Security Token Offering vs Initial Coin Offering: STOs Look to Restore Trust In Crypto After ICO Bubble
Can STOs Restore Trust In Crypto Which Was Lost Because Of ICOs?
The explosive increase of ICOs in 2017 has already been doubled in the first half of 2018 with over $13.7 billion raised by ICOs this year. While established venture capital deals still dwarf these numbers, the rapidly expanding fundraising model has shocked the world of finance and widened the surprised eyes of even the most weathered investors.
Despite the remarkable success of ICOs, there is already a new model on the rise, called a Security Token Offering, or an STO.
One might be hard-pressed to think that the two are largely different but they are rather similar. However, in order to understand what an STO is, one must first understand Initial Coin Offering (ICO). The latter refers to a token offering from a company or organization in order to raise capital for a project. Buyers are issued with digital tokens. Unfortunately, ICOs are largely unregulated, thus putting investors at risk.
Many investors focusing on blockchain and cryptocurrency-related opportunities have lost money from fraudulent ICOs by fraudsters that have elaborate scams aimed at earning them some quick easy cash. This, plus the lack of regulatory guidance are the reasons why ICOs have received a lot of opposition from regulators. An STO is a token offering that is similar to an ICO but the main difference is that STOs are regulated.
Problems With ICOs and STO’s Solutions to
- Token Status: The status of tokens issued in the course of a fundraising campaign has been the stumbling block for the majority of ICOs. Most of the projects consciously define their tokens as utilities — putting it simply, as an inner currency of a particular product or service, intended solely (de jure) for its operational needs. Most investors never buy tokens during an ICO campaign in order to buy the services of a particular application in a year or two. They do so to gain profits. Which is, by the matter of fact, can be considered as an indication of a security. When doing an STO, founders do not have to invent a use case for their token within their platform, product, or service in order to raise investments. Security tokens constitute financial instruments, backed by a particular asset (equity, debt, real estate, etc) and are fully compliant with all legal requirements.
- Investor Rights: Projects avoid stating any revenue promises in white papers, as they are legally not authorized to do so. It creates a tricky situation; investors want to gain profits, but they do not have any rights for any asset and revenue distribution. Plus, there are no guarantees that your tokens won’t be stolen as a result of a hack or that you will not forget or lose your account details, that can not be restored. Unlike utilities, security tokens provide investors with clearly defined (and fully legal) rights — a share in a company, revenue distribution, voting rights — these parameters may vary, but these rights will be guaranteed as the whole process is backed by the over-100-year-old regulative system.
- High Scam Risk: According to some estimations, about 80% of all ICOs in history were scams. In 2017 a lot of intentionally fraudulent projects took advantage of unregulated fundraising schemes and zero taxation. while STO does not fully solve this problem by itself, the implementation of blockchain technology provides a very useful solution: the DAO principle.
Can STOs Restore Crypto’s Lost Trust?
STOs are registered with the Securities and Exchange Commission (SEC) and they take advantage of securities exemption such as Reg A+. They, therefore, have a lot of similarities to shares. For example, tokens issued in STOs give investors some rights to the firm or organization issuing them.
The registration with the SEC is one of the ways in which STOs promise to offer more security to the investor. This is because the registration with the regulator discourages fraudulent individuals, thus allowing only the projects that are legitimate and serious about their pursuit. The registration process is also similar to the registration process for Initial Public Offers (IPOs) and this not only a positive step for investors, but it should also eliminate government concerns.