The objectives of most securities regulators is to provide protection to investors from unfair and fraudulent practices, foster fair and efficient capital markets, and contribute to the stability of the financial system and the reduction of systemic risk to facilitate capital formation. In order to fulfill their mandate, securities regulators not only require issuers to provide fulsome public disclosure and reporting but also require participants to validate customer identities through Know-Your-Client (KYC) obligations.
For general-purpose blockchains, meeting regulatory requirements, like knowing who someone is, runs counter to core aspects of blockchain ethos, particularly pseudonymity and censorship. And while identity solutions can be added, they come in the form of layer-2 add-ons, creating additional complexity in the end-to-end solution. Polymesh, on the other hand, is a blockchain built specifically for security tokens–we needed to address major concerns of regulators like identity in the foundation of our solution. Polymesh has identity at the core of the chain; this means a user’s identity on the chain can only be tied to one person, and that one person can only have a single identity. Now, participants on Polymesh can more easily satisfy regulatory standards since tokenholders cannot subvert rules by holding assets under multiple identities. It also makes the chain more resilient and less vulnerable to Sybil attacks.
Today, the most common way financial service providers comply with identification requirements is to have users provide them personal information as verification, usually in the form of government-issued ID. On Polymesh, asset issuers, and other financial intermediaries can examine the Polymesh blockchain to confirm questions about identities without the need to re-identify users. This arrangement is mutually beneficial for all participants because it streamlines the identity verification process and reduces costs for all participants. Issuers and institutions no longer need to re-identify users, and users do not have to re-submit their information to each institution they want to work with.
Bringing identity to life on Polymesh
With Polymesh, every user onboarded validates their identity through a basic customer due diligence (CDD) process, or the verification of your name, date of birth, and place of residence through a CDD provider. All users — whether issuers, investors, service providers, operators, or stakers — need to validate their identities through CDD to hold POLYX and therefore use the chain. Once complete, any accounts a user creates will be securely and confidentially connected to this identity, allowing users to create new accounts and complete transactions as needed. And most importantly, any asset held by a user will be linked back to a real-world identity.
Polymesh identity verification is modular. Issuers can enhance Polymesh’s base CDD with additional identity verification or due diligence actions to meet their desired assurance level. The potential benefits of such structures are numerous. Issuers, investors, and regulators no longer need to choreograph sequences of the “paper shuffle” with one another. Entities that are entitled to receive certain information about issuers or investors can be permitted to do so and will have the ability to query the Polymesh blockchain for identity-related information rather than re-identify users or wait for information to be submitted by agents.
The Polymesh Pillar Series
To understand how a blockchain built for security tokens could best address the challenges affecting adoption and acceptance of security tokens, we learned that it was not just Identity acting as a roadblock. Governance, Confidentiality, and Compliance were also elements that impacted the embrace of this technology by institutions, regulators, and issuers. That’s why each has been built into the core of Polymesh, removing challenges and bolstering security token adoption. Check out the other blog posts in our series for more information on the other pillars and how they form the foundation of Polymesh.