STO stands for Security Token Offering and refers to the process of creating a security token. By nature, they are similar to ICO projects, but there are several key differences that characterize STOs as secure tokens.
What is an STO?
As with ICO projects, investors receive cryptocurrency or a token that represents their investments. However, unlike ICOs, security tokens represent a contract for an underlying investment asset, such as stocks, bonds, mutual funds, and exchange-traded funds.
Thus, a security token contains information about ownership rights to an investment product, stored on the blockchain. For example, when you invest in traditional stocks, ownership information is recorded in a document and issued as a digital certificate (such as a PDF). In the case of STOs, this is the same process but stored on the blockchain and issued as a token.
STOs can also be viewed as a hybrid approach between cryptocurrency ICOs and more traditional initial public offerings (IPOs), as they intersect both methods of raising capital.
How do STOs differ from ICOs?
It is essentially the same process, but the characteristics of the tokens are different.
STOs are asset-backed and comply with regulatory oversight. On the other hand, most ICOs position their coins as utility tokens, which give users access to their own platform or decentralized applications (DApps). They claim that the purpose of the coin is usage, not investment. As a result, ICO platforms sidestep certain legal frameworks and are not required to register or strictly adhere to strict governance by regulators.
Therefore, the barrier to launching an ICO is much lower, as they do not need to undertake all the preliminary work to ensure compliance. They can also sell their coins (i.e., raise funds) to a broader audience.
It is significantly more complicated to launch an STO, because the intent is to offer an investment contract in accordance with securities laws. Therefore, these platforms will have to conduct preliminary work to ensure they meet all regulations. They typically can also raise funds from accredited investors who themselves meet certain requirements.
What are the advantages of STOs?
During the heyday of ICO projects, many token issuers sold investors token packages without any economic rights, value, or adherence to applicable securities laws.
Security token offerings are designed to be a compliant alternative to regular token sales. They aim to correct perceived inequalities on the investor side, such as providing holders of security tokens with rights to dividends or other predefined income streams.
STO tokens are also beneficial for issuers. There is no need to declare that the tokens have no intrinsic economic value, and they usually have clearly defined stakeholder obligations regarding token distribution, issuance procedures, and secondary transactions.
Other benefits of security tokens include:
1. Credibility. The ICO space is, to put it mildly, chaotic. Many people have been scammed, even more projects have failed to deliver on promises, and most investors are left with worthless tokens. STOs, on the other hand, comply with all regulatory requirements and allow blockchain and cryptocurrencies to regain trust.
2. Free market. Security tokens are not limited by borders or local rules in their usage.
3. Accessibility. Traditional securities contracts only apply to locals, while security tokens are accessible to anyone online.
4. Greater liquidity. Security tokens will be traded on specialized exchanges, providing investors with an easy way to liquidate their assets.
Most importantly, security tokens and STOs allow companies to create a new set of stakeholders with combinations of debt, equity, or deposit roles.
Therefore, security tokens are generally considered an improvement over ICOs. They address the fundamental shortcomings associated with the sale of commercial tokens and can enhance traditional securities.
