The Investment that Defies the Crash
Funding in the time of Corona: The Security Token Offering Explained and why STOs are so hot right now.
With the recent classification of COVID-19 as a worldwide emergency by the World Health Organization and the resulting stock market crash, many people are looking towards crypto as an alternative to the traditional stock market. While cryptocurrencies like the bitcoin have taken the same shock the stock market has, Security Token Offerings (STOs) are still going steady. Today we will learn what STOs are and why they’ve been holding up so well amidst the biggest market crash since 1987.
What is a security token offering? How do Tokens work?
A Security Token Offering (STO), also known as an Initial Token Offering (ITO) or “the future” is probably the best way for companies to secure funding right now. It works like this: Any financial asset you can think of (Company Shares, Real Estate, Resources, even Ships) can be represented as a “Token”. These Tokens can work like any traditional financial instrument (like a share or a bond) and can even be configured to represent ownership rights such as votes or others. An Investor simply buys some Tokens if he’d like to invest.
Here is a comprehensive example on the issuers side:
1. The company EcoGreen would like to build 3 new windmills and needs funding for that project.
2. They create a token that guarantees a profit participation for those three new windmills.
3. Before they launch the token, they make sure it’s compliant with all local regulations for crypto and financial assets.
…And one on the investors side:
1. Thomas hears about the new investment and is interested. Before he can buy the token, he needs to verify his identity as a legitimate investor so that EcoGreen can make sure they’re compliant with Anti-Money Laundering regulations.
2. This Identity Verification is also called a “Know your customer” Check or KYC Check and can take as little as 3 minutes nowadays.
3. Once Thomas’ KYC check is complete, he can buy EcoGreens Tokens and benefit from his profit participation.
Are security token offerings (STO) legal? How are STO regulated?
Since there is an underlying asset associated with the Token, STOs are not only government regulated but often even encouraged. Since they are regulated, all outside investors go through so called “KYC” (Know your Customer) Checks as mentioned above, meaning their Identities are verified and the token issuer checks whether they comply with all regulations. This compliance with regulations is often the biggest obstacle for companies when planning their Token offerings.
What’s the advantage of an STO? Can I get more return on investment from an STO than from regular instruments?
Because of Blockchain technology and digitization in general, STO have various advantages over traditional funding methods, here are the benefits for both parties:
1. Investors and Issuers are not only protected by local regulations but also by the underlying blockchain technology: Every transaction is saved on a decentralized network, meaning it’s absolutely tamper-proof.
2. Cut out the Middleman: Since there is no broker or middleman between Issuer and Investor, trading tokens is much cheaper than any exchange-bound financial instrument.
3. And lastly: Since the entry barrier for an STO is much lower than that for an IPO at any exchange, STOs are viable for much smaller projects and companies, opening up exciting new investment opportunities.
Since an STO is much more cost-efficient than an IPO and a lot of trivial tasks can be automated thanks to Blockchain technology, Companies can offer Investors a better Return on Investment. The Investors profit from owning the most secure Blockchain product and the only one that’s actually asset-backed. Both profit from a growing global market that’s uncorrelated to the currently crashing stock market. If you’d like to know more about automated tasks on a blockchain (so called smart contracts), Jimmy Song wrote a fantastic piece on them.
Why are STOs doing so well right now? Are they the best investment in this crisis?
While the rest of the market crashed, Tokens just shrugged their shoulders and went on with their day. Alternatives have historically often fared well during market downtrends, but there are other reasons for the good state Tokens are in right now. The main reason is that they represent an actual physical asset, meaning they’re not highly correlated with the stock market. The most ignored one is consistency: since most companies only accept investors above a certain threshold (sometimes $1.000 and sometimes as high as $250.000), Token holders are not very likely to panic trade their Tokens away, meaning that Security Tokens usually have low volatility. Lastly, considering IPOs and most traditional methods to secure funding are not something anyone would recommend right now, STOs are currently the best way to secure funding for companies both large and small.
Conclusion
Even though a lot of people still don’t understand Security Tokens or are afraid of Blockchain Technology, STOs were already gaining a lot of traction before the market plummeted. With other options of fund-raising failing, they’ll rise to the top and might be the light at the end of the tunnel during this corona induced market crash.
