If you intend to become a more successful crypto investor, you need to always stay informed and the first step towards this goal is understanding the pros and cons of security tokens and security token offerings. As the market was filled with too many scams in the last years, the shift in the direction of regulations compliance was, some say, the only way to make sure the crypto market will not only survive, but thrive. Security Token Offerings (STOs) grant startups the possibility of transferring securities to a blockchain. Yet, as any other form of investment, STOs have certain advantages and drawbacks or limitations that we will try to cover in this article.
PROs of Security Token Offerings
Security tokens continue to be the new trend around the world, allowing startups and investors alike to partake in the crypto market in a regulated fashion. When a company issues its security tokens, the process is called security token offering (STO). Thus, it allows the more classical business models to convert to state-of-the-art blockchain technology-based designs.
As opposed to tokens that are proposed as part of an ICO (Initial Coin Offering) which give no rights or obligations but provide access to a certain product or service, tokens proposed as part of an STO are real financial securities that are backed by tangible assets (such as shares or stocks) which offer their holders legal rights (voting rights or parts of the profits) and obligations (securities regulations).
Unlike other investing types, security tokens are cost effective as they come with no costs for buying or selling them. Having reduced the costs, the investors (and in this case token holders) can obtain greater returns on their investments. The blockchain technology allows startups to automate their transactions by recording them on the digital ledger. In addition, smart contracts monitor, track and distribute investment funds without the need of external intervention.
The process of buying or selling security tokens is typically very fast thanks to KYC (know your customer) and AML (anti-money laundering) checks and is available for 24/7 trading; security tokens can be bought or sold at any time of the day, during every day of the week.
The tokenization is the process of converting rights to an asset into digital tokens (like, for instance, a security token that represents a company share). Trading property ownership rights implies that all involved parties are regulations compliant. Security tokens are designed to integrate all these laws and regulations straight into their protocol.
CONs of Security Token Offerings
Security tokens fall under the same legal framework as securities. Too many regulations that need to be taken into consideration, as well as limitations on who can invest in these STOs can be considered the major drawback of security tokens. Also, unlike the classical securities that have exchanges and brokers established worldwide, STOs require the creation of a platform where the tokens are issued and afterwards traded. Evidently, this comes with a cost for the issuing startup.
Another disadvantage of STOs is represented by secondary trading market restrictions as security tokens can be traded only within specific platforms. In addition, security tokens could present a time-lock mechanism (you can only trade them after a predetermined amount of time after the STO).
Having better understood the major advantages and disadvantages of security tokens, you can make a better decision regarding your next investment. The most important thing you need to keep in mind is that STOs do not represent the solution to all the problems currently on the crypto market and not all startups could or should adopt this type of crowdfunding.