This far in the blockchain industry, startups were funded by Initial Coin Offerings (ICOs), thus allowing people around the globe to use this method of crowdfunding to invest in the earliest phases of the project. Unfortunately, while ICOs have managed to raise great amounts of money, they also generated a lot of scams or shoddy projects that made traders lose their investments. It is obvious the cryptocurrency market needs to shift towards a more ethical and regulations compliant environment. STOs might be the only solution as they bring legal compliance to a transparent and decentralized market.
What are STOs?
In simple words, a Security Token Offering (STO) is an initial coin offering that is legally complaint. Security tokens are actual financial assets (like banknotes, bonds, stocks, futures, options or swaps), called securities, that are recorded on a blockchain (or distributed ledger). The main advantages to the “tokenization” of securities are: transparency, accessibility for traders and investors alike and easiness of auditing the records (as they are public and accessible to anyone that is part of the blockchain).
With a legal framework for securities already well defined and established all around the world, STOs have the foundation to make sure the crypto market will thrive.
Why STOs and not ICOs?
While utility token holders own nothing more than an app coin (that enables their future access to the services or products the company will offer), security token holders own a share of what the startup is supplying or producing (the tokens being backed by actual financial assets). In other words, a security token is a security (such as stocks, derivatives, deposits and so on) in crypto form, thus more accessible and faster to trade.
The shift in the crypto market towards security tokens comes naturally after a long period during which ICOs (initial coin offerings) were used to scam a large number of investors. It is reasonable for investors nowadays to show interest with respect to security tokens thanks to their regulation compliance. Regulators could no longer ignore the huge market for ICO fundraising and started to take a stand in the sector. They focus mainly on guaranteeing fair treatment between traders/investors.
Given the possibility to choose between utility and security tokens, investors would always favor the latter, that give the holder more benefits such as equity stakes, dividends (or passive income) or voting rights. In addition, utility tokens remain in the legal “gray zone”, where being legally-complaint is not mandatory.
Security token offerings guarantee more protection for investors as they comply with laws and regulations, creating initial coin offerings more lawful in the investing market, thus reducing the number of scams and less likely to face legal problems. STOs rule out the incidence of pump and dump schemes and offer token holders more reliable instruments to invest and benefit from their funds. Thanks to the fact they provide investors with confidence and greater security, STOs are less volatile and more legit than traditional ICOs. Will such features, STOs will be the future of fundraising in the blockchain industry.