Some people believe that STOs will eventually completely replace the original Initial Coin Offerings (ICOs). Others believe that STOs in their current form actually take away from a lot of the original positives that crowdfunding through an ICO provided.
Due to the unregulated nature of ICOs, they are very susceptible to fraudulent activity and a large number of investors have been left out of pocket. Furthermore, due to there being no regulation for ICOs, stolen money can almost never be recovered.
This means there were, and still are, two main problems.
Problem A – market. More than 78% of all ICOs were identified as scams so investors will not invest in something they don’t believe anymore. This led to the coin market vulnerability and slowing ICO market down.
Let’s see the numbers.
Problem B – legal. By the conclusions of Securities and Markets Stakeholder Group (ESMA), absent a legal tender status or central banking backing, the market price of such tokens cannot be rationally assessed and merely depend on offer and demand. Moreover, there is also a risk of market abuse. It has been argued that some “investors” in payment tokens are actually diversifying their holdings from large cryptocurrencies into others. Collusion among them could result in prices being maintained artificially high and in the manipulation of a block of transactions (possible with more than half of the mining power). Moreover, there are risks that private data or digital identification get lost or are stolen.
Will an STO solve this?
In the very beginning, let’s first say what security is.
“In terms of finance, security is a certification or some other financial instrument, that has an intrinsic monetary value. These securities can then either be traded by exchanges, who will broker the transaction or, they can be traded directly from peer-to-peer. These securities are then broken down into two subcategories, equity, and debt securities. This is in effect, owning part of a company, without actually taking it into your possession.”
So What is STO – Security Token Offerings?
STO is similar to ICO. It allows consumers to buy digital coins or tokens as a part of a public offering. However, unlike many ICO’s; STO’s are the sale of tangible securities such as assets, profits or revenue of the start-up.
What are the advantages and disadvantages of STO?
All of the above means that STO will cost more (time and money) than the ICO. The procedure will still be very similar to the IPO, but still cheaper. Why? For example, smart contracts can still lower the operational costs of the entire process.
Every STO is required to be compliant with relevant financial regulations as well as being overseen by the regulator, thereby providing credibility to the project and security to investors/token purchasers.
This means that when launching an STO, you would need to enlist legal support to help you properly understand the required regulatory practices. All of this legal red tape can be expensive. However, it also provides protection for businesses who are looking for investment. So, in the near future, the assumption is that there will be far fewer STOs, but this form will be regarded as far less risky than ICOs.
How did we see the future of ICO last year?
Author: Dunja Funduk