A Bird’s Eye View of The Security Token Offerings World
Security Token Offerings (STOs) have been making strides in the crypto space. From establishing regulatory frameworks to providing the tools to generate security tokens, the STO world has been busy paving the way for mass adoption. Behind the flurry of activity is a team of key players, working furiously to maintain and improve the ecosystem. I have listed the players below, and included a short summary of each team player. If you’re a visual learner, check out the STO chart that the CryptoGrinders team has made at the end of the article.
Regulatory Bodies
Security tokens must comply with the regulatory framework of whichever jurisdiction they fall under. Regulatory frameworks, or consumer protection laws, were established due to the need to protect investors from fraudulent activities of companies.
Regulatory bodies, guided by regulatory frameworks, enforce compliance and investigate companies that flout securities laws, thus protecting investors.
Regulatory bodies also confer licenses to projects, exchanges and in jurisdictions like Malta, other important players that fall under securities laws, like VFA agents. In the simplest of terms, regulatory bodies are the gatekeepers of the STO space, as they have the power to grant access and banish anyone that is not compliant.
Security Issuance Platforms
For mature companies who wish to eliminate investment barriers and introduce their assets to individuals, they can do so by creating their own security tokens. Security Issuance Platforms can help companies tokenise their asset, so that these security tokens can be made available and easily accessible on the market. Security issuance platforms are an important part of the ecosystem as they enable traditional assets to take part in the digital asset world, thus making traditionally illiquid assets liquid.
STO Projects
Apart from mature companies, STO start-ups are also found in the ecosystem. These companies often use the STO model for crowd funding efforts, where investors can take part in capital raising in exchange for equity-backed security tokens. STO projects have to go through regulatory bodies for a license to issue their security tokens for trading, and remain compliant to securities laws as long as they offer securities for trading.
Investors
Unlike traditional IPO models, the STO models invite individuals to participate in their businesses via exchanges. In the simplest of terms, anyone who has purchased a security token is technically an investor or a trader. If you are interested in trading security tokens, you can do so on exchanges that have been granted the license to facilitate security token trading.
Exchanges
As mentioned, investors (and traders) who wish to purchase security tokens can do so on exchanges. These exchanges would have obtained licenses to facilitate security tokens trading or security trading from regulatory bodies, and are fully capable of supporting trading, as well as commencing listing procedures for STO projects. The exchanges that can be found in the space may differ in terms of the features they offer; some exchanges may offer fiat-crypto and crypto-crypto (also known as Tier 1 exchanges) transactions, while other exchanges may purely offer crypto-crypto transactions. Exchanges may also offer different types of orders that investors can use, from the more commonly found Market Order, Limit Order, and Stop Market order, to the less known Fill or Kill order, Trailing Stop Limit order and Reserve Order. While there are many exchanges out there, it is recommended that investors find one that is secure and has features that best fit their trading style.
Bonus! Custodians and Institutional Investors
Crypto custodians resemble custodial service providers in the traditional financial world, that is, they hold and store assets on behalf of a third party. The main types of crypto custodians in the market consist of third-party custodial solutions, self-custody solutions, and exchange custodial solutions. They exist to provide consumers with a secure environment to safeguard their assets. Different cryptocurrency custody solutions may use different technologies and measures to store customers’ digital assets. Custodians may boast bank-grade vaults, incorporate multi-sig technology into their solutions, or have a combination of hot and cold wallets, which are storages that are connected and disconnected to the internet respectively.
Crucially, custodial services enable institutional investors to take part in the space. Institutional investors are entities that invest or trade securities on behalf of their clients. To protect these clients, certain regulatory frameworks expect institutional investors holding customer assets to store these assets with a custodian. Examples of institutional investors include hedge funds, insurance companies, commercial banks and mutual funds.
Exchanges that support (third-party) custodial services are likely thinking of tackling adoption by enabling the infrastructure for institutional investors to enter the space.
For the visual learners, here are all the players of the STO space at a glance:
Conclusion
With the financial world moving rapidly into a new era of security tokens, industry leaders have already begun making the necessary strides to obtain key licenses to facilitate trading of security tokens. Don’t hesitate in finding out more about the STO space. Check out our website for curated news to stay in the loop.
All the best,
Min
