ICO & STO Report — Shift to more regulated Tokens

By the sheer number, 2018 was the most successful year for Initial Coin Offerings (ICO) and Security Token Offerings (STO): 1132 events raised a total amount of $19,6 billion dollars, almost three times more than 2017. But this is only half of the truth. Two unicorns, EOS ($ 4.1 billion) and Telegram ($1,7 billion), accounted for $5,8 billion of the 2018 volume. And in the second half of 2018 “crypto winter” spoiled the party with the effect that the number and volume of ICOs and STOs declined sharply, as PwC Strategy& states in its forth ICO / STO report, which has been realized in collaboration with the Crypto Valley Association.

The rise of STOs

How can the shift from ICO to the STO be explained, and what are the main differences between them? According to PwC, STOs are not fundamentally different from ICOs, but are a more mature and regulated form, as the underlying tokens provide different financial rights, including dividends or shares.

STOs combine many features of ICOs (e.g. low entry barriers for investors) as well as traditional Venture Capital / Private Equity fundraising characteristics. The regulations are based on local security laws, including “Know Your Customer” (KYC) and “Anti Money Laundering” (AML).

How is PwC seeing the development of STOs?

• In 2017 the concept of STOs was pioneered as two STOs raised around $22 million combined.
• In 2018, STO figures grew exponentially with 28 STOs and $442 million in volume.
• In 2019 and 2020, further growth is expected, as the adaption of funding methods will increase.
• The biggest STO to date has been tZERO, a subsidiary of eCommerce giant overstock.com, which raised $134 million in the third quarter of 2018.

“The trend demonstrates that from an investment strategy perspective, ICOs or STOs remain attractive to investors for venture capital financing. However, there is a process of rethinking in favor of more security and transparency for investors.” — Daniel Diemers, Head of Blockchain EMEA at PwC Strategy&

Exemplary STO jurisdictions

As a global trend, jurisdictions leverage existing security regulations as “STO framework”. The PwC study has highlighted some exemplary jurisdictions:

• Switzerland: The regulator (Finma) distinguishes between asset tokens, utility tokens und payment tokens. Asset token based ICOs can be considered as STOs.
• United States: The regulator (SEC) U.S. generally regards tokens distributed via ICOs as securities, with the exception of cryptocurrencies. The Howey Test is applied to determine securities (a very broad application). And there is an additional state regulation supporting STOs.
• Liechtenstein: The principality launches the Blockchain Law in the first quarter of 2019, which will serve as a basis for token based fundraising. The regulator (FMA) closely interacts with companies planning an STO.
• Germany: The regulator (BaFin) regards cryptocurrencies in general as financial instruments. It approved the first German STO in the first quarter of 2019.
• Estonia: The regulator (FSA) categorizes tokens as follows: 1) donations, 2) utility tokens, and 3) security tokens. A token can be defined as a security token, if it provides the investors rights in the issuer company or is tied to profits.

Daniel Diemers further says: “ICOs have often been designed as highly speculative vehicles and have attracted the attention of regulators. Improved regulation through the tokenization and recognition as securities is another step towards maturity. It is interesting to see how the industry has changed in such a short time and what business models will result or which will prevail.”

Read the full report here.