Is it possible for the Security Token Offering (STO) to replace ICO?

On 27 Jul., 2019

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Is it possible for the Security Token Offering (STO) to replace ICO?

In the year 2017, a whopping 857 Initial Coin Offerings raised US$6.23 billion collectively which works out at US$7.12 million per ICO. The following year, the number of ICOs shot up to 1257 which a collection of US$7.85 worldwide. The success journey of ICOs was thwarted after the bitcoin price started to slump in the midst of the year 2018. Since then, ICOs haven’t seen making it big as they were earlier. In the year 2019, no one is even trying to gather the data on how the token-based crowdfunding projects are performing. The descent of ICO has certainly forced us to look for alternatives and they have appeared now.

The first ICO was launched in 2013, it was the Mastercoin project which successfully raised US$5 million globally. A year later, Ethereum was launched and it managed to raise funds to the tune of US$15 million. Alongside the rise of cryptocurrencies and products based on them, the number of scams also increased and dubbed the decentralized technology as a scam. The number of scams rose and it impacted the honest players as well, it worked as a catalyst in the global criticism of Bitcoin and other cryptos.

Is the age of ICO over?

Currently, launching an ICO campaign is a very ineffective step, if you aim at maximum fund-raising. Multiple scams have changed the view of investors and have turned them against this innovative idea. This token-based instrument hasn’t remained secure because it can be launched by anyone with a little investment. The generation of tokens, whitepaper and marketing could be easily done which eventually makes the job of scammers easy. The lack of regulations if also a reason which let a large number of miscreants toy with the emotions of investors.

However, we still see a few ICO campaigns which indicate that its era is not over yet. But the deflection towards other means has begun and new methods have made their way in. There is one thing that is unique in the token-based crowdfunding which is the fact that you don’t have to share the ownership of your company as it happens with IPO (Initial Public Offering). Using this instrument, the project owners can raise capital by just offering a decent amount of ROI. But when it comes to the protection of investors’ money, ICOs have failed to perform and that’s why they are on their way to becoming extinct.

Accept the change with Security Token Offering (STO)

ICOs were launched with the help of utility token which does not have an intrinsic value. The token issuer could sell them on a price they want and that made them the favorite tool of fund-seekers. After buying them, the token holders would get access to the products and services offered by the project. A security token is the new kind of token which is backed by real-life assets and are also regulated by the Securities and Exchange Commission (SEC).
The regulatory body’s own ruling states that any token could be considered as 'security' as they are expected to generate profits. Moreover, a security token also fulfills all the criteria set in the ‘Howey Test’ which is done for testing the feasibility of any investment. A security token offers much more than you can expect from digital currency, it even offers some rights to the buyer in many forms. A buyer can expect to have some ownership in real estate or stake as well. Security tokens are subjected to regulations and non-compliance to the latter could cause punitive actions taken against the offender.

Security tokens are distributed through Security Token Offering (STO), a campaign similar to ICO with the basic difference of the nature of coins. Due to affiliation from the regulatory body, security tokens have attracted a large number of investors across the globe. In addition to that, the token holders get the benefits of voting rights and dividends on the basis of their ownership. The advantages of these tokens are not limited only to investors, there are various things offered for project owner as well as a stakeholder.

5 Benefits of the Security Token Offering

The reason the security tokens have become more feasible in the involvement of multiple stakeholders including buyer, regulator, issuer, and exchange. Technically, this token has extended the limit of the business and made it reach different bodies through public markets. It enables the investors to look beyond the norms and achieves all the goals in the course of crowdfunding. The major benefits that you get with STOs are as follows:

1. Tokens are Programmable

In the purview, this is a big advantage that security token provides to its users. It means that various changes can be done in the mechanism and rules can be implemented to its core. The rules could vary in nature and doesn’t have to be necessarily associated with one particular thing, it can include voting rights, dividends, and other privileges too. These rules can be modified and made effective to make a certain aspect better as per the needs of the project.

2. Full Liquidity

The mainstream securities, bonds, and shares can only be traded between 9 to 5 on weekdays. Furthermore, they require some additional days before they go on sale. With blockchain-based trading platforms, tokens become instantly ready for trading. Other than that, it is a lot easier to trade with tokens rather than traditional securities. The buyers and sellers get an option of a secondary market where they can exchange utility tokens. This maintains the liquidity in their accounts and in the markets as well. Also, there are many more benefits than conventional investment options.

3. Access to Global Markets

As compared to the conventional options, STOs helps the project owners reach global markets. On the other hand, IPOs allow you to reach only a regional market which limits your extent and funding thereby. With a token-based crowdfunding campaign, you can reach investors across the globe. This is possible with ICO as well, but again, the security aspects are quite dim in it making the asset-backed token the first choice for security tokens.

We have already seen the extent and scope of crypto, for obvious reasons, it becomes the first choice of every entrepreneur worldwide. With this instrument, the distribution of ROI and dividends also become very easy. The coins can be easily transferred from one digital wallet to another without a hefty price of the transaction fee. When you launch your coin in multiple markets, it reaches millions of investors and escalates the chances of your success.

4. Traceable and Compliant

Compliant is a very profound matter when it comes to cryptos. With security tokens, you can achieve full traceability and compliance at the same time. The very mechanism of this coin ensures that it could be traced which ultimately makes it a much safer option for the investors. It is programmable and the strictures could be embedded in the core of the coins. It makes the setup of regulations very easy and automatic for every single transaction.
It brings a great level of security and efficiency in trading with the help of easy degradation and maximum throughput. It makes transparency a major factor in the trade and gives you what you want in a long-term without leaving scope for any loopholes.

5. Fractional Ownership

Getting ownership is a big thing for any investor and STO fulfills that basic need to the hilt. It also does a great job in diverting the risks of investors and makes the situation easier for every individual who is participating in the crowdfunding event. For the distribution of the ownership of the tokens, it creates a perfect environment and brings liquidity in the markets. With this particular investment, it is possible to avert all the risks and earn benefits which are greater than ever. You also get many options for saving the assets and can invest in highly diversified portfolios.

What are the challenges that STO can face?

Though there are many advantages of using an STO, launching your project using this instrument is easier said than done. Especially when they are compared with ICO, as mentioned above, launching an ICO is very easy. There are plenty of regulations that you have to deal with, which means that you will require legal consultation. In addition to that, the value of a security token is comparatively higher than a utility token. Therefore, the price of driving a security token offering is significantly higher and you need to have a sizable amount fund beforehand to prepare for an STO.

And there are more challenges to face, you also have to deal with the exchanges. One of the biggest advantages of security token is that its liquidity quotient which is high. You need to have access to secondary markets as well because there are potential chances that tokens you launch will be cascaded there. To get things straightened out, you also need to have a thorough understanding of regulations because they underpin security tokens. There are many exchanges which allow the projects to connect with the secondary markets. The former also helps the latter to get the licenses which are required to start selling the tokens. The rise of STO is noticeable in mainstream trading as many exchange platforms have started to list them. Exchanges like London Stock Exchange (LSE), Canadian Securities Exchange, Gibraltar Stock Exchange (GBX), Malta Stock Exchange (MSX), and SIX Swiss Exchange (SDX) are going to list STOs soon. This is indeed an inkling that the little challenges we are facing will soon be overcome.

Will the STO replace the ICO?

We certainly cannot deny that it is eventually going to happen, but it may take a while. The regulations are still being worked upon and they are going to be more conducive for the project and the entire market. The liquidity is going to increase gradually and there will be greater scope for making profits for everyone. The entire market is getting more positive about security tokens as they offer a higher level of security.