Security Token Offerings are All the Rage has ICO 2.0 But in Reality No One is Trading STOs (Yet)
The cryptocurrency space has certainly matured from its initial days and the markets are showing more reliability than ever before. A lot has changed since the 2017 massive bull run which saw a wider expansion and use of cryptocurrencies. Among the plethora of noticeable changes in trends, the most significant one has been the transition towards Security Token Offerings (STOs) from Initial Coin Offerings (ICOs).
ICOs were the go-to options for investors and new crypto startups up to 2018, however, as the popularity of crypto rose, so did the scams associated with it. ICOs slowly became the most likable playground for scammers, luring investors on promises of high returns and vanishing with their money without a trace. This prompted regulatory bodies and law enforcing agencies to tighten their noose around ICO conduction and countries like China and South Korea completely banning the use of ICOs.
The downfall of ICO market gave rise to a new form of crowdfunding called Security Token Offerings (STOs), which promises investor security over their investment. Although the popularity of STOs has gained quite a momentum in recent times, there is a dearth of use for the same.
HYGH, a peer-to-peer advertising network, and content management system has recently opted to raise funds through a token sale, and the company has decided to go with STO over ICO. The main reason behind the decision is said to be the protection of investor funds. CEO Vincent Mueller explains the company's decision on choosing STO.
“We see clear benefits to aligning incentives between the project and its backers, and we believe a compliant STO is the best way to achieve this. We’ve set a small check size of $500, in exchange for which investors will receive a 9% share of the revenue.”
The CEO says that STO has become the benchmark for raising funds as it is one of the most ethical and transparent ways of raising funds which protects the interest of investors as well as the firm. He also added that STOs make the investors a long-term advocate for the company.
In the US, there is a one-year lock-up period before a securitized asset becomes tradable. However, it does not guarantee the same for security token investors as liquidity is the main problem that has emerged. Off-boarding a venture is not as easy as it seems, in order for an investor to trade off their security assets requires a counterparty willing to acquire the same. But, looking at the current market, the number of investors looking to buy security token is quite scarce.
The Various Problems Associated With Security Tokens
The debate over the status of utility tokens is understandable but that does not undermine the problems associated with security tokens. Any form of security be it token, bond or contract must adhere by the regulatory guidelines set up by the concerned authorities. Apart from that, any exchange offering STOs need to get a license from the security regulator, and if you know how regulatory bodies are, it becomes even harder to provide the necessary liquidity for the market.
Josh Stein, CEO of security token exchange Harbor talked about the various problems associated with the security offering industry. He said,
“The issue is getting a critical mass of investments and investors. You can have the best tech in the world, but you still need buyers and sellers willing to transact … It’s like a fission reaction, you gotta reach critical mass.”
Stein emphasized on the need of multilateral approach for the STO Projects which includes issuance platforms, custody providers, secondary exchanges, regulators, and all the other intermediaries who are responsible for looking after the STO landscape.
The Importance of Liquidity
The STO market is fairly new and the restrictions around it surely make it a complicated form of fundraising. The STO markets are definitely bullish, the caretakers and crusaders of the industry just need to find a balance between the offering and the liquidity. Harbor's CEO notes that short term innovation is minimizing the investor amount. But in the long term, when the market grows the options for liquidity will also rise.
Security offerings can also be utilized with cryptocurrencies as has been the case with Kraken exchange, which has begun to offer dividends to its investors with check sizes as small as $1000.
Josh Stein predicts that the STO market is bullish and it would only expand from here and hope that the security offerings become an on-chain component. As of now, most of the security tokenization is being done for traditional assets such as real estate and bonds.