What is an STO? How Are they different from ICOs? And will 2019 be the year of STOs?
This article is hard for me to write – my anarchist soul forbids me to embrace more regulation and rules, Bitcoin always was about being independent and provide freedom, banking the unbanked and get rid of the wheelings and dealings by the banks. However, especially the last year has suggested, that we – the worldwide crypto community, cannot handle the amount of provided freedom, unfortunately. Maybe it just needs time to build the needed magnitude of personal responsibility, maybe we will never achieve it. Nevertheless, for a crypto price surge, it seems to be mandatory to let regulation and rules in – managing the wild west of crypto and make it more reliable for the big boys. This is what STOs are supposed to do for the former ICO market. This article about STOs is a prelude for a series of articles, where we will spotlight some coins/tokens that tackle this field and we considering building an STO portfolio for the case the skyrocket this year.
The year 2017 saw the coming to the fore of Initial Coin Offerings, with companies raising over $5.6 billion. The trend continued further in 2018 with a phenomenal $13 billion raised. Interestingly most of the ICOs in 2018 was done in the first quarter of 2018. Unfortunately, the fortunes of these ICOs have continued to dwindle ever since. Only, 8 percent of the successful ICO have grown to present any sort of impact. A majority of ICOs have been marred with accusations of scams and frauds. In a bid to eliminate licensing and compliance concern associated with ICOs came Security Token Offerings or STOs.
For many people, STOs can be simply defined as regulated ICOs. However, there is more than meets the eye, while ICOs are generally utility tokens, Security tokens are actual securities that are backed by real-life assets such as property, cash, profits, or company revenues. Essentially, the only major difference between traditional securities and STOs is that STOs are operated on the blockchain platform.
To be approved as securities STOs must be subjected to rigorous vetting and evaluations within their respective legal jurisdiction. While they have been a slowed progress in the adoption of STOs, investors and companies are slowly warming up to these new regulations. Critics of STO have argued that regulations take away the decentralization brought about by the crypto-space. However, given the wild-west nature of ICOs in the last two years, it is evident that regulation is long overdue and ultimately inevitable.
How ICOs compare with STOs
Initial Coin Offerings or ICOs have been largely developed with the aim of crowd-sourcing of funds for a project. Most ICOs operate on the guise of offering Utility Tokens, that provide access to a certain product or service within a platform. By convention, utilities do not offer holders an opportunity to reap off the profits of the project. In a bid to provide more value to holders most ICOs have resulted in offering some profit incentives to token holders. This move has eked the ire of regulators such as the SEC and hence regulators have been on the heels of ICOs in the recent past.
On the other hand, Security Tokens are actual securities backed by real-life assets. By definition, securities are tradeable financial assets. Examples of such assets include bonds, option, shares, and warrants. By owning securities one owns a part of an organization and is provided with some unique benefits such as voting rights, preferential treatment and so on.
Overall, ICOs were developed to leverage on the token economics and many investors prefer them for their liquidity and ease in speculation. STO while similar to ICOs in the way of raising funds are distinct in that the participants are investing in a security. For ICOs participants are largely viewed as users who pay to receive certain benefits from the platform or reap from the speculated growth of the said Tokens or coins.
Why 2019 might become the year of the STO?
After the exuberance of 2017, ICO/STOs have undergone numerous growth in 2018 without reaching the expected threshold. Many experts, investors, developers, and users have expressed optimism that this is the year that finally STOs come of age. As trust continues to build and the crypto-space continues to evolve we will witness both seasoned and inexperienced investors embracing STOs. Large organization and startups alike will also embrace STO as the gold standard for crowd-funding. Below we examine some of the reason behind these projections.
STOs will solve the Problems with ICOs
Most ICOs are rolled out with an aim of bringing a project to fruition. The challenge with this model is that a majority of tokens issued do not have any utility since the platform in which they operate is yet to be developed. Essentially, most of the utility tokens being issued depend on the trustworthiness of the project team and their ability to deliver the said projects. Unsurprisingly, due to their unregulated nature investors are left vulnerable to scams and are unprotected in case of failures.
STOs solve this problem since investors are presented with security in form of equities, bonds, or stocks. Since their investments are backed by real-life assets, investors can, therefore, rest easy. Investors are rewarded with dividend and rights just as they would with regular securities. Overall, this model presents a more profitable and feasible alternative for investors, hence it is highly likely that STOs will finally overtake ICOs in terms of investor preference.
Generally, STO offers increased transparency compared with ICOs. The need to ensure strict regulation and verification by agencies such as the SEC should further increase the acceptability of STOs by many investors. Furthermore, STO offers additional legal rights such as voting which allow investors to participate in projects decision making. In 2019, more and more investors will continue to invest in STOs given the increased protection available. Simply, STOs will be offering a similar likelihood for growth as ICOs but with greater assurance.
One of the largest criticism that has been leveled against cryptocurrency is that they lacked intrinsic value. Reputable corporations and individual have dismissed the crypto-space as hot –air with no value. The mainstream financial market is yet to appreciate cryptocurrencies for the force they are. The entry of security tokens promises to change this paradigm.
Numerous companies such as Polymath, Harbor, 0x, Open Finance and Tzero are focused on giving real intrinsic value to STOs and cryptocurrency in general. With actual securities such as equity and stocks now attached to Security Tokens, STOs can, therefore, be equated to real-life assets. This move will not only act to dissipate the criticism towards STOs but also enhance their standing within the financial markets.
