What is an STO token? How Are they different from ICOs? will this be a game-changer for the crypto market? I will delve into these subjects and provide my perspective on them.
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 providing freedom, banking the unbanked, and getting rid of the wheelings and dealings by the banks. However, the last years have suggested that we – the worldwide crypto community, cannot handle the amount of provided freedom, unfortunately. Maybe it just needs time to build the magnitude of personal responsibility; maybe we will never achieve it. Nevertheless, for a crypto price surge, it seems mandatory to let regulation and rules in – managing the wild west of crypto and making it more reliable for the big boys. This is what STOs are supposed to do for the former ICO market.
How did it start?
2017 Initial Coin Offerings (ICOs) raised over $5.6 billion in 2017 and $13 billion in 2018. However, only 8% of successful ICOs have made an impact, with many being accused of scams and fraud. Security Token Offerings (STOs) were introduced to address licensing and compliance issues.
For many people, STOs can be defined as regulated ICOs. However, there is more than meets the eye. At the same time, ICOs are generally utility tokens; security tokens are actual securities backed by real-life assets such as property, cash, profits, or company revenues. Essentially, the only significant difference between traditional securities and STOs is that STOs are operated on the blockchain platform.
STOs must be subjected to rigorous vetting and evaluations within their legal jurisdiction to be approved as securities. While they have slowed progress in adopting STOs, investors and companies are slowly warming up to these new regulations. Critics of STO tokens 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 years, it is evident that regulation is long overdue and ultimately inevitable.
How ICOs compare with STOs
Initial Coin Offerings, or ICOs, have been primarily developed to crowdsource funds for a project. Most ICOs offer Utility Tokens that provide access to a particular product or service within a platform. By convention, utilities do not allow holders to reap the project’s profits. To provide more value to holders, most ICOs have offered some profit incentives to token holders. This move has eked the ire of regulators such as the SEC. Hence, regulators have been on the heels of ICOs recently.
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, options, shares, and warrants. By owning securities, one owns a part of an organization and is provided with unique benefits such as voting rights, preferential treatment, and so on.
Overall, ICOs were developed to leverage token economics, and many investors prefer them for their liquidity and ease of speculation. While similar to ICOs in raising funds, STO is distinct in that the participants are investing in security. ICO participants are primarily viewed as users who pay to receive certain benefits from the platform or reap from the speculated growth of the said STO Tokens or coins.
Why 2023 might become the year of the STO?
After the exuberance of 2017, ICO/STOs underwent considerable growth in 2018 without reaching the expected threshold. Many experts, investors, developers, and users have expressed optimism, but when will STOs come of age? As trust builds and the Crypto space continues to evolve, we will witness both seasoned and inexperienced investors embracing STOs. Large organizations and startups will also embrace STO as the gold standard for crowdfunding. Below, we examine some of the reasons behind these projections.
STO Tokens will solve the Problems with ICOs?
Most ICOs are rolled out to bring a project to fruition. The challenge with this model is that most tokens issued do not have any utility since the platform they operate is yet to be developed. Essentially, most utility tokens being issued depend on the project team’s trustworthiness and ability to deliver the said projects. Unsurprisingly, investors are left vulnerable to scams and unprotected in case of failures due to their unregulated nature.
STOs solve this problem since investors are given security through equities, bonds, or stocks. Since real-life assets back their investments, investors can rest easy. Investors are rewarded with dividends 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 regarding investor preference.
Generally, STOs offer increased transparency compared to 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, allowing investors to participate in project decision-making.
One of the most significant criticisms that has been leveled against cryptocurrency is that it lacks intrinsic value. Reputable corporations and individuals have dismissed the crypto-space as hot –air with no value. The mainstream financial market has yet to appreciate cryptocurrencies for their force. The entry of security tokens promises to change this paradigm.
