There is a lot of hype around Security Token Offerings (STO) these days.
Experts have predicted that 2019 is going to be the year of STOs.
The number of Initial Coin Offerings(ICOs) have depreciated dramatically during the first quarter of 2019 – 280 ICOs a significant dip from the 662 ICOs launched during Q4 of 2018. This is approximately 60% decline. In April the tendency extended with a decline of 84%. In contrast, the number of STOs increased by an impressive 130%[1] in the first quarter.
What is so special about this fundraising tool? Another abbreviation from the crypto world with no actual difference or just a hype-driven growth?
Well, in traditional markets a security is a “fungible, negotiable financial instrument that holds some type of monetary value,” in other words, an investment product that is backed by a real-world asset. A security token represents the ownership information of the investment product, recorded on a blockchain rather than on a document or digital certificate.
There is a huge conceptual difference between ICOs and STOs. With the ICO users buy tokens with the prospect that the token will inflate from the starting price. Later on, they will hope to trade the token with a profit. While many ICOs issue “Utility Tokens”, which seem to be not utilizable enough, with security tokens you have something backing the coin. It may be a tangible asset, profit, future profits or just anything tolerable. The CEO of Goldman Sachs-backed crypto company Circle Jeremy Allaire says that everything can be tokenized.[2]
Being backed by fiat currencies, stablecoin is an outstanding example.
If you feel confused and you are not sure which of the coins are securities or utilities, there is a commonly used Howey test (learn more here[3]).
With this in mind, people can invest in anything that they consider reasonable. Now you can have funds backed by something, not just a paper banknote backed by… nothing.
Traditional capital markets usually have a high entry barrier from both sides. All the investments go through specialized market participants. Both the investor and the company raising money face the high transaction costs, including bureaucratic, regulatory and many other issues.
At the same time, ICOs have a lower entry barrier compared to other capital markets. STOs can take micro-investing mainstream allowing more people to participate in various ventures that were previously restricted.
Furthermore, according to an estimate, STOs have a 99% success rate. Whereas ICOs simply sold their fishy whitepapers, STOs are much more likely to have something real to offer.
With cryptocurrencies highly affected by the market price of Bitcoin, investing in crypto seems more like betting on a dark horse rather than a rationally calculated transaction. In this sense, STOs are directly affected by the performance of the company, specifically its cash flows, or the market conditions of the assets backing the security.
Of course, we couldn’t skip SEC’s (The U.S. Securities and Exchange Commission) – the number one newsmaker of the crypto world – approach to this fundraising tool. SEC takes significant steps towards adoption of STOs and regulating the market. With a slight change in the SEC’s paradigm, generally saying, it is more open to changes occurring in the fintech industry.
The dialectical approach proves as the sustainability of the STO concept, it is not a cyberpunk chimaera. Combining the best aspects of traditional investment models and ICOs Security Token Offerings bring legitimacy, thus guarantees, possibly less volatility and simplicity in investment procedures.
Indeed, if nothing significant happens, 2019 can truly be the year of tokenization.
[1] https://www.inwara.com/report/q1-2019-report
[2] https://medium.com/pillar-companies/the-tokenization-of-everything-a-talk-with-circles-jeremy-allaire-sean-neville-5111f8269a3d
[3] https://consumer.findlaw.com/securities-law/what-is-the-howey-test.html
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