Clear legal structures
For a long time, there has been continued inconsistency and confusion around the position of utility tokens. With some regulators considering them as securities while others do not. Some quarters have argued that all those projects raising money in the US without clearance from the SEC are operating outside the law. This has generated continued anxiety and uncertainty with investors. The volatility witnessed in the crypto-space in 2018 can be partly attributed to uncertainty and confusion emanating from regulators mixed signals.
The entry of STOs as exclusively regulated blockchain securities will change this situation for the better, while not in the actual sense of the cypherpunks. Investors are now offered with increased clarity on where they stand within the law. Legal security tokens are bound to be the catalyst for a larger, less volatile and legitimate market.
The valuation of most ICOs tends to be astronomically high despite having very little in terms of product. Since the highs of December 2017 and January 2018, the market has severely punished ICOs and cryptocurrencies which have continuously been on a downward trajectory ever since. New ICOs are now being more realistic about their valuations. STO compliance will require projects to prove their valuations to be realistic hence there will be few of the catastrophic slumps witnessed in 2018.
2018 saw major brands and companies start recognizing cryptocurrencies as a legitimate way of payments. Companies like Microsoft, Paypal, Subway, Expedia, Shopify, Overstock, and Pizzaforcoins are leading the way in the adoption of cryptocurrencies as a means of payments. In 2019, it is expected that even more companies will join the bandwagon. Experts projects that in 2019 cryptocurrencies will slowly move away from being a tool of speculation to a real medium of exchange. This transition might help in decreasing the volatility in the crypto space and further enhance the position of STOs.
Furthermore, proponents of blockchain and cryptocurrency argue that 2018 is the year that decentralized applications(dApp) finally come to the fore. With increased innovations and developments on the Ethereum ER 20 platform, there is bound to be an immense improvement in areas such as sharding and implementation of faster off-chain transactions. The platform is also going to become more scalable for the implementation of large-scale dApps.
Overall, the increased usage of cryptocurrency and dApps will have a ripple effect on the world of STOs and crowdfunding. Not only will the blockchain platform become more reputable in facilitating critical transactions, but also the trust in the system is bound to increase.
While in previous years companies that have engaged in STOs were nascent startups, it is expected that in 2019 more established companies will move to raise funds using STO. Companies that have gained some traction within the industry will aim to expand their businesses via STOs. This will largely be accomplished by rationalizing business process through blockchain and smart contract tokens.
Access to global markets
Historically, the growth and development of small and medium enterprises have been continually hampered by lack of reliable and consistent funding. Most of the large conglomerates have always thrived on the basis of their ability to access foreign investments. In this coming year, STOs are bound to tilt the scales and level the playing field.
STOs are not limited to any geographical locations, it is, therefore, possible for companies to present themselves to a worldwide network of investors using STOs. Several service providers such as Polymath, tZero, DUSK, CHX among many others are also quickly emerging to facilitate offerings in diverse markets and languages. This flexibility will definitely aid startups and growth companies to access more funding and create broad awareness. Bounty programs and tokenization will also provide a new and distinctive advertising platform for companies offering Security Tokens. Generally, users can be rewarded for performing certain tasks such as sharing actively about a brand on social media. The global nature of STOs also means that there might be greater market liquidity going into the future.
In 2019 it is expected that STOs will finally fulfill their promise of offering better terms compared to a Venture capitalist. Overall, with STOs it is now possible to raise funds without the risk of the original management teams being usurped by new investors. First and foremost, companies do not need to give up a board seat when raising funds using STOs. Secondly, for equity STOs. Companies will now be able to sell common stocks allowing original stockholders to retain a higher ownership percentage even during a bear market. These improved terms will definitely be attractive to companies who aim to raise funds with STOs in 2019.
Low cost of entry
STOs generally lower the threshold of entry in the capital markets scenes. Normally, a security token can be used to represent diverse assets, commodities, or financial instruments, hence fringe companies are able to raise a large sum of money without incurring large operational costs. Security tokens are integrated with compliance frameworks such as Reg D and Reg A+. Since the tokens themselves are integrated with these frameworks, the tokens can, therefore, be transitioned from one use to another without the need for extra legal interventions.
To offer increased value to security token holders, most companies are still experimenting with the incorporation of utilities within the security tokens. It is projected that in 2019 a majority of companies will continue to provide utilities along with the security tokens, hence STOs will have an extra dimension beyond traditional securities. Essentially, with tokenized offering companies will be able to reward a customer for buying and holding securities. These measures will go along way in not only providing incentives for buying securities but also increasing brand loyalty and consciousness.
All these factors above seen to be good omens for STOs in 2019. Given the past troubles of ICOs and the continued demand for blockchain solutions, STOs might become a solid bet for the immediate future of crowd-funding and investment. STOs provide an unparalleled level of ease, practicability for startups and established businesses to raise funds. Business can leverage the immense potential of the blockchain platform to raise funds for growth and development. On the other hand, investors are provided with a great opportunity to invest in ground-breaking projects while benefiting from the benefits that come around STOs such as utilities. 2019 could be the year that we finally witness the immense potential of STOs in business financing and investment.
As positive this all sounds, the anarchist within me wants to close with a slight note of warning:
They who can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety.
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