Initial Coin Offering(ICO)
Initial Coin Offering is a fundraising process for cryptocurrency projects. It has expeditiously become a major topic of discussion within the blockchain community. An ICO is a cryptocurrency version of Initial Public Offering (IPO). In IPO investors purchase the company’s shares but in ICO, utility tokens are distributed among the investors. Utility tokens are also called as user tokens which represent future access to a company’s product or service. Utility tokens promise access to a network, platform or service of an organization. But they’re often backed by an abstract idea or nothing at all. Since the funds are generated by selling the tokens to the crowd, henceforth, ICO is termed as Crowdsale, where one offers investors some units of new cryptocurrency or tokens in exchange for existing cryptocurrencies, such as Bitcoin or Ethereum or with fiat currency. For example, if a team comes up with some innovative idea on Blockchain then this idea can be sold to the public in exchange for some cryptocurrency or real currency or both by paying some fuel. This fuel is called token. Let’s call this token X Coin. The team has 1 X Coin and sells 1 X Coin for 0.1 BTC or 0.1 Ether. People will buy coins for two reasons. First, they are passionate about blockchain technology and second, they will buy for less money and make some extra money by selling the coins once their cost increases. Selling is possible post-ICO when the coins are listed on some cryptocurrency exchange. This usually happens post project launch after the ICO. You can check the list of current, past & upcoming ICOs on https://www.ico-list.com
Are ICOs Safe?
The next question is if ICOs are safe or not. To be honest not really, because many of the crowdsales are fraud, where founders have taken the money and escaped without delivering the project. Since it is not regulated, it is almost impossible to recover funds to be returned to the original investor. As of now, this innovation is at a nascent stage, hence you have to be very careful before investing money into any kind of ICO. Given the uncertainty of the market, the apparent fraud and speculation, the lack of regulation and the Securities and Exchange Commission’s(SEC) warnings, this becomes a backlash to ICOs within the technology industry. Facebook banned ICO-related ads in January, and then Google announced in March that ICO ads would be prohibited from June, Twitter, and then Mailchimp followed. The very term “ICO” generates problems. This led to an alternative way of Security Token Offerings(STO).
Security Token Offerings(STO)
STO is security token offering in which Security tokens are distributed among the investors. If a crypto token derives its value from an external, tradable asset, it is classified as a security token and becomes subject to some securities regulations. Failure to fulfil by these regulations could result in costly penalties and could threaten to derail