We have been studying the growth of digital technology with the stretching time. There was a time only a few knew about Bitcoin, and now the market is flooding with a whole new set of tokens which are being embraced by a few and rejected by a few. We have witnessed a lot of projects come up with their tokens in the market, but for the past few months a new trend has taken over the market.
Among the digital currencies, one such term is being heard time and again is a security token offering (STO). The STO is being detected as a valuable alternative to venture capital financing and private equity for international companies. We have it on a good source that the estimated growth of STO is to grow up to $10 trillion over the next few years.
For people who are soliciting to raise money, an STO is worth the investment for many good reasons. If the goal is to establish a large amount of capital, then STO is the path to be taken but keep in mind a few points which could make or break your company profile.
It is exemplary considering an STO if your organization is:
● Desiring greater liquidity for stakeholders
● Generating $10 million in annual revenue
● An elevated growth companies
● Operating a global business
● Issuing a transferable asset
Before jumping in to stamp why STOs are becoming compelling for investors at the same time for companies trying to raise funds, let us try and understand what security tokens are and how do they function?
In simple terms, security is a financial tool representing a real asset. Market Stocks, bonds and supervised real estate trusts are examples of securities. Historically, when security was purchased, the transaction was signed on paper. A security token does the same function as that signed paper, except it confirms ownership through blockchain transactions. These types of tokens offer some financial rights to investors which include equity, dividends, profit shares, voting rights, and other financial instruments.
Security Token Offers (STO) — The Future of Fundraising
A recent study by Node Blockchain Inc., a Toronto-based blockchain company specializing on independent research, asset management, proof-of-stake mining, and analytics found that Security Token Offerings could be a breakthrough for the fundraising in the blockchain industry.
So far, in the blockchain market, cryptocurrency projects have been funded through ICOs. This innovative method of crowdfunding or fundraising has allowed investors from all over the world to invest from the beginning of a new project or business.
However, while ICOs have raised a lot of money, the fundraising method has also spawned a variety of scams and crypto-currency projects. Many investors have lost a lot of money this year due to abandoned encryption projects and false promises.
Recently, the US Securities and Exchange Commission (SEC) has been working to combat fraudulent and noncompliant ICOs in order to define and enforce better standards in the industry.
In light of the many issues and issues raised by the ICOs, the security token (STO) offers to appear as the new crowdfunding method and could be the next important step in the growth of the sector.
What are the offers of security tokens (STO)?
As per the Node Blockchains Inc. study, STOs offer better fundraising potential because the tokens that investors receive are actual stakes in the business or project and its assets. This differs from ICOs, where investors obtain tokens that are fundamentally unusable until the project does not keep its promises.
As explained in the study, an STO is one:
Financial security issued as a digital asset; which generally represent proprietary rights in an underlying company and/or its assets. This is distinctly different from the aforementioned ICOs, which were “utility tokens” or digital tokens giving access to the future product/service of a project with no real right to an asset or equity interest.
In a similar way that STOs present a changed approach to the fundraising concept of cryptocurrency projects, the study highlights an interesting philosophy that varies from the one we are used to in the decentralized blockchain industry.
According to the study, the central idea of a decentralized blockchain that excludes intermediaries and key intermediaries such as bankers, bankers, lawyers and accountants, depositories and exchanges, is misguided. According to the study, these entities are needed to improve and create efficiencies and must be immersed in the blockchain’s ecosystem instead of being removed by it.
We are aware that ICO fundraising was mostly concentrated on bringing in investment but not how to deploy the capital collected productively as such getting the consensus system up, running and growing. Whereas, STO decided to ensure that they agree with the regulatory bodies and take an opportunity to make securities liquid, transferrable and transparent.
There have been a quite few STOs in the recent time, in order to understand let us look at a few examples.
When bitcoin came into action, others decided to take a step ahead and work on a better way of collaborating with the world regulatory bodies and ensure that trust is built not just by working on the network but also backing them up with assets of actual existence.
There have been various technologies evolving with time. Ethereum’s ERC20 is dominating the space with maximum token adoption by STOs. The technology has been picked by significant players in this market to support their needs and grow along with the world leaders.
Polymath , was among the first few companies to advocate the notion of STOs in the crypto world with their ST-20 token standard bringing a large chunk of 23% to the table. Similarly, securitize has developed four digital security issuers exclusively for STOs. The adoption of these tokens is not universal yet but increasing rapidly as companies are bringing in their technology to support the cause.
We have also seen Kinesis.money which has brought a whole monetary system to the table which has the backing of precious metals as security. The tokens will be based on precious metals such as gold and silver with an allocation ratio of 1:1, where one token is equal to 1 billion. The purchase of Kinesis currencies simultaneously allocates you real gold or silver bullion stored securely in one of several third-party vaults around the world ensuring no counterparty risk.
The kinesis system can be overlaid on top of anything that can be standardized, traded, and stored as a value. Subsequently, they are developing a kinetically charged cryptocurrency system with the allocation of bullion, fiat banknotes, cryptocurrencies or any other asset which are secured physically and digitally stored in their banking and asset management system. Kinesis is not abstract or theoretical, but it has been meticulously planned to support commercialized ecosystem. This project has started making its mark in the market right after its launch. They have been awarded prize money of $50000 from Dr. Evan Singh Luthra for their idea at MIB 2018 held in Monaco(Source).
Though when it comes to cryptocurrency investments, STOs are considered to have low risk because of diversity in the security token in comparison to ICOs.
While there are some benefits of STOs, it’s true this way of raising funds is not suitable for everyone. To begin, this is an emerging market. With the first STO being completed just less than two years ago, we do not have extensive precedent (legal or otherwise) for proving a point. Second, without the time on its side, insights around how STOs will fare over the long term are still being formulated.
Third, regulators could weigh in at any chosen time and influence the market with compliance decisions. The closer scrutiny given to security tokens it can turn into a burden rather than a boon. Fourth, there is still uncertainty around when can a token be treated as security, although the SEC is attempting to address this issue.
Finally, running an STO requires that businesses create and manage tokens which means ensuring that they have the right security in place. Security tokens are not resistant to the threats of hackers.