Security Token Offering — a new cure for the blockchain projects market

7 min readSep 16, 2019

Why the crypto world needs a new crowdfunding model?

Everything which goes beyond current standards always attracts people with a burning desire for innovations. However, fresh blood also attracts sharks. ICO was considered a decent investment model until 2018, but after the incomes from blockchain-based projects fundings got way off-limits and went to the moon, everything became evident: we need another market instrument to avoid insane fraud rate. Right there, STO was born from the ashes of failed crypto market models.

Behind the curtain of ICO pitfalls

Over the past three years, blockchain startups have raised considerable amounts of money in ICOs. In theory, the ICO (Initial Coin Offering) model offered a highly profitable investment for both companies and investors willing to support the project. In the first case: the benefit for the company was in offering their tokens in exchange for cryptocurrency without the need to sell their shares. In turn, investors can participate in the project that they want to support by purchasing tokens — for a resale later of for using them inside the ecosystem of a particular project.

The problem is — utility tokens can represent the opportunity to pay for a service that often does not yet exist. A resale is a decent option in theory, yet the long-term value is absent until the company launches its service (and most ICOs never did).

Back in 2017, ICOs raised more than $5 billion worth of capital. Some of the largest, Filecoin and Tezos, raised more than $200 million each! The essence of the problem is simple: many tokens did not have any real value, as they had been unbaked by something that provides it. A security token in STO (Security Token Offering) is a result of rising need to offer something representing real value. Unlike utility tokens, they are tied to real securities that represent tokenized assets. Moreover, these tokens represent real capital in the enterprise, serving as so-called digital shares.

Tightening the belts of financial freedom

Due to the peculiarities of security tokens, a legal perspective treats them differently. If gaining utilities meant gaining access to a company’s product or service, security tokens are tied to real securities, which are considered a financial investment. Thus, additional regulatory requirements are imposed on the companies issuing them, which means more attention and even reporting!

These regulations are the only option nowadays as security tokens usage solved one of the ICOs primary issues — the lack of compensation guarantees in the event of project failure or fraud by the organizers. In addition, they serve as a risk-hedging tool for an investment strategy, such as the Simple Agreement for Future Tokens (SAFT).

Overall, this model is considered safer, as it gives accredited investors the opportunity to purchase tokens after the project is launched.

Numerous benefits

STO is now considered as the next and logical evolutionary step after the ICO, which defines the vector of industry development towards a more regulated and transparent market. However, STO and ICO are two different mechanisms for attracting investment, designed for different situations.

First of all, STOs intend to issue digital assets in full compliance with the requirements of securities legislation to provide a higher degree of protection of investor rights and lower regulatory risks for token issuers. In addition, STOs are guided by a different target audience — only professional (accredited) investors can participate in such a placement.

Security tokens have many pros when compared to traditional financial products. Despite the elimination of intermediaries such as banks and other organizations, which provides a completely different environment for investing and concluding deals — more solvent and more responsible.

This environment or a category, according to the U.S. Law, includes people who meet at least one of the following requirements:

The annual income of more than $ 200,000 per person or $ 300,000 for a couple, supported over the past two years and projected this year, in which the person plans to make investments.
Net assets in excess of $ 1 million, which do not include the value of the real estate in which the person lives permanently.
An organization with total assets in excess of $ 5 million, such as a venture or trust fund.
A company all of whose members are accredited investors.

Speaking about the particular advantages of this digital asset class, we can name such as:

Shared ownership
Fast transaction execution
Market Access 24/7
Lower transaction costs
Increased market liquidity
Option to automate compliance procedures
Simplification of the exchange/trading of such assets
Creation of an ecosystem of related services.

Safe and sound future?

Despite the fact that this area is considered promising, the possibilities of investors are still quite limited. Large cryptocurrency platforms such as Binance and large stock exchanges like Nasdaq are also interested to work in this area.

The trend is obvious, but the transition to it will not be fast and simple. More than just need to comply with financial regulators rules is present, the development of crypto industry also requires a specific necessary infrastructure.

However, as for 2019, there was a very small number of licensed trading platforms offering such tools — such as the tZero platform with KODAKCoin, designed to serve the KODAKOne digital imaging platform. The token allows professional and amateur photographers to receive payment for licensing their work, a share of the platform’s total income and sell the ownership of their work using the secure KODAKOne platform.

Many other projects specializing in technological and financial solutions for this field should also be noted. Developers and liquidity providers for this area such as Blockchain Capital Brock Pearce, Polymath, Securitize, Templum, Securrency, OpenFinance Network and Orderbook from Ambisafe and more.

Crafting a complex platform or ecosystem for the projects of the post-quantum era is an entirely different task of its own complexity.

There are already successful examples in pursuing that goal — one of the most prominent is the QUUBE Exchange Project, which quantum cryptography solutions have been recognized by the global-scale businesses and validated by cooperation agreements. Moreover, last year, researchers from the QUUBE presented a quantum-safe blockchain trading platform that utilizes quantum key distribution.

QUUBE Quantum Attack Resistant exchange platform is a full-scale and complex blockchain ecosystem, resistant to the “quantum computing attack”. The project will provide an unmatched and smooth experience for crypto trading and even more: STO launchpad is really a game-changer here, offering convenient options to rocket your startup without the need to suffer from security-associated burdens.

The QUUBE Exchange project will utilize it’s Launchpad service to provide the best experience in this field — to conduct a tokensale through the Quube platform, a project will have to comply with the securities regulation. Every IEO can expect fair institutional engagement from 2000 linked investment funds within QUUBE IEO Alliance. Accepting only regulated tokens provides an opportunity for accredited and institutional investors to participate in an IEO. Moreover, QUUBE is working with the largest banks to set up a fiat/crypto gateway and a fiat payment clearing option.

Future market vector

With the STOs rising in numbers, popular ICO trackers even assigned them into a specific group. According to the STOscore tracker, there are 88 such projects at large for now.

One of the STO platforms — Polymath — estimates that security tokens will soon win the race with the now-dominant “utility tokens” like Bitcoin and sees security tokens exploding to a value of $10 trillion by 2020.

Despite the rising trend for the STO model, some market players will still continue to adhere to the principles of traditional ICOs and try to fund their creative project through that infamous model. In its essence, STO is closer to a classical IPO than Initial Coin Offering. STOs with their strict rules are a product of a new time, invented to avoid the “illegal” approach to fundraising. Moreover, these rules create a real investment opportunity for institutional investors, which can lead to a plentiful flow of funds into the blockchain field.

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