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


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.

Jayashree Ingle
CBW - External Analyst
INDIA