Why Security Token Offerings (STOs) Will Replace Initial Coin Offerings (ICOs)
Initial coin offerings, or ICOs as they are more widely known, are a method used by blockchain startups for crowd raising funds needed to launch the project. In March of this year alone, over 500 ICO projects came to market.
Of the various applications and industries being targeted by ICO projects, none is more popular than the creation of platforms and cryptocurrency. The two sectors combined have raised a total of more than $23 billion across 4500 different ICOs.
While in many ways the ICO model has been successful and proved that fundraising can be done without going the traditional venture capital funding route, itʼs not without its problems. Legal hurdles are beginning to reveal themselves and there is widespread negative sentiment surrounding the perceived greed of ICO projects. Whereas traditional tech startups are lucky to raise anywhere near $1 million, ICOs have routinely raised in excess of $40 million with nothing more than a whitepaper (a document outlining the projectʼs vision).
As sentiment toward ICOs has worsened along with the increasingly harsh marketwide downturn, ICOs have struggled to hit their fundraising marks – even with significantly reduced raise amounts. Investors are beginning to turn away from ICOs in droves, leading many to wonder what the future of decentralized fundraising will look like.
Security token offerings (STOs) are rising up to fill the widening void being left by ICOs, and for good reason. Many market observers, pundits, analysts, and insiders consider STOs to be what ICOs should have been all along – securities. In this article, weʼll take a look at what ICOs are and what they lack, as well as how STOs differ in what they offer. Lastly, weʼll summarize why STOs and security tokens are the future of the blockchain industry.
What Is an ICO?
ICOs are a method for crowdfunding used by blockchain tech startups. The way they work is simple for those familiar with blockchain and cryptocurrency, but complicated for those who arenʼt.
In a nutshell, ICOs are blockchain applications and networks that have created a token that has some form of use within the blockchainʼs ecosystem. Some of the tokens offered work as entry credits to the blockchainʼs applications, while others are used as a form of gas that keeps the network running. Since ICOs issue tokens that have some
form of use within the network, their offerings are known as utility tokens.
To raise money, ICOs sell utility tokens to the public at a set price that is usually denominated in ethereum (ETH) or bitcoin (BTC). The funding target is known as the ICOs hardcap.
The problem with ICOs is that they create uses for utility tokens that are not necessary in order to avoid being labeled as securities by government regulators. This has two negative consequences for ICO token buyers:
1. Utility tokens are probably securities anyway, meaning regulators will eventually penalize the ICO project that issued them.
2. ICO token buyers donʼt own part of the blockchain in the same sense that shareholders own a piece of the company. This makes ICO projects much less beholden to token buyers than traditional companies are to shareholders.
What Is an STO?
By contrast, security token offerings are created according to securities laws and regulations from the start. Instead of masquerading as ‘usefulʼ tokens, security tokens represent a direct ownership stake in the STO project or asset.
In the STO paradigm, security tokens wonʼt need to have a creative use case within the project or asset ecosystem. Instead, security tokens can be just that – tokenized securities which indicate some amount of ownership based on the amount of tokens you own. Blockchain projects issuing security tokens can openly setup return on investment (ROI) models for investors, and because those projects will be complying with regulatory bodies, theyʼll be much safer for investors.
Security Tokens Will Tokenize Everything
Bringing securities to the world of blockchain has a secondary effect that will likely bring a tidal wave of money into the space. By allowing for direct tokenized ownership of assets, security tokens bring about the possibility for any asset to be tokenized. Going forward, cryptoʼs new mantra will be tokenize everything – and doing so will finally be possible.
Global real estate assets are worth more as an asset class than stocks and debt combined. By some estimates, global real estate assets top $170 trillion in value. Problematically, there is no way to spread that liquidity worldwide, as the assets themselves and the systems which support them, sell them, and transfer them, are all too physical.
Security tokens can be used to directly represent, or tokenize, real estate assets, giving them the advantages of instant, frictionless, worldwide liquidity and trustlessness that are innate characteristics of blockchain.
This model can be used on any asset in existence, unlocking a pool of global liquidity that has never been seen before. So, while the bear market may have your portfolio looking red, there are changes happening in the background that will bring cryptocurrency markets to all new heights.