In just the first half of 2018, a little over 2000 projects raised a total of $12.8b.
But, as a wise man from New York once said:
“More money, more problems.”
There’s a lot to talk about regarding ICO-fundraising. A few examples being the outrageous out-of-proportion amounts of money involved, the extremely low success rate and of course, the scamming and scheming issues that surround ICO crowd-funding. The U.S. Securities and Exchange Commission (SEC) is still hovering around quietly and we hear a lot of discussions about whether specific tokens are ‘truly’ utility tokens. If there’s an expectation of profit there, you’re likely at risk.
However, there’s an alternative to this. If you’ve been active in the blockchain space lately, you’ve probably heard this term discussed quite frequently.
STO stands for Security Token Offering, and it’s a new and legitimate way of funding blockchain innovation.
STOs require licensing by regulatory bodies like the SEC, and in layman’s terms, it comes down to tokenizing all kinds of traditional assets into security tokens.
Security tokens give the buyer ownership over whatever the token represents (e.g. equity, derivatives or real estate) in digital form. STOs create more liquidity, accessibility and traceability. Being fully compliant with regulatory frameworks (licensed), they also hold protection against fraud.
Besides, there’s much more accountability when a company fails; from not reporting according to the rules, or just failure in general. All of this would make it more plausible that institutional investors — and thus money — will flow in.
ICO stands for Initial Coin Offering. When doing an ICO, a company doesn’t have to sell equity, and users can buy tokens for use, which — the latter — is great for both parties. Utility tokens represent access to a company’s products or services; they are not an investment in the company itself and users aren’t entitled to anything. Actually, there’s no value until the company delivers what they promise, which they might never do.
Zero accountability, zero value, zero protection — you’re basically buying hope.
Most ICOs are either behind schedule or have already failed, and if these projects want to run away with your money, there is not much anyone can do to stop them.
So, the question we must ask is: Is this the right moment for a new alternative?
What makes STOs a viable alternative to ICOs
STOs are seen as more stable and legitimate than ICOs, and security tokens are tied to real securities, which (may) represent tokenized assets. Asset classes represent an astonishing amount of money, potentially boosting the cryptocurrency market.
As there’s still much uncertainty around future regulation, most Initial Coin Offerings are liable for legal trouble at some point. Security Token Offerings will meet regulatory criteria from the beginning.
Having no threat of government interference is a big deal, while the assurance of a project that the tokens are ‘utility tokens’ doesn’t mean much at all. Issuing a security token and meeting regulatory criteria takes away the risks.
On top of this, we all know there have been numerous cases of fraud, scams and illicit activities around ICOs. Being registered with the SEC drastically reduces any of these — Less risk and more confidence for investors.
For companies, Security Token Offerings bring complex processes and paperwork, while ICOs haven’t brought any real hassles so far. It has been fairly easy to raise ridiculous amounts of money, and this lucrative way of raising funds has been going out for quite a while. On the other hand, it’s becoming clearer that these methods have been dying out recently and investors are starting to see that the token economics often don’t make any sense.
An issue we are seeing with Security Token Offerings however, is that some forms of STOs don’t allow some of these retail investors into the sale. When securities are on the regulated exchanges, most trades will be performed via algorithmic trading, thus bringing centralization. Access to ICOs shifted more to accredited investors as well, but not exclusively.
Another issue; since the demand for tokens is based more on their value and future valuation, it acts more as a speculation tool. As long as exchange-listing of tokens continues, people will continue to do this.
In theory, the set-up of STOs brings a lot of benefits to the table, but we still have to see how it will play out in reality.
As the market gets more sophisticated, investors will likely express a greater demand for security tokens, offering governance & protection. It’s highly likely that STOs won’t replace ICOs, but it certainly looks like an interesting alternative. And with all the backlash and fraud that ICOs have been facing, it makes sense.
We’ll talk more about this subject at Beyond Blocks Summit Bangkok in the STOs vs ICOs panel.
Beyond Blocks will be hosting the next major blockchain conference in the heart of Bangkok, at the InterContinental hotel. After this sold-out, record-breaking event in Seoul, the momentum continues it’s way to Bangkok, where the world will witness exactly why Southeast Asia is the region on the rise for blockchain innovation.
Why you need to be at Summit Bangkok:
– Full two-day access to the conference and exhibitions
– World-class speakers and industry leaders
– Meetups, workshops and amazing networking opportunities
– Because Bangkok is one of the liveliest cities in Southeast Asia!