If you're familiar with the crypto environment, you're probably aware that the ICO boom in 2017 and 2018 was unparalleled, resulting in massive funding. However, the rise of the ICO (Initial Coin Offering) was marred by a series of scams, and people were stunned by the 2018 downturn. So, in order to make legislative changes, it was past time for the Blockchain community to come together.
As a result, the brightest minds took advantage of the opportunity to learn more about distributed ledger systems, opting to ‘BUIDL' rather than ‘HODL.' So, 2018 was a “incubation” year for ICOs, prompting everyone to wonder, “What is a STO?” ’
Security Token
A security token is a controlled digital asset that sits at the crossroads of traditional financial assets and electronic money. Consider the following example: if Bitcoin is "programmable capital," a security token is "programmable ownership." Stocks, real estate, art, shares, private equity, and even vehicles – whether physical or virtual – can all be tokenized.
One of the most appealing aspects of a security token is its intrinsic worth, which stems from the fact that it is asset-backed, giving investors legitimate ownership rights.
Investors' traditional securities are difficult to convert into fiat currency without a lot of effort. As a result, security tokens seek to address this problem by bridging the gap between the crypto and traditional financial markets in order to serve people's best interests. They increased liquidity by facilitating asset trading while also safeguarding investors using Blockchain technology and the smart contract framework.
Since security tokens self-execute, they can achieve incredible liquidity. The activities will be carried out automatically and independently once smart contracts are in effect. This feature alone provides investors with more flexibility when it comes to moving and controlling money.
The following are the main characteristics of a Security Token:
Compliance
One of the most difficult aspects of trading securities is adhering to a specific set of laws and regulations. This is due to the fact that regulations vary depending on the type of investor, asset type, and jurisdiction. Since a security token is programmable, it is possible to ‘back compliance' into the token.
Market Exposure
It is extremely difficult for Asian investors to invest in US real estate or private startups. Owners of security tokens can make business transactions with whomever they want anywhere in the world, as long as they stay within regulatory bounds. Security tokens facilitate foreign trade by democratizing and simplifying securities exchange.
Fractional Ownership
Many consumers are unable to invest in high-priced properties such as artwork and real estate, which are worth millions of dollars, because they cannot afford to. However, you will benefit from fractionalized ownership with security tokens. Rather than investing a large sum of money in a single investment, fractions of that asset may be purchased.
Low Fees
Since there are no middlemen when exchanging digital assets with security tokens, the fees are very low. With smart contracts in place, processes such as wire transfers, signing documents, and mailing checks become programmable, low-cost, and hassle-free.
Security Token Offerings
Despite the steep decline in the cryptocurrency market in 2018, many foreign startups saw security token offerings (STOs) as an important, stable, and powerful alternative to private equity funds and venture capital.
STO offers investors new ways to purchase security tokens backed by real-world assets. Startups will easily benefit from holding a STO because it will help them gain access to more reliable funding that will ensure their potential success.
Benefits
International capital
STO allows all firms, regardless of size or form, to easily market themselves to investors, i.e. STO goes beyond borders. Since the security token offering is so adaptable, it gives startups a one-of-a-kind opportunity to tap into larger funding pools while also raising brand awareness.
Layers of STO
Blockchain Protocol
The underlying technology on which a project is based is the protocol. Thousands of developers and contracts use Ethereum, but there are also other protocols that are leading the market. EOS is one such example, which is particularly common among gaming and gambling DApps.
Smart Contracts
Smart Contracts are the automated contracts. They are, in essence, self-executing programs with unique instructions written in their code. They are only carried out if certain conditions are met.
When anyone wants to do something on Ethereum, they usually start a smart contract with one or more people. These Smart contracts are a collection of instructions written in the “solidity” programming language. This is based on the IFTTT logic, which stands for IF-THIS-THEN-THAT logic. After the first set of instructions is completed, the next operation is executed, followed by the next, and so on until the contract's end is reached.
Issuance Platform
Essentially, the issuance platforms are in charge of ensuring that the smart contract is compliant and supervised.
Exchanges
The most important roles in the crypto ecosystem are exchanges. They essentially serve as a bridge between the fiat and crypto worlds.
STO versus ICO
STOs are backed by real assets and are governed by regulations. Unlike most ICOs, which place their coins as a utility token that grants users access to the native platform or decentralized applications, most ICOs position their coins as a security token (DApps).
The coin's intent, according to its creators, is to be used rather than to be invested in. As a result, ICO platforms avoid such legislative structures and are exempt from regulatory bodies' strict laws. This is why so many ICO scams have been uncovered.
Since STO is governed by the governance body's laws, it is a little more difficult to launch. They will, however, have security and confidence. There will also be trustworthy people to collect funds from confirmed investors who had met those criteria themselves.
STO versus IPO
Both STOs and IPOs are regulated. Only private businesses that want to go public use IPOs. They collect money by selling shares to qualified investors in an initial public offering (IPO).
STO tokens, on the other hand, are distributed on the blockchain to approved investors and reflect a share of a real asset. Shares in a business or a share in the ownership of a house, fine art, and investment funds are examples of these. This is due to tokenization, which may apply to any asset intended to generate a profit.
STOs are less expensive than IPOs. To gain access to a larger investor base, businesses must pay high brokerage and investment banking fees for IPOs.
STOs may still pay lawyers and consultants, but since they have more direct access to the market, they would not be forced to pay high fees to investment banks or brokerages. STOs' post-offering administration is often more effective and less expensive than conventional IPOs.
Final Words
STOs are likely to become the most common form of crowdfunding in the near future. It's because they're more regulated and secure than initial coin offerings (ICOs) and far less expensive than initial public offerings (IPOs). STOs have the ability to make wealth ownership more accessible to a wider range of people.