: security is security. We already have very clearly defined rules around.
Graeme: There are some slight question marks on how we can improve capital markets with blockchain and with security tokens. There are things like maybe you don’t need a transfer agent to have a publicly traded security because the blockchain accesses the transfer. You can see 0x123 owns these shares, and 0x123 actually maps back to John Smith, who went through the issuer’s KYC process. Maybe potentially you don’t need something like an essential Securities depository, because the blockchain acts as the CSD. You can see where the shares are, you can see where the ownership lies, and you can maintain ultimate beneficial ownership and still have somebody else maintain that asset.
Graeme: So those kinds of questions are really interesting and we really don’t know how that is going to shake out. But the nice thing is if you wanna issue a security, you have to follow existing securities laws. And the nice thing that has happened is, over the last few years, we started doing this back in 2017, you should talk to a lawyer, a securities lawyer and say “Hey, I wanna do a tokenized asset” and “I don’t know what that is”. It costs a huge amount of money to get through all the legal hurdles. Your lawyer is asking a million questions. Now, it is pretty well understood, “Oh, you are doing a tokenized asset. Cool, we just need to add these five sentences in your offered memorandum”. That has become really great now, where over time the legal community broker, dealers, exchanges, are starting to understand this technology and I would not really say regulation is a barrier in securities, but there is still education that needs to be done.
Lachlan: Yeah. But for example, you know I saw that they were tokenizing a building in New York. I know some other examples, but compared to the potential of this, it really seems like there has not been too much progress in the mainstream. You mentioned a lack of education. Are these big companies, big banks, all looking into this?
Graeme: Finally they are. In 2017 or 2018, we would talk to some of these banks and they would just go “Okay, sounds interesting”. But you could tell, their minds did not really wrap their heads around the benefits and what was gonna happen. That has changed in a drastic way.
Graeme: Even in the last two years, we think Polymesh and application specific blockchains like it are a really big reason why that’s changed. Now, we are building infrastructure specifically for these kinds of regulated assets where Ethereum and a lot of the blockchains try to be everything to everyone all the time. We are focused on one specific use case, and we think we solved a lot of those challenges with adoption.
Graeme: But yeah, the interest that we have received recently has been very promising. We were talking just before we started recording, I think you mentioned BCG, they have talked about 16.1 trillion dollars in tokenized liquid assets by 2030. Another quote I love is from State street, they think the global tokenization market can grow to 5 trillion by 2025. We are talking about the trillion dollars finally, whereas in terms of assets actually issued today, we are still in the billions mark. But that’s gonna be trillions very soon.
Lachlan: There is a huge potential for asset tokenization, like creating liquidity out of these illiquid assets, having global liquidity pools and global liquidity networks, a huge industry that I am very interested in myself. So, it is awesome that you guys are pioneering this.
07:51 – 14:23: Five pillars of building Polymesh
Lachlan: Which actually brings me into the next question is that you guys have five pillars in particular that sort of distinguish you guys. I would love to go over those, cause they are quite interesting to reflect the subtle nuance that separates various players confidentially. Do you mind walking us over those five pillars?
Graeme: For sure, so the five pillars we like to talk about for why we built Polymesh and really what we’re focused on: governance, identity, compliance, confidentiality, and settlement. I’ll just briefly talk about those. For governance, there’s a huge problem with Ethereum and a lot of other general purpose blockchains where there can be contentious forks. Everyone obviously is aware of the merge that happened recently. There is proof of work, and there is Fork I have seen, I am sure there are a couple others. Everyone knows Ethereum Classic as well, so there’s a huge problem with that when you start dealing with regulated assets.
Graeme: I’ll just take an example. Let’s say Goldman Sachs issued a hundred million bond on Ethereum, and then after the merge, which token has the real claim to the underlying assets? Is it the one on the Eth merge Proof of Stake fork, or is it the one on the Eth Proof of Work Fork? And why do you select which one is correct? Do you listen to Vitalik Buterin and he tells you which real token has the claim to the underlying assets? Do you wait for hashing power to work out? Obviously doesn’t make sense for proof of stake, but that’s what a lot of people did for Ethereum Classic and ETH.
Graeme: As I said, whichever chain has more hashing power, I guess that is the one we will decide is the real one. And tokens on there have the real claim to the underlying assets. So a huge governance problem when you start looking at that. On Polymesh, we have a forklift architecture where through our governance process, you can always be sure that there’s one canonical version of the chain. So that just again, gives institutions a lot more comfort.
