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Security Token Offering (STOs) Emerging as Holy Grail for 2020

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Crypto Business World

CBW -External Analyst

INDIA

Jan, 09 2020

Jan, 09 2020

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After the euphoria of Initial Coin Offerings (ICO) in 2017 and their steep decline in popularity, excitement for a Security Coin Offering (STO) has been surfacing vehemently in recent times while shrinking the ICO space. After the scams and frauds corrupted the reputation of the ICOs, Security Tokens (STOs) entered the markets in late 2018s which are perceived as the latest iteration for capital raising with more promising proposals for the investors. Several startups and businesses are considering STOs as a fresh business model to raise capital involving the general public and institutional investors as well.  Delving more into the comparison, it’s apparent that the STO model is more robust than the ICO model.

ICOs and STOs are the Same?
Many of us are tangled a bit with the resemblance of the ICOs and STOs as both are blockchain-based tokens with several other similarities. But we can count on a number of differences to differentiate them. 

                      ICO

                       STO

ICOs are a technological products

STOs are financial product

ICOs are less regulated.

Funds raised are enormous but investors security is perilous

STOs are more Regulated and offer 100%regulated offerings so less perilous for investors

ICOs follow crowd-investing model i.e. Anyone can launch and invest in ICOs

STOs allow only legally recognized bodies and accredited investors to invest.

They are publicly traded at crypto exchanges

They are traded on specialized security exchanges.

 

They issue Tokens

They issue Ownership

They are less expensive

They are more expensive

They are prone to high volatility

They are prone to less volatility

They have an 80 % failure rate so-called as Wild West

They are more stable and thus are called Settled frontier

They are easier to launch with minimum upfront compliance work regarding the regulations

The launch procedure is more time consuming, more expensive and more strenuous owing to strict regulations imposed on STOs

They are more risky with high vulnerability to scams

They are less risky with less vulnerability to frauds

They have low liquidity value

They have high liquidity value

 
 While pondering over the differences, it’s apparent that STOs are a boon in several aspects. But First, let’s dig out the reasons behind the instant popularity and the downfall of the ICOs.

Initial Coin Offerings (ICOs)
ICOs in the crypto industry are similar to IPOs in financial markets. But they differ in the core structure. ICOs lack regulations and they are decentralized and thus more unrestricted in structure. Startups looking for expansions generally adopt various capital-raising techniques. In conventional markets, companies aiming to raise large funds invite public involvement and sell them shares through Initial Public Offerings (IP0s). Surpassing the conventional methods of fundraising, the crypto industry embraced a similar avenue with Initial Coin Offerings (ICOs) for massive capital raising. Many crypto startups raised billions of funds by offering coins, or apps or services with lucrative return offers. ICOs were instant hits in markets as they are decentralized, highly unregulated, offered high-profit margins with several other benefits like anonymity for buyers. But the lack of regulations has victimized the ICO investors with billions of scams and financial losses.

In 2017, 297 ICO schemes turned fraudulent, in 2018, around 631 ICO launches were duplicitous and $100 million were stolen whereas in the second quarter of 2019, on average, $4.3 billion were lost through the ICO token scams. Owing to the sudden upsurge of these digital tokens and the fraudulent activities taking their toll. Regulatory bodies across the world have started restricting them within their boundaries. ICO Tokens got popularity in the video gaming industry, blockchain-based services, and social networking sites. So apart from many governments, Facebook, Twitter, and Google have blocked ICO related ads in 2018 to curb ICO related frauds.

Security Token Offerings (STOs)
The first Security Token was launched in April 2017, by blockchain Capital (BCAP) which raised a record break capital of $10,000,000 in a single day. Since then the STOs have gained traction in the last couple of years. STOs offer a fully regulated investment contract to the investors which resembles the conventional investment assets like funds, stocks, derivatives, real estate, etc. The ownership information is recorded on the blockchain which makes it secured and immutable. And the investor is issued a token. These are 100% regulated tokens launched by trustworthy regulated bodies so offer more security to the investors. STOs are further traded by registered entities which makes them safer.

Past Successful STO Projects
Spice VC, Open Finance Network, The Hub at Columbia, tZERO, Science Blockchain (SCI), Quadrant Biosciences, Aspen Coin, sharespost are the past significant successful STO projects. 

Prediction of STOs for 2020
2020 seems to be favorable and promising for Security Token Offerings (STOs). The STOs are now launched through improved infrastructure technology, lower launching costs on a well-structured platform. The occurrence of critical custody and regulatory framework will help to flourish them more in the upcoming years. Through the number of platforms including the Swarm, Polymath, Harbor, and Securitize, STOs are being offered.

STO Regulatory policies in Various Countries

China
In the first week of December 2019, China has announced that it will soon allow STOs within a rigid regulatory framework.

US
Under the strict regulations of the US Securities and Exchange Commission (SEC), STO projects are on the rise with regulation exemptions allowed under another set of rules and regulations

UK
In January 2019, The Financial Conduct Authority (FCA) in the UK announced recognition of security tokens similar to traditional securities.

Switzerland
Switzerland’s The Swiss Financial Market Supervisory Authority (FINMA) has classified STOs equivalent to traditional securities including the bonds derivatives and equities

Japan
Even in Japan, the Security Tokens have been regularized under the Act of Settlement of Funds and the Financial Instruments and Exchanges (FIEA).  

France and Italy
MiFID II regulatory body from Italy and French Monetary and Financial Code (MFC) from France to have initiated a favorable atmosphere for security tokens by classifying them under conventional securities.

STO prospects in Europe
The prospects for security tokens are brighter in the EU as the European Securities and Market Authority (ESMA) has increased the securities value limit up to € 1 million. These STO friendly policies in Europe will surely fetch more investments for startups and medium-sized companies.

Concluding Words
In 2020, more regulatory clarity is expected worldwide. It will surely augment the growth of the STOs.  Analysts predict that STOs will sweep a $10 trillion market in the upcoming year. With the majority of the economies favoring the STOs, it is surely going to alter the investment landscape in 2020. STOs arrival is perceived as a mature phase in the Crypto industry.


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Crypto Business World

CBW - External Analyst

INDIA

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