Is STO “Security Token Offering” The Answer Key?!

How blockchain developers see STOs!

Eman Herawy

Published in

The Dark Side

6 min readAug 30, 2019

Disclaimer

This my current personal thoughts as a blockchain developer after in-depth reading, I might be wrong & I do appreciate any attempt that helps me fix my misunderstanding.

If you want to read this article in Arabic “ Egyptian dialect “

Are you thinking of launching your STO?
Do you have a promising Idea and want to raise funds?

PLEASE WAIT !!! and read on!

Before we start talking about the regulation concerns that might put you in jail with this new fundraising model, let me tell you the story.

Before Blockchain

Companies tend to use IPO “ Initial public offering“ as a way to raise funds in return for a company’s shares. It’s a fully regulated way to raise money but it’s a long, expensive and exhausting way to raise money.

A New Era with A New Business Model

With the emergence of the blockchain’s star waging in the scene with its revolutionary thoughts, new business models have been developed to cope up with the nature of blockchain technology, which was fundamentally a revolution on the centralized control to bring it back in the hands of individuals.

One of these models is ICO, which stands for “ Initial Coin Offering “, that was developed to avoid the painful cycle of IPO.

If you have a promising idea, you don’t need more than presenting your idea with a simple website, and punch of tokens to sell and you can raise funds to start working on it.

Wow, That Seems Amazing! What’s the Problem?

The problem is that the ICO is not regulated at all, there are lots of scammers and money laundering, which leads to a situation where lots of investors have lost their money. If we look at the Fabric Ventures “State of the Token Market” report, we find out that about 58% of token sales failed to raise capital, disappeared, or refunded participants where we only had 42% successful token sale.

Given that the regulations are following with concern what is happening on the scene, right after the DAO Attack, where hackers stole $50m, the SEC “US Securities and Exchange Commission” released a report in which it asserted for the first time that ICO constituted an illegal sale of unregistered securities.

We started to hear new terms like utility token, security token.

What is the Difference Between Utility Token and Security Token?

Simple and main difference is that utility token is a promise of product or a service while security token is a promise of profit .

How to Know that Your Token is a Security Token?

Simply if it meets the following criteria:

It’s an investment for money
Invest in a joint venture
There is an expectation of profit from the work of promoters or third parties.

So, What is STO?

Security Token Offering “STO” is a new version of the ICO & IPO, where a company trying to raise funds legally, by selling actual shares of the company to investors. A try to mitigate the cons of ICO & IPO where it’s fully regulated but you don’t have to suffer with the painful IPO cycle. That’s why there is a massive interest in STO.

Does this Mean STO is the Answer & Everything is Perfect?

Every model has pros & cons . Despite the STO advantages like :

Increased corporate responsibility
Reduction in the likelihood of fraud
Proposal to protect the rights of depositors in the event of a company’s bankruptcy

I don’t see STO as the answer key.

The problem from my point of view is that it puts a lot of restrictions on investment as well as innovation , as a developer if you haven’t paid attention for a tiny point, you might find yourself under the penalty of the law and these investigations are so painful and time consuming as Jason Somensatto explains in this article the risks of potential SEC enforcement actions now facing developers .

The main issue as I can see here is that you are regulating a decentralized ecosystem with laws & regulations that suit a different ecosystem “ centralized one”.

How Can We Force That and Expect Innovation?!

The imposition of strict laws on finance, instead of innovating new solutions that keep pace with the spirit of this technology will Obstruct technology rapid growth.

I am NOT calling for unregulated solutions but I’m asserting that this technology needs a space to breath, to bring it’s brilliant innovative solutions that suit the nature of this technology. I’m calling for a degree of exception where developers can bring their innovative ideas to life . Creativity can’t live with fears or hunger. Effective traditional regulations might not be effective at all when being applied to this new business models but harmful.

Imagine Ethereum or EOS for example without making their successful ICOs? Can they reach this current level of development that enhance the entire blockchain ecosystem ? If they tried to make STO , Would it work ? I don’t think so,

As blockchain produced a new form of security, that bump up against the traditional form of existing central systems,I believe it would produce a safe valid business model. But if we don’t give this technology a space to breath, we would lose all the promising benefits that would bring.

Not to mention security major part come from the individual’s awareness .
Given that a large proportion of the Scammers and failed ICOs exploit the lack of individual’s awareness and their urgent desire for quick profits, we can see that a major part of solving the problem is to raise awareness.

My Final Word As A Blockchain Developer:

STO is not the solution , it can be a good solution for certain use case & that’s why some projects tend to use private sales to avoid STO pain. We need to compromises to allow technology to breathe and protect the rights of individuals up to a point. I’m sure sooner we will see lots of innovative regulative ideas & I can’t wait to see them.