Companies such as Polymath, Harbor, 0x, Open Finance, and Tzero focus on giving STO tokens and cryptocurrency real intrinsic value. With actual securities such as equity and stocks now attached to Security Tokens, STOs can 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 operate outside the law. This has generated continued anxiety and uncertainty among investors. The volatility witnessed in the crypto space 2018 can be partly attributed to uncertainty and confusion emanating from regulators’ mixed signals.
The entry of STOs as exclusively regulated blockchain securities has improved this situation, while not in the actual sense of the cypherpunks. Investors are now offered increased clarity on where they stand within the law. Legal security tokens will catalyze a more significant, less volatile, legitimate market.
The valuation of most ICOs tends to be astronomically high despite having very little in terms of product. Since the highs of the 2018 top, the market has severely punished ICOs and cryptocurrencies. Some ICO projects have topped again in 2021. New ICOs are still not realistic about their valuations. More STO compliance will require projects to prove their valuations more realistic.
STO tokens: Increased Usage
Between 2018 and 2023, significant brands and companies recognized cryptocurrencies as a legitimate way of payment. Microsoft, Paypal, Subway, Expedia, Shopify, Overstock, and Pizzaforcoins are leading the way in adopting cryptocurrencies. In 2023, more companies were expected to follow. Experts project that cryptocurrencies will transition from a speculation tool to a tangible medium of exchange, potentially decreasing volatility.
Furthermore, proponents of blockchain and cryptocurrency argue that decentralized applications(dApp) are the way to go. With increased innovations and developments on the Ethereum ER20 platform, there is bound to be an immense improvement in areas such as sharding and implementing 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 ripple effect on STOs and crowdfunding. The blockchain platform will become more reputable in facilitating critical transactions, and trust in the system is bound to increase in 2023.
While companies that have engaged in STOs were nascent startups in previous years, it is expected that in 2019, more established companies will move to raise funds using STO tokens. Companies that have gained some traction within the industry will aim to expand their businesses via STOs. This will primarily be accomplished by rationalizing the business process through blockchain and smart contract tokens.
STO tokens: Access to global markets
Historically, the growth and development of small and medium enterprises have been continually hampered by a lack of reliable and consistent funding. Most large conglomerates have thrived based on their ability to access foreign investments. STOs will tilt the scales this coming year and level the playing field.
STOs are not limited to any geographical location. 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, and CHX, are also quickly emerging to facilitate offerings in diverse markets and languages. This flexibility will 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 specific 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 2023, it was expected that STOs would finally fulfill their promise of offering better terms than 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 can now sell common stocks, allowing original stockholders to retain a higher ownership percentage even during a bear market.
Low cost of entry
STOs generally lower the threshold of entry in the capital markets scenes. A security token can typically represent diverse assets, commodities, or financial instruments. Hence, fringe companies can raise much money without incurring enormous operational costs. Security tokens are integrated with compliance frameworks such as Reg D and Reg A+. Since the tokens are integrated with these frameworks, they can be transitioned from one use to another without extra-legal interventions.
To offer increased value to security token holders, most companies are still experimenting with incorporating utilities within the security tokens. It is projected that in 2019, most companies will continue to provide utilities and security tokens. Hence, STOs will have an extra dimension beyond traditional securities. Tokenized offerings can reward a customer for buying and holding securities. These measures will go a long way in providing incentives for buying securities and increasing brand loyalty and consciousness.
Conclusions on STO Tokens
All these factors above seem to be good omens for STOs in 2023. Given the past troubles of ICOs and the continued demand for blockchain solutions, STOs might become a solid bet for the immediate future of crowdfunding and investment. STOs provide unparalleled ease and practicability for startups and established businesses to raise funds. Businesses can leverage the immense potential of the blockchain platform to raise funds for growth and development. On the other hand, investors are provided with an excellent opportunity to invest in ground-breaking projects while benefiting from the benefits of STOs, such as utilities. 2023 is the year that we finally witness the immense potential of STOs in business financing and investment.
As positive as 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.