Security Token Offering (STO) or Initial Coin Offering (ICO)?
In 2018, ICO has been the most popular three letter word among the Blockchain investors In the world. Since past three years, the ICO’s have raised a massive $5.6 billion and made investors rich. While ICO space is huge and they raised good money in 2017 and 2018, the increasing number of regulations, stepping up of SEC on ICO companies, banning of ICO’s by the government made blockchain startups with tokens look for an alternative route. That is the reason why ICO’s started shutting down in the second half of 2018.
In a traditional ICO, tokens or coins are offered by companies in exchange for cryptocurrencies like BTC or ETH, as a form of crowdfunding. These tokens can then be traded against different cryptocurrencies on exchanges.
With ICO’s coming down in the second half of 2018, a new term in the market emerged, called Security Token Offering (STO). STO’s were first introduced by Polymath in 2018 and are believed to be the next big revolution in the blockchain industry.
So what exactly are STO’s?
A crypto token that fails the Howey Test is deemed a security token. In simple terms, STO is similar to an ICO in that an offering is made by a company or business to the crowd, and customers purchase the crypto tokens built on a blockchain. While ICO’s are the sale of tokens and coins, STO’s are the sale of securities. STO purchasers receive security (equity, debt, revenue share etc) in the form of a token. STO companies are registered with the SEC. So all security tokens are subject to federal security and global security regulations. That is the reason STO’s are believed to increase the investors trust in various projects.
There are many issues with ICO’s and the solution for these issues seem to be lying with the STO’s, some of which are listed below:
- Reduced Scam: In the past, over 80% of all ICO’s were scams. Lack of regulations resulted in fraudulent ICO’s that made investors lose their valuable money. Security tokens offer a more transparent fundraising solution with regulations predefined by SEC for the company and the investors thereby making them legitimate.
- Investors Confidence: To create an ICO, companies have to define a use case for their tokens to raise money. Whereas for an STO, companies do not have to invest in any use case for a token as all the tokens are backed by law.
- Investor Rights: ICO’s do not offer any legal rights for revenue distribution, whereas STO’s does. Also, in case of hacks or stolen assets, STO’s promise added security, unlike ICO’s.
In conclusion, we can say that STO is a powerful concept and it has the potential to raise more crowdfunding for blockchain projects, which is critical for every project. It will also help to bridge the gap between the blockchain community and the government by aligning the blockchain projects with the government regulations. As of now, security tokens have a far less share in the market as compared to ICO tokens, but in the near future, they are expected to gain popularity by providing solutions that bypass the problems associated with ICO’s.
As a leading Blockchain development offshoring company, Prolitus helps businesses build the right STO platform & campaign, as well as fully automated token sale platform for launching their ICO’s.