How are STOs Different from ICOs?
A new player entering the game known as secure token offerings (STOs), are now demanding the attention of investors as a safer and potentially more profitable option.
In a fast-paced and varying environment for digital assets, lately there has been a shift in focus with cryptocurrencies and the decentralised exchanges which make them available to the public.
By now, the term initial coin offering (ICO) is familiar and understood as the issuance of new cryptocurrencies. A new player entering the game known as secure token offerings (STOs), are now demanding the attention of investors as a safer and potentially more profitable option. This article will discuss the key differences between the two and why STOs could help legitimise the entire cryptocurrency space.
The past few years have seen several ICOs raise substantial capital from investors, many of whom have suffered losses at the hands of fraudulent projects. To add safety and security to this new asset class, security token offerings (STOs) are overcoming the hurdles of a fledgling crypto regulatory system, bringing security tokens to the masses. INDX Capital is at the forefront of this new asset class, providing a regulated and compliant STO whilst hedging against market movements to safeguard their investor capital raised.
Raising funds for a secure token offering (STO) differs from an initial coin offering (ICO) in a number of ways. STOs are similar to ICOs in that they are fundraising exercises where capital is raised in return for the ownership of tokens. The majority of tokens sold through an ICO are sold as utility tokens which the token holder may use on the related blockchain platform or application once it has launched. The utility value rests in the ability to use a product or service while circumventing intermediaries and governmental laws, to theoretically have a low-latency, cost efficient transaction between to parties.
Similarly, STOs also offer tokens in exchange for capital raised, but their stated purpose is to see an increase in the value of the token over time. When an investor participates in an STO, they expect to receive potential benefits that would come with traditional securities investments, like dividends or increased NAV. With this model, STOs are required to be regulated in order to prevent Ponzi-type schemes with promises of “guaranteed” returns proliferating the space. Unfortunately, many investors have fallen victim to fictitious ICOs, concerning regulators who have put pressure on banks, credit card issuers and exchanges to implement know-your-customer and anti-money laundering measures. This has spawned the STO models that are now attracting much attention from institutional investors who were hesitant and unable to add digital assets to their portfolio mix.
Under the increased regulatory scrutiny, ICOs have begun to vet applications through KYC/AML. Naturally STO’s too are required to onboard all applicants by capturing KYC documents in line with global compliance standards. To a greater security extent, STOs also register the address that the tokens will be sent to with the validator. In the case of INDX, this is done via onboarding partner Swarm/Securitize. This is a crucial difference to ICOs which list any ERC20 address and passes the tokens on another ERC20 address or exchange the receiver specifies. Security tokens are not permitted to be sent to an unregistered address, making the options for addresses at the time of the STO launch more important. This ensures that residents of countries banning tokensised securities are unable to obtain them as well.
Due to the nature of STOs, there is a movement towards increased credibility of token sales within the cryptocurrency space. Given the vastly higher number of regulations that secure token offerings must adhere to in comparison to ICOs, only those that meet the highest conditions are allowed to proceed through to the token sale stage.
Security tokens like INDX are bringing more legitimacy to the cryptocurrency space, allowing both institutional and individual investors to take part in the development of this new investment environment. With time, regulations will become more structured and a defined framework will allow for easier entry into the cryptocurrency market.
