Why security tokens are the future of ICOs

(image: DESICO)

During the last two years, the ICO industry has experienced a surge in popularity as a fundraising method for businesses. In 2017, startup companies raised $6,5bn through ICOs as way of financing their business endeavour.

However, as the ICO industry continues to develop, further regulations are required to distinguish between a security token and a utility token. Companies wishing to fundraise their startup capital issue two types of token to investors — security tokens, and utility tokens.

The difference between security tokens and utilities tokens

As way of distinguishing between the token forms, a securities token is — in non-crypto economics terms — best viewed as an investment. It is an external, tradable asset such as a debt or an equity claim on behalf of the ICO that issues it. Security tokens might also promise their holders a share of their future company’s earnings or capital flow. To once again draw a comparison from the world of non-crypto economics, securities tokens are comparable to equities, bonds, or their derivatives.

Unlike a security token, a utility token is not designed as an investment. It is created to give its holders access to an application or service via blockchain. Utility tokens are always fixed in supply, meaning their value is likely to increase should the demand for the product or service to which they provide access increase. They are also referred to as ‘user tokens’ or ‘app coins’.

Why securities tokens are the future of ICOs

If 2017 represented the year of the “ICO boom”, then 2018 is predicted by financial analysts to be the year of the security token.

Currently, security ICOs are governed by a series of recommendations or “soft-laws”, meaning ICO investors have almost zero protections in comparison to “traditional” securities. Funds lost in an ICO may never be recovered and the tokens from a typical ICO are not backed by any real world assets.

However, security tokens are built on smart-contracts and can be programmed to verify who is able trade them as an asset.

During the second quarter of 2018, regulations around ICOs are set to tighten, with Google, Twitter, and YouTube scheduled to completely ban all ICO advertisements during this period. Yet despite the regulatory noose tightening around the neck of ICOs, former Swedbank senior advisor and DESICO co-founder, Audrius Griškevičius, believes the stronger regulations surrounding security ICOs will benefit the ICO industry as a whole.

“Stricter global regulations surrounding security ICOs mean the issuers of security tokens will need to comply with certain rules,” he said. “In any case of negligence, regulators will be able to enforce investors’ protection mechanisms. Tighter regulations surrounding ICOs will also open up a world of opportunities to investors such as pension fund and retail investors who do not usually make speculative, high-risk investments. Moreover, smart-contracts will ensure that any securities traded will be traded in accordance with any rules required by the issuing ICO’s compliance process.”

The DESICO ecosystem’s role in the future of security ICOs

In-light of the increasing legal requirements for ICOs, Griškevičius believes that the DESICO ecosystem will become a key-player in the world of fully legally compliant security ICOs.

“The DESICO ecosystem’s in-built exchange platform is the world’s first to work in full compliance with the law. It works under regulation from the European Central Bank of the European Union, and operates from Lithuania, which was named as one of the world’s most business friendly countries in 2017. Lithuania’s securities and crowdfunding laws are some of the most favorable in the European Union. I believe that Lithuania’s legal climate, plus its thriving business and fintech environment will lead to the DESICO ecosystem becoming a leader in the security ICO industry of the future.”

Lithuania became an EU member state in 2004, and a Eurozone member in 2015.

Welcome to DESICO. Welcome to the future of ICOs.

If you have any further questions about the use of security and utility tokens on the DESICO platform, please contact us via our Telegram channel.