What is the Security Token Offer (STO), and can it replace the ICO?
12.09.2021 • Просмотров:

What is the Security Token Offer (STO), and can it replace the ICO?

By Decimal

In the project descriptions on Coinmarketrate.com we can easily find information on projects where it is said that in 2017, 875 initial coin offerings (ICOs) were held, for which 6.23 billion US dollars were collected, which is an average of 7.12 million US dollars per ICO. In 2018, 1,257 ICOs were held, which attracted 7.85 billion US dollars, which is an average of 6.25 million US dollars.

It is not surprising that the vast majority of these ICOs were held in the first months of 2018. Over the last four months of 2018, the total amount of funds raised amounted to $873 million.

In recent years, we have seen the growth and decline of the initial placement of coins.

The ICO appeared in 2013, when the Mastercoin project raised 5 million US dollars at the first ICO in history. A year later, Ethereum raised $15 million for the further development of Ethereum. Unfortunately, with the rise in the value of cryptocurrencies, we have also witnessed a significant increase in the number of scammers who tried to get rich quickly. These scammers have negatively affected many honest startups, who considered the initial placement of coins as a relatively easy way to raise funds for their project.

Currently, conducting an ICO has become very expensive, and in many jurisdictions it is prohibited. Due to the nature of ICOs, investors do not have protection, as a result of which many governments create ICO rules to better protect them. Unfortunately, these rules vary around the world, and since ICOs are a global product, startups must comply with a variety of rules. In addition, ICOs require field presentations to promote ICOs, which increases costs.

As a result, the initial placement of coins is now very expensive, and it is better to use this money to develop a real product or platform. Therefore, many people believe that the era of ICO, or the token generation event (TGE), as it is sometimes called now, is over. It was a great race, but the fun is over.

However, the idea of using a token to raise funds gives many advantages. In the case of an ICO, these advantages are mainly intended for a startup: large amounts of money without loss of capital or voting rights.

On the other hand, an investor can only hope that the founders of a startup will keep their promises, since there is no investor protection. This explains why investors have lost interest in this now, which is a sign of the maturity of the market. Therefore, it is not surprising that a new funding model is emerging. One that benefits not only companies, but also investors.

Security Token Offer

The idea of the ICO was to launch a service token. A utility token is a token that provides the buyer with future access to a product or service, or gives the buyer certain voting rights in the network. However, the Securities and Exchange Commission (SEC) claims that many of the offered tokens are actually securities, since both the buyer and the seller expect an increase in the price of the token, which will lead to profit.

A token is a security token if it meets the four criteria set out in the Howey test. The security token offers the buyer certain rights and obligations in relation to a certain asset, whether it is a share in a company or (partial) ownership of real estate, works of art or digital assets. The security token is subject to the rules. Failure to comply with these rules can lead to severe fines.

The distribution of security tokens is carried out during the Security Token Offering (STO). Depending on how the decision is structured, it can give investors many advantages, such as the opportunity to express their opinion through voting, access to dividends and other rights based on proportional ownership of the underlying asset or company.

However, STO not only benefits investors, but also brings significant benefits to the issuer, as well as other interested parties, such as regulatory authorities.

5 advantages of Offering security tokens

Several stakeholders are associated with the security token, including the issuer, the buyer, the regulatory authority and the exchanges. Traditionally, access to public markets as a source of financing was possible only for the largest companies, but with the help of STO, smaller companies can now focus on the public market for financing.

It offers investors a tool that goes beyond speculation, provides transparency for regulators and offers a new business model for crypto exchanges. In general, there are a number of main advantages of STO compared to traditional securities:

  • Security tokens are programmed.

The main advantage of security tokens over traditional financial securities is that they are programmable. This means that you can include certain rules in the security token that are applied automatically.

These rules may be related to the issue of dividends (the longer you hold a token, the more dividends you will receive), voting rights (the longer and the more tokens you have, the more voting rights you will receive) or other privileges. These rules can then become an effective way to encourage ownership and ensure price stability.

