2020 was a year when regulatory authorities increased control over ICOs (Initial Coin Offerings). Consequently, such a pressure resulted in a situation where multiple Blockchain companies initiated a new way of issuing tokens. As of today, security tokens are known as a new investment vehicle and try to comply with investment rules in different countries completely.
In this article, we’ll tell you about the latest trends in the security token offerings sphere. Stay tuned!
Are security token offerings (STO) the way of the future?
Cryptocurrency and Blockchain are exciting technologies with many possible applications, but they have yet to capture the public’s imagination. If you ask any person’s opinion on cryptography, they will probably either talk about the wild fluctuations in Bitcoin prices or tell you about their friend who lost a lot of money on ICO (Inicial Coin Offering) scams.
The next step in this path is to offer a safety token or INX crypto security tokens. Security tokens aim to serve as a storehouse of real value on the Blockchain, whether by tokenizing current assets (such as precious metals, stocks, and bonds, or real estate) or by being used as currency.
What exactly is the initial supply of coins?
The issuance of tokens for remuneration for “inspection and control” services allowed the development of a new method of financing, which was called the initial supply of coins precisely because of the role that coins are designed to play in promoting the company’s development itself. The investors exchange their digital currency for tokens, and at the same time, investors can use the received tokens to enjoy innovative services provided by startups or sell them when the market evaluates them and can provide a markup.
For example, an American startup received multi-million dollar funding from the ICO to build a network of blockchains where it is possible to buy and sell storage space using the Filecoin protocol or a token protocol to request ICO funding. Thus, if the company successfully creates this market for digital storage, the value of Filecoin is likely to increase. Lenders can use Filecoin to purchase storage space or exchange them for selling their stake in the company.
There is a significant difference between an ICO and an IPO. If, on the one hand, the ICO and the IPO respond to the same need with a similar implementation logic, it should be said that in the case of an IPO, all transactions are subject to control by the supervisory authority. In the case of the ICO, there is no monitoring body.
From ICO to STO, to increased security
The initial offers of coins caused a lot of objections and concerns, they were often used as a means of financial speculation, and in many cases, the industrial project did not live up to expectations or, in fact, did not exist.
STOs represent something more and can be seen, once again with simplification, as updates. The principle is always tokenizing the asset with the implementation of the token, which can then be traded. The significant difference is that security tokens must be based and insured on a tangible, concrete, and measurable asset.
Security token offering allows a company to raise money by selling a “security token,” representing a stake in the company and providing a vote to the token holder.
ICOs are generally reserved for blockchain companies as the utility tokens sold must have a specific use within the company’s ecosystem or platform.
STOs can be used by any company, as security tokens can be sold as shares of a business, even if the business is not using blockchain technology.
ICOs have the potential to be a powerful force in the development of open-source blockchain technologies. ICOs can also be a significant driver of financial and democratize access to investment.
Even though STO will not give such freedom as ICO, it has its significant advantages that can attract those investors who are scared off by the “freedom of action” in the ICO.
Here are some reasons:
- Lower fees. Most commissions are charged when making financial payments are fees to intermediaries (bankers, brokers, etc.)
- Faster processing of transactions.
- Free impact on the market.
- Expansion of the investor base. When asset owners can offer their securities to anyone with an internet connection, the potential investor base grows significantly. It is one thing to attract investments from only accredited American investors and quite another to attract every potential investor in the world to your project. This will provide healthy competition and long-term profits for the financial markets.
- No manipulation by financial institutions. This is a complex topic that causes controversy. But one thing can be said: there is a high probability that corruption by financial institutions will decently decrease if they are excluded from the investment process.
- Positive network effects. The STO model generates positive networking effects that allow you to revitalize and enhance decentralized applications that require multiple users (or operating nodes).
- Settlements through the Blockchain. Confirmation of contributions and distribution of tokens simply requires monitoring and updating of distributed digital books. This requires less effort and resources compared to the traditional process of raising funds for checks and bank transfers, sending standardized contracts, managing them, and so on.
For investors and consumers:
- Liquidity. Popular tokens have liquid markets on cryptocurrency exchanges. The most popular tokens can exceed $100 million in 24 hours.
- Democratization of investments. Venture finance is typically geographically concentrated in financial centers such as Silicon Valley, New York, and London. The STO method usually allows anyone in any geography to make money. In general, it also allows anyone to contribute.
- The potential growth of cryptocurrency. Cryptocultures changed prices quickly. The AirToken in August 2015 was less than 1 dollar, and in early September 2017 traded about 250-350 US dollars. The value of bitcoin was about 100 US dollars in June 2013, and in early February 2021, it was 60,000 USD. Investors hope to find the token could be the “next Bitcoin” in terms of economic evaluation.
The ICO boom may be long gone, but the era of tokenization has just begun. According to digital assets banker Finoa, tokenization has the potential to do for property rights what digitization is for the media. This new paradigm will affect everything from standard issuance products like stocks and bonds to smaller and illiquid assets like company stocks and real estate.
For these reasons, there are many possibilities to be optimistic when it comes to security token proposals. The current reading of the market suggests that demand and adoption will be slower to materialize as regulatory standards have just been applied and implemented. But the growing appetite for blockchain-based projects means STO is a potentially future-oriented asset class.