STO: Another Brightly New Wave of Blockchain
- what is STO? — A new way of IPO
STO, this word is heard more and more often this year. The first STO exchange, Open Finance Network has launched; Crypto world gradually finds a new way to revolutionize the real finance world.
Security token offering (STO), as the word stands, the key features of STO consist of these three words. Basically, they are financial securities because they mimic traditional shares. Moreover, it involves with regulations, which imperatively differentiate themselves from ICO.
Firstly, we should know there are two different types of tokens, utility tokens, and security tokens.
Utility Token can be used in actual services provided by the issuer, whereas Security Token is like a combination of traditional financial instruments and the concept of the digital asset, which is more acceptable for traditional investors.
In this case, security Token tokenizes the ownership of traditional assets, such as a bond, debt and real estate, and it is subject to the regulations, increasing the transparency, which ICO lacks. This is a transformation of traditional assets initiated by cryptocurrencies.
During the raise fund process, the security tokens issued through STO are backed by assets, profits, or the company’s revenue. For example, the Security tokens represent the stock of the resort. Thanks for the regulations by law, it gives the investors more confidence that they would gain guaranteed returns and protect invest rights, encouraging more investors to participate in this market.
2. What’s the difference between ICO? — — A better way of ICO
Last year, ICO had a boosting growth in the past two years. It seems like a magic and everyone, such as young companies or, even some projects with a whitepaper, without legal entity, were able to raise millions of dollars.
However, the problem comes. ICO is a place without regulation, transparency, which provides more opportunities for frauds and manipulation. These actions may hurt the amount of capital, especially from the retail investors, and results in many complaints from investors. The company can issue tokens, take the money, close down and never lift another finger to improve the ecosystem regardless of the amount of money raised. Reportedly, more than 10% of $3.7 billion raised in ICOs has been stolen.
STO is a better way of ICO. The two key elements differentiating STO from ICO is regulated by the Law and reliable assets behind the projects.
By proactively issuing a security token and jumping through the appropriate hoops set by regulators, STO issuers reduce the risk of regulatory interference and also help secure the rights of investors by taking on the legal and financial obligations of traditional security issuers.
3. Why it matters? — — Connect cryptocurrencies world with the real world.
It is a better way of ICO and a new way of IPO. The intrinsic value of STO is to tokenize and digitalized the assets. Frankly, STO could bring some real benefits, facilitating to solve some long-lasting problems existing in the traditional finance market.
(1) Quick Settlement
In our current security market, trades can be executed within seconds, while the settlements could take several days. For example, the settlements in the stock market are done two days after the deal is closed and several parties are involved which makes the processes more complex. Through blockchain technology, settlements can be done within minutes with a more simplified process.
(2) Cost Reductions
“The rising trend of investing in emerging markets is supporting the trend of capitalist globalization, thus Security Tokens can be very useful since they support cross-border transactions easily.”
Traditional asset securitization is a relatively slow and long process. In the process of securitization, it is necessary to conduct a detailed audit of the asset pool and the parties’ agreements under the condition of information asymmetry. The preparation of the whole transaction takes six months to one year, and the service cost of the transaction varies from tens to millions. This not only reduces the enthusiasm of the promoters but increases the costs of money and time. In contrast, STO would relieve these problems, especially ones related to global transactions.
(3) Fractional Ownership
Stocks can be viewed as fractional ownership of a company. But more different types of high-value assets, such as real estate, fine art and jet plane, can be divided into small units through tokenizing these assets. Through fractional ownership, STO could
Increase liquidity of assets and market depth, making it affordable for retail investors to participate in the high-risk investment.
In one word, based on the tokenization and blockchain technologies, STO would improve the efficiency of resource allocation and transaction settlement: The chain is a depository platform, the transaction is a liquidation, the codes are compliances.
STOs are projected to have a market cap of $10 trillion in 2020. Polymath, led by Trevor Koverko, is banking on being the catalyst for STO market growth. This may become the most valuable and potential alternative plan for companies to raise money compared with traditional methods. Meanwhile, STO Connects cryptocurrencies world with real finance world.