It’s no secret that cryptocurrencies took the world by storm over the course of the last two years. This global phenomenon is still the hottest topic among the world industries, as the rise of cryptocurrencies spawned an entirely new generation of start-ups that launched their businesses based on this concept.
With this new generation of startups comes a new generation of non-conformists along with their efforts to change the image of money as most people see it.
While there are so many business opportunities coming from cryptocurrencies, all the world industries and individuals as well are looking for the best ways to use the internet and blockchain to their advantage.
If we look at the dynamics of technology and business changes today, it’s safe to say that the internet will play a crucial role in shaping the future of the business industry.
The best proof for this is STO or security token offerings. Just two years ago, initial coin offering or ICO was the main player in the cryptocurrency market. But this has ended, and 2019 will see the rise of STO instead of ICO.
Perhaps the biggest reason why STO replaced ICO is that ICO was related to several high-profile scams, so the world cryptocurrency market simply lost its trust in ICO and it was time for something completely new, for a real game-changer that would bring some positive change into the online money market.
With all this in mind, we’ll cover a few important points related to STO such as what they are, what to expect in 2019 when it comes to STO – the benefits, and so on.
What are Security Token Offerings?
Put in simple words, STO is nothing more than digital money that has a certain value in the virtual environment. There are two types of tokens:
- Utility tokens
- Security tokens
Anyone who has already dealt with any kind of blockchain project is well aware of what utility tokens are.
These tokens are mostly Ethereum-based currencies, used to buy services such as access to certain features within some blockchain platform, storage of data or as payment for items. Security tokens are the opposite of utility tokens.
STOs give their owner an opportunity to get a share of a company’s equity or an asset for which that particular security token is issued. That means that the owner is now allowed to take participation in capital management.
Since these tokens are similar to traditional stocks, they are heavily controlled by governments. This an excellent thing for the investors, as it guarantees the necessary legal protection, as well as faster transaction speed compared to the traditional ones.
STO vs ICO
ICO or initial coin offering is a very popular term in the world of cryptocurrencies. The beginning of cryptocurrencies wasn’t all shiny, there were a lot of troubles and to overcome those troubles, ICO came to life.
After the introduction of the ICO concept, an entire network of different cryptocurrencies was developed with the main goal aimed at establishing a secure line of exchange between the newly established currency and other well-known cryptocurrencies like Ethereum and Bitcoin.
The biggest difference between ICO and STO is the level of security. When ICO hit the sky-high limits of its fame, countless scammers saw a golden opportunity in all those immense trusts from numerous investors, which resulted in serious high-profile scams.
Because of all that, ICO lost its credibility in 2018 and that’s how STO was born. It was another form of fundraising, much more secure and controlled by the government, eliminating any chance of scams.
This is also the first time that some cryptocurrency, as well the token lenders, was subjected to regulations, as the concept of crypto was to bypass governments and regulations.
When thinking about STO, perhaps the biggest similarity to these security tokens are the securities that investors get while investing in bonds and stocks. So in the battle of STO vs ICO, ICO loses for several reasons:
- Due to recent scams, ICO contributors experienced a significant profit reduction.
- ICO lacks the necessary transparency in the online world.
- The slow introduction of blockchain into the traditional market only further weakened the position of ICO.
- The absence of initiative and real-world implementations from ICO project teams.
When comparing STO with ICO, STO is better as it has two main advantages: reliability and safety. In case that ICO disappears, there is no compensation for the loss of the investors’ money.
With STO it’s a completely different story due to strict legal regulations and demands that exclude any potential risk of financial and online frauds. Therefore, most online investors consider STO to be a secure and profitable investment.
Benefits of STO
When it comes to STO investments, not everyone can access these, as there are certain demands that STO investors have to comply with. There are two cases when investors can be attracted to a project:
- When a project is registered in SEC.
- When a project isn’t subjected to the Securities Law taxes.
In the USA, only accredited investors with $200,000 of minimal annual income per person are allowed to participate in STO campaigns. When it comes to financial organizations, the numbers go up to $5 million worth of digital assets. So, with all this in mind, there are two huge benefits that come from STO:
- Regulated STO
- Exemption regulation STO
Regulated STO gives all the necessary rights to token holders and once a project is examined and approved by SEC, there are literally no legal risks at hand. Such projects offer a huge gamut of advantages for registered investors.
They can have limitless crowdfunding caps, use instant exchange services, publish advertisements, and work with non-accredited and accredited investors. Still, there’s one downside to this.
The process of STO registrations involves tons of paperwork, it’s expensive and time-consuming. All that extra security and safety is obviously not without a high cost.
On the other hand, exemption regulation STOs come with certain legal restrictions such as working with accredited investors only.
Then, there’s a 12-month blockade of purchased tokens, which significantly affects the liquidity of the investors. Finally, all exemption regulation STO projects need to go through strict blue sky laws in order to comply.
These additional problems and troubles are necessary to keep STOs reliable and safe for online trading and eliminate the risk of them going through the same faith as ICO. Still, to shed some light on all this, it’s still easier to initiate an exemption regulation STO than any of the official SEC project examinations.
Last but not least, since STOs equal traditional bonds and shares, most token holders recognize additional opportunities in STOs, especially when it comes to investing. All these benefits are the biggest reasons why STO took over the digital money market so easily.
What is STO bringing to 2019?