  • Full liquidity

Current securities can be traded only from 9:00 to 17:00 on weekdays. In addition, it often takes several days to repay securities. Tokens using blockchain technology can be calculated instantly or within a few minutes. Thus, the service token can be calculated much faster than traditional securities.

When there is a secondary market for the exchange of service tokens (which currently does not exist, but more on that later), it offers investors full liquidity on their assets. Compared to traditional investments, such as real estate, which takes months to sell, this is a significant advantage for investors.

  • Global market availability

Whenever an organization decides to create an initial public offering, it must decide where it wants to conduct its IPO. This may be the country where the company is headquartered, or another country, depending on regulatory requirements, market demand or other reasons. However, with an IPO, the organization will never be able to offer its shares worldwide.

As we have seen with the example of ICO, blockchain technology does not care about borders, and startups attract funds from all over the world. For example, Origin Protocol has raised $6.6 million from more than 1,800 investors from 50 countries. It’s the same with STO.

Suddenly, an organization can offer its security to the global market, which will increase its chances of success. In addition, launching an IPO in several markets usually requires large commissions for banks and consultants in different markets. This is not so on time STO, which reduces the fee for fundraising.

  • Fully traceable and built-in compliance

Compliance with regulatory requirements is key for security tokens. However, the rules vary depending on the type of investor, type of assets or jurisdiction. Combining them all, as a rule, would not be easy. However, since security tokens are programmed, rules can be embedded in the code. This means that after setting up the system, the regulation becomes exponentially easier and automatic.

In addition, security tokens are fully monitored, as are service tokens. With any cryptocurrency, it will always be possible to track the coin for many years, find out who it belongs to and for how long. This will bring transparency to the markets and stakeholders.

  • Shared ownership

Last but not least, there is the possibility of shared ownership. Investors like to give up investments to hedge their risks. However, in the current situation, shared ownership is very difficult when working with expensive assets, such as real estate or art. With a security token, it becomes possible to own a small part of a building in one part of the city, and another part of a building in another area.

Instead of spending all your money on one building, thereby increasing your risk, you can now divide your money into several real estate objects. This will significantly reduce your risk. Since these assets are now also highly liquid, this gives the investor much more opportunities.

What are the problems of STO

However, not everything is rosy, as there are also some serious problems that need to be overcome before the offer of security tokens can become a full-fledged replacement for ICO.

First, they are much more complicated. At the moment when you decide to make an STO, you will have to follow a lot of rules, and the regulator will especially closely monitor you. Therefore, it takes a lot of preparation and serious legal advice to make sure that you are doing everything in full compliance with the requirements.

The second problem is related to exchanges. One of the main advantages of a security token is its liquidity, which means that an investor can sell the token at any time he wants. To sell a token, you will need a secondary market or an exchange (when securities are sold for the first time, this is called an offer on the primary market, but when an investor wants to exchange his investments, this is called trading on the secondary market.

Naturally, these exchanges will have to comply with the most extensive rules, which means that it is difficult to develop a new exchange for security tokens. Existing exchanges, such as Coinbase, recognize the opportunity that STOs offer and are preparing (i.e. obtaining the necessary licenses) to allow secondary trading of security tokens. In addition, traditional exchanges see the opportunities that STO will bring. These exchanges, such as Australian Securities Exchange (ASX), Gibraltar Stock Exchange (GBX), SIX Swiss Exchange (SDX), London Stock Exchange (LSE), Malta Stock Exchange (MSX) and the Canadian Stock Exchange (CSE), offer STO listing and secondary trading. Thus, the solution to this problem is a matter of time.

Will STO replace ICO?

The answer is yes. Although this may take some time, since the necessary ecosystem has not yet been implemented, and the rules are also still being developed.

The advantages of STO over ICO are too great to ignore, and investors will simply no longer accept tokens that do not provide any security.

When there are enough secondary markets to ensure the liquidity of security tokens, and there is clarity from the regulatory authorities, we will see a large increase in the supply of security tokens, and the primary supply of coins will die out like a mammoth.