What is an ICO? STO? TSO?
There has been a lot of talk about the difference between the three, whether it’s between the blockchain community, or between the regulators. With respect to technology, they basically are very similar. It’s the characteristics that make them different.
Note: This is entrepreneurial opinion and in no sense constitutes as legal advice. Legal advice is important but what is missing in legal advice is understanding the context of why these came about. So I hope this post can demystify some of the opinions and/or facts, or even trigger more debate. I’m not a lawyer, but I tried to make it as understandable as possible, and possibly some details may not be correct. Whatever it is, please do seek legal advice for your endeavors.
Disclaimer: I’m speaking in the perspective of Singapore, and not of other countries.
Context and history
In 2015, co-founder of Ethereum, Vitalik Buterin announced that when you use Ethereum as your blockchain, you can write the code for bitcoin is just 5 lines of code. This changed the world. Some may see it as “ok sure, what’s the big deal?”, for me, I saw it as “wow think of the applications for that, and having new cryptocurrencies compatible with the native cryptocurrency ether. But that didn’t spark any interest yet.
In 2018, Singapore was the third largest ICO hub in the world that but was no accident (Second note: But even today, I refuse to call ICO as fundraising as will explain it below, although the context looks very similar). The blockchain community here was blooming, lead by the efforts of the blockchain association, ACCESS (access-sg.org), here as well as many influential blockchain evangelists. However many of the projects experienced similar pains, and that is to raise sufficient funding from venture capital firms. What I mean by sufficient, is even just enough to make ends meet, cushioned by a bit of savings.
Many of the venture capital firms here had four main objections to blockchain companies (going all the way back to 2013):
- We don’t understand cryptocurrencies and blockchain enough to invest
- Regulations are not clear hence we will not touch this space
- The market is not big enough
- The main one (not exactly like this but the gist is similar): “Your product is very new and hasn’t shown any precedent overseas that it’ll be a success.”
Point 4, basically was what caused the problem. VCs incentive is to make money for their LPs, and it makes perfect sense to invest in clones, i.e. ones that have shown precedent that it works well overseas, may work well here. Many of the blockchain projects had the idea of decentralization as the core ideology behind their products, which is definitely a very new concept for everyone. But because of this, raising funds was definitely very challenging.
But obviously things are different now, now that venture capital firms here are starting to understand the space much more after the crypto spring happened in November 2017 (and now we’re in crypto winter as of 14 Jan 2019).
ERC20 — the catalyst to permissionless token creation
ERC stands for Ethereum Request for Comments. ERC-20 was a significant milestone as it standardized the way how tokens are to be created and the functions that go along with it. When people talk about “ERC-20 tokens”, basically the tokens created are compliant with the ERC-20 requirements. Since then, anyone that knows how to code in solidity can easily create a token, and as of November 19 2018, there are more than 142,200 ERC-20 token contracts.
What is an ICO?
ICO stands for Initial Coin Offering. Relative to other countries, Singapore has quite a progressive stance on it which is very welcomed by the community.
In the traditional sense, when you fundraise, it’s in the form of security, be it equity, note, bonds or some sort of convertibles. All this leads to a “right” in some form of control in one way or another. When you buy bitcoin or ether, you don’t have a right to a share of Bitcoin, or have some sort of control. You are just buying because you see the value of Bitcoin’s utility, i.e. as a payment system or store of value. You buy ethers (mostly) because you need it to write smart contracts. People say bitcoin is bought for speculation. Yes definitely, so does anything that doesn’t have stability. But the point is this, when you buy a coin or token, you don’t have a say in it whatsoever.
Not only do you not have control, if you want to earn bitcoins, you need to work for it. In this case, you need to mine it where the rewards are distributed via the protocol, proof of work. You don’t have a claim or right to it immediately.
Since you don’t have any right or potential control to it, then how is it fundraising? If this is fundraising, so is Kickstarter. Tokens that provide utility and give no claims and rights, is no different to Kickstarter products that are asking for support.
But because it’s not a security, it does not mean that you don’t need to follow rules. According to the March 2014 announcement by MAS, all virtual currencies are subject to KYC and AML/CFT measures. Hence when you execute your ICO, you need to do all the necessary checks and verifications of the token supporter.
ICOs can have different structures such as:
· Pre-set funding goals and static supply of tokens;
· Dynamic funding goals and static supply of tokens; and
· Dynamic token supply depending on the funding received
What is an STO?
STO stands for Securitized Token Offering. The key difference for an STO (compared to an ICO) is the backing of the offering by something tangible like assets, profits, or revenue of a company. When an STO happens, you are selling some form of right or potential control of the company. You can also add utility characteristics into it, but as long there is a right, claim or potential control, it falls under the securities and futures act of Singapore (SFA), or that similar in other jurisdictions. And because it falls under SFA, all your activities will need to comply with the rules set by your country (and the countries you’ll be marketing the token in).
In the blockchain community today, there is a lot of discussions in the blockchain space. It’s not actually following the rules to comply with the laws that is the problem, it’s actually trying to list the tokens as the marketplaces and exchanges must have a license before they are allowed to list security tokens. Not only that, for normal stock listing campaigns, you will usually be doing roadshows around the world. And because the token will be a security token, you’ll need to comply with the local security regulations of each country as well. One word — costly.
To cite an example, Securitize recently launched a successful STO for SPiCE VC, a tokenized VC fund where token holders are entitled to the full net revenues of future exits.
My biggest question today for STO issuers, is that from an entrepreneurship angle, if you’re doing this, how different is this from listing on an exchange, in terms of cost? I’m not skeptical (positive in fact), but I’m still studying (personally) the viability of STOs.
The popularity of STO would really depend on how the cost of issuance can be brought down. Currently, the costs are as high and perhaps comparable to an IPO. Besides, STO requires issuers to undertake the issuance process themselves as the financial intermediary is eliminated. This means the issue will have to underwrite the deal themselves through third-party audits as well as to solicit the interest of investors themselves, prepare marketing materials and ensure regulatory and security compliance.
What is a TSO?
TSO is not something new, but now becoming the new talk of the town. TSO stands for Tokenized Security Offering.
TSO stands for Tokenized Security Offering. Tokenization is basically digitalization of existing security or “anything” that may not be under the current definition of security. TSOs are tokenizing “things”, rather than making the token that has the characteristics of a security i.e. STOs. In simple terms, storage and management of an asset are digitally represented by tokens, i.e. TSO is changing the way in which the ownership of the asset is managed.
A lot more regulatory discussions are needed but I am very optimistic about TSOs, relative to STOs. In terms of progress in the space, TSO makes a lot more sense, as there are many assets in the world that can’t be securitized by mainstream finance, especially in many of the frontier and emerging markets such as Cambodia, Myanmar, many parts of Africa, have a lot of assets that banks will not securitize. This is where TSOs will be useful.
To illustrate how a TSO would function, consider an asset worth $100,000. If the owner requires $20,000 quickly, using this asset as collateral to raise funds would take a lot of time and processes. Instead, he can tokenize the asset and transform it into 100,000 tokens and issue this onto a platform that supports smart contracts. This would ensure that the tokens can be traded freely.
The same can be done in the case of livestock (e.g. cow or goat) that has lesser liquidity. Some investors who wish to take exposure to help the farmer where the livestock is valued at US$300, can do so easily if the cow was tokenized and thereby trade in the tokens on an exchange.
Unlike STOs, TSOs mirrors that of the security, but it does not have the same rights and claims like an STO. TSO can be a great way for fundraising or to raise capital for a company that wants to expand. Moreover, currently, a lot of real estate deals and financial transactions happen between two people. If the asset is tokenized, the underlying asset can be traded on a platform thereby ensuring liquidity for the issuer. For investors and traders, this opens up a gamut of instruments that can be traded on.
I’ve written a lot up here, but I hope I can sum up some of the points in the table below (fingers crossed):
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