2019 is officially the year of STO, which only means that STO will bring a few changes. Since this is an important thing to consider when it comes to the future of the digital money and market, we can safely say that STO will bring a lot of interesting things to look forward to in 2019. Two things, in particular, are extremely interesting:
Blockchain will become more than welcome in the eyes of governments and banks — with such a high level of financial safety and security, both governments and banks will no longer look at blockchain as something that usurps their monetary systems and the traditional way of doing this.
This alone is already revolutionary as it’s beneficial for both the people and the financial and governmental institutions. Still, most banking institutions see crypto and blockchain as a threat and progress in this field is yet to be made.
The fundraising market will see its full rebirth upon the rise of STO — in the past, ICOs were in the foundation of almost every fundraising and crowdfunding campaign, but since STOs are slowly but surely taking the place of ICO, this trend will see a change in the favor of STO.
This will also encourage thousands of people who lost their faith in ICO to restore it and go ahead and make their investments — they can now trust in STO, as it’s backed by additional security.
STOs are yet to prove their value and worthiness but there’s no doubt that more and more investors and companies from all over the world are now turning their minds towards the plethora of possibilities and investing opportunities that the rise of STO has spawned.
Regulations that impact STO
When it comes to STO regulations, it’s important to mention that these are high stakes that we’re talking about here. This means that the regulations are extremely strict and rigorous and apply to all, without any exceptions.
Despite all that legal security, there are still certain compliance issues, which we at MVP Workshop are working on in collaboration with Swarm, one of our partners. With that in mind, Market Access Protocol is introduced as a new standard in the trading security tokens industry and it is to help solve all difficulties and existing inefficiencies encountered by token qualification providers, exchanges, investors, and token issuers.
MAP is to make sure that the flow of all securities transactions on the blockchain is according to the SRC20 — which is security tokens cryptographic standard. Such a protocol is simply necessary as we still don’t know all the possibilities and consequences as well as advancements of security tokens.
Because of that, it’s mandatory to keep those advances in compliance with the regulatory environment that comes with those advances. Therefore, all investors need to obtain permission or qualification to invest, all according to regulations and laws that apply on securities as viable investments.
MAP vindicates this identity verification and makes it a bit more pleasant for the potential investors instead of it being just another regulation or a strict rule. All crowdfunding companies need to register their practices. When it comes to STO regulations, there are a couple to mention:
- General solicitation — it includes using the general public to raise capital through a form of advertising.
- Restricted securities — securities with certain limitations that can’t be traded freely until certain conditions are met.
- Preemption — there are certain exemptions in the SEC laws concerning a case when a preemption of an investing offering occurs regarding companies that wish to issue their securities, as these companies need to comply with federal and state and all additional laws that follow such regulations. If this happens, such securities won’t have to register with the state regulator.
According to the most recent studies, cryptocurrency is on the rise, as $5 billion has been added in value in 2018 alone. This means that there are new online business models all over the internet!
Security Token issuance is free!
When it comes to offering STO, Swarm might be a good idea as they are offering issuance of STO tokens for free. In fact, Swarm is the very first live blockchain platform that allows anyone to co-invest in high-return assets, which was formerly the privilege that only wealthy and well-connected could enjoy.
Swarm allows for the tokenization of good investment opportunities and their unique framework simplified the entire flow of transactions which greatly helped solve many of the compliance issues.
With their own way of offering tokenization for free, they have revolutionized the realm of digital investments with the vision that was built on three pillars:
- Tokenization — token creation, token configuration, fundraising, token management
- Compliance — investor qualification, transfer restrictions, rules execution auditability
- Governance — asset management, policy change, civic engagement, upgradability
These three pillars are the foundation upon which Swarm shares their security token investing opportunities with all the participants in the Swarm network. It’s permissionless and open infrastructure with the goal of securing the investors and the assets while adding value to the entire network.
Swarm’s model is the best way to get a fair share of STO investment opportunities with flexibility, accountability, and transparency built in. With enabled compliance, the token investors are empowered through governance to facilitate and manage their tokens according to their interests and the interests of the network.
With all this in mind, Swarm’s token issuance platform is changing the entire business landscape of the digital economy. Like Sam Stone said in his article:
“Swarm has transformed from merely an issuance platform to a technology-agnostic infrastructure builder. Transcending our own blockchain, we will support any tech stack, even non-blockchain applications.
We’ve discovered a way to offer tokenization for free, we’ve ensured that we offer opportunities for anyone to collaborate and build with us, and we have found the partners we need to scale with us onward from here”.
Swarm’s vision stems from the original idea of blockchain technology being a major force that empowers the individual.
What are your thoughts on STOs? Do you have an interesting project worth following and investing in? Let us know in the comments section.
This article is part of our blockchain awareness posts where we try to help newcomers and businesses interested in blockchain use cases enter the space more easily. Follow us and subscribe for more upcoming articles such as this one, and feel free to join the conversation on Twitter and LinkedIn.
For free business consultation about how blockchain can impact and change your business model, STOs, or anything else related to the technology — get in touch with us. Also, don’t forget to check out our Business Decentralization (PDF) canvas and let us know your thoughts on it.
Security Token Offerings (STO): What Are They, and Where Are They Going in 2019? was originally published in MVP Workshop on Medium, where people are continuing the conversation by highlighting and responding to this story.