Graeme: The next one is Identity. When we look at identity on Ethereum, on Cosmos, I know you’re at the Cosmos event recently. You’re always 0x123ABC whatever, and so on Polymesh , you’re still 0x123abc. In terms of what is visible publicly, however, all the users of Polymesh have to go through a KYC process. So we’ve got about 3000 people that have onboarded Polymesh through this KYC process. We use third parties for that. We don’t store any of the data ourselves. And then also there’s a KYB process and then on top, all of the node operators, so entities that are authoring blocks and producing blocks, those are all regulated financial entities.
Graeme: How can you make institutions more comfortable with this technology? You build these kinds of guardrails into the blockchain. One of the questions or one of the concerns we kept hearing from institutions was “Okay, so I make a hundred million dollar bond. I trade with my counterparty and that trade costs $5 in gas or whatever, that $5 in gas can go to a minor in North Korea or a Staker in North Korea”. So that just makes them very uncomfortable to use types of blockchains where these guardrails aren’t in place.
Graeme: Next one is compliance. So all of the technology we initially started building back when we were at Polymath was all smart contracts on Ethereum. And when you start having a smart contract, talk to a smart contract to do all of these compliance type functionalities, it becomes really computationally expensive.
Graeme: We were hitting the limits of the Ethereum architecture in sort of year one of developments. So you can imagine what happens in your fifth year and tenth year when we wanna put every single aspect on the chain. Just computationally infeasible to do that.
Graeme: Confidentiality a big one. We actually have a patent pending process, called MERCAT. We’ve got a white paper out for that, where you can start to obfuscate a lot of the data inherent in transactions and in assets. I’ll just keep talking about Goldman and, and JP Morgan for a hundred million dollar bond. When they trade with each other, they don’t necessarily wanna broadcast the price and the amount when they are trading with each other. So we have a way with cryptography, and stuff that is way above my head, but our tech team understands about it where you can hide some of that information.
Graeme: Finally, settlement is a huge one of Polymesh. I will keep picking on Ethereum. I love Ethereum, but pick on them for general purpose and in my opinion, not being the best place for financial securities. On Ethereum, when I find your address, I can send you anything I want. There’s no concept on Ethereum of two-sided affirmations for settlement, and that’s a huge problem for institutions. That’s never how they’ve done trading ever. They’ve always required that both parties are settlement instructions.
Graeme: When Visa, for example, announced that they bought a crypto bond, everyone just started sending random assets to Visa. Now Visa has to hold those assets on the balance sheet. Do they get rid of them immediately? Is that a taxable event? So just again, huge question marks for institutions. And these were some of the things that were keeping them outta the securities, the security token market in my opinion. And, so having that settlement tension where there could be five different legs of settlements for 20 different counterparties and where everyone has to affirm settlement instructions and only then can the trade execute that just gives them a lot more comfort and it is a lot more closer to the world that they are.
Lachlan: That’s awesome! I think in particular the hiding information is super interesting to me because I was told this week in a Cosmo the example of in the future if I just want to buy coffee and I paying crypto, suddenly I could know their wallet and then people could see this coffee shop’s, finances and everything and you don’t want that. Having these measures in place where maybe you’re using zero knowledge technology or whatnot to sort of hide it, but then you can still show it to regulators or whoever asks at the same time, it can be super important. I think that on top of that, aspects that you mentioned, like governance are super important.
Graeme: Yeah, that is the big one. And, you mentioned you still being able to show to regulators that was the reason why we did not build a private blockchain. We like public blockchain infrastructure, but one is when you have something like a private blockchain, regulators cannot necessarily tap into that whenever they want and see what is going on. And so having a public blockchain or regulators can still essentially run a node and see what’s happening in real time in capital markets and plug into that data. That’s something that they’re really excited about.
Graeme: Sometimes, people say “Oh you are doing security tokens, well, regulators don’t really like that. Regulators don’t like blockchain”. It is not exactly true. Regulators actually really do like blockchains, because they can see what’s going on. Finally, they can see in real time what’s happening in capital markets rather than having to wait for someone to sue someone they know. Going into all the lawyer’s offices and, and going into all the filing cabinets and taking out all the data. So that real time access to regulators is really important.
Lachlan: Yeah, that is big. And you guys are super regulatory compliant, which is awesome. And it kind of pivots a bit.
14:26 – 18:01: A USD-backed stablecoin on Polymesh
Lachlan: The thing I wanted to touch on was our US dollar-backed stablecoin – USDS . Because Stably, similar to you guys, is very regulator compliant.
Lachlan: Creating a crypto collateralized stablecoin is not that hard. But there are drawbacks compared to a US dollar-backed, while you know that the real US dollar exists and is held by a regulated trust company such as Prime Trust. That has a lot of implications, it takes a lot of work to actually get that and get that going. But there are huge advantages.
Lachlan: Do you mind going over how you got in touch with Stably and the thought process that went through you guys’ heads when you decided to partner with us for US dollar backed stablecoin infrastructure?
Graeme: Yeah, I think I initially heard about Stably when you launched the USDS on Chia. And I have been following the Chia blockchain project pretty closely for a while and I noticed. Like “Cool, Stably is doing this. Sounds good, I think we reached out to your team. We really wanted what you guys had to offer. We liked the aspect of how things are held in custodial accounts”.
Graeme: You guys are big on regulation, making sure that all your T’s are crossed, all your I’s are dot. And we really wanted the stablecoin on Polymesh. And I was actually talking to an issuer yesterday, who issued one of the tokens on Polymesh. And he said ‘Dude, I was just about to message you and say when are you guys getting a stablecoin” and then he saw the news about USDS.
Graeme: What’s really exciting for us is Issuers of assets, being able to trade their security tokens against something like US dollar without really having to involve a third party. A lot of issuers will ultimately want their assets to trade on a big exchange or big ATS or in some type of closed environment.
Graeme: Some are comfortable with having some level of liquidity where their early investors have the ability to just post a simple sell order for a certain amount of dollars, and for someone to say “Yeah, you know what? That sounds like a good investment. I like this company. I like this equity instrument, or this real estate instrument, or this debt instrument”, and they can execute a trade person to person on something as simple as a bulletin board system.
Graeme: So being able to finally now have that liquidity on a chain that doesn’t necessarily rely on dollars being in a bank account somewhere, you guys are doing all the heavy lifting with the dollars in the bank account. Now there can just be some stablecoins that live on chains and people can easily trade those for security tokens.
Lachlan: Yeah, exactly. Stablecoins are huge. I think they’re one of the most immediate use cases of crypto because having actual US dollars backed that are redeemable, like make sure that that’s, it maintains its peg at $1. Cause if it drops to 95 cents, I could just scoop up a bunch and redeem them for US dollars.
Lachlan: So massive implications for bridging blockchains for buying, selling assets, for holding your liquidity and just like the list goes on.
Graeme: It’s huge for institutions. I am maybe comfortable trading security tokens against Bitcoin, or Polyx or Eth or you know, anything. People are obviously comfortable trading NFTs against the Eth on something like OpenSea. Institutions are not. That level of volatility is absolute nonstarter for them. They need Dollars or they need Euros, or they need Yen, they need whatever currency they do their books in. And they need to feel comfortable with the level of certainty that that dollar is actually a dollar. So yeah, stablecoin is absolutely huge and especially huge for institutional adoption.
Lachlan: Amazing!
18:02 – 19:11: The future of Polymesh
Lachlan: One last thing. I know we’re almost at a time, what’s next for Polymesh? I would love to hear what you guys are working on.
Graeme: More and more integrations with the world’s largest financial companies. So we have some, hopefully pretty exciting news coming out soon with some of these companies that we’re working with. And really it is just about adoption, adoption, adoption. How do we get more and more assets on a chain? How do we help institutions do that? And how do we help the average person like “I can go to tokenize my bike if I want”, and we wanna see those assets on Polymesh as well.
Graeme: But really, institutional adoption is coming, it is here. They are beating down our door to tokenize assets on chains and it is finally happening. So we are really excited.
Lachlan: That’s awesome. Yeah. There’s such a big future. Who knows how many trillions it will actually be five years from now, 20 years from now. But there’s massive potential, like with tokenization and it’s really gonna change things.
Graeme: Agreed. The hockey stick is starting to happen. We’re still here on the hockey stick, but you can finally start to see it tick up, and charts are going up into the red.
19:11: Ending
Lachlan: Sweet. Well, thank you so much for joining us today, Graeme. That was awesome! Love the overview of everything you guys are working on and how it fits into the bigger space and yeah I am with Stably supper happy to be partnering with you guys. You are awesome, thank you for taking the time.
Graeme: Thanks, you are welcome! Thanks for having me!
Lachlan: Yes, take care! Bye everyone.
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