Understanding The Background Of Security Tokens

Undeniably, Initial Coin Offerings or ICOs have changed how startups go about funding their projects, adding a new dimension hitherto unheard of. With just a document presenting their vision, philosophy, and execution, enterprising innovators can fund their disruptive solutions in days, sometimes minutes from tens of thousands to billion dollar affairs. ICOs have promised everything from turning users into their own banks to having any asset we want anywhere, revolutionizing the grounds beneath our feet, and owning a piece of the heavens. However, recent government policies and increasing supervision by regulatory bodies have brought this utopic existence crashing down. The truth is it wasn’t much of a utopia in the first place.

While ICOs have truly delivered some of the most innovative developments this side of FinTech disruption, a majority of them continues to pose concerns in the utility of their tokens — or the lack of them. Contrary to the “Utility” branding most ICOs like to swaddle themselves in, very few tokens on the market offer any sort of utility. One could go further and argue that the raison d’etre as a utility is non-existent. A security, on the other hand, is where things start to get interesting.

When Exchange?

Mastercoin, now known as Omni, launched the first ICO in 2013 before Ethereum followed suit, the following year, to crowdfund the blockchain that many disruptive dreams would be founded on. Back when Mastercoin pioneered the concept and Ethereum developed a solution that would make it easier to leverage blockchain technology without the hassle of coding one from scratch, ICOs were launched strictly for the development of coins, not tokens….

Wait, coins are not tokens?

Yes. Coins are cryptocurrencies with their own blockchain, the purpose of which is strictly to enable payments on the blockchain. Coins underscore the word “utility” in cryptocurrency due to the fact that every operation on the blockchain requires payment in this currency for successful execution. Tokens, on the other hand, are created on an existing blockchain and possess other functions that transcend payment such as representing a skill, share in a company, representation of a future event, or parts of an asset. Depending on its uses, a token can be classified either as a payment token — with the function of paying for subscription or gas or such, equity tokens — representing shares in a company and its success, much like stocks, utility tokens — for accessing certain services, or security tokens — representing everything from dividends to interest payments and even value appreciation.

Did you just say value appreciation?

Yes, we did.

It used to be that when someone bought into a decentralized crowdsale, they were contributing to the development of an innovation altruistically. Not so these days. Crowdsales are all about returns on investments, dividends, and spectacular value appreciation after listing (without a product in sight).

Wait, that does sound like security?

Yes, it does.

With the SEC recently declaring that it is yet to see a true “utility” token and implying that most utility tokens are cleverly worded securities, we’re now staring at a scenario where just about every token out there is a security and in direct violation of securities laws.

Blockchain-based crowdfunding has failed under its ICO garb. The scams and myriad of cryptocurrencies without any “utility” attached to them attest as much. However, crowdfunding on the blockchain is beginning to enter the era the mainstream industry had been waiting for the era of Security Token Offerings (STOs).

A Secure Token Offering

What happens to backers when a blockchain project goes bust? For utility token holders, they have little to no recourse, after all, what they acquired are more or less tickets to a circus and if the circus moves away, nobody can be held liable. This loophole has made it possible for malicious actors to issue tokens, receive funds, exit, get onboard another token and start the circle all over again. Others may not run away, but they wouldn’t be bothered to offer any improvement on what they’ve developed because buyers of utility tokens are not investors. Basically, utility token holders have no protection whether the project delivers or not — in any capacity.

The reverse is the case with security tokens.

Security token holders are investors with legal rights and protection. Investors are not only assured by the fact that their investments are secured by tangible assets, but also the legal obligations of the issuer to their investors. Most importantly, STOs will finally clear up the regulatory murkiness that has held back the potentials of the industry, enabling groundbreaking, blockchain project funds like CentrumCoin bring secure investment opportunities to the fingertips of the global community.

By working alongside government agencies, regulatory bodies, and stakeholders, STO issuers have positioning blockchain development for the next era of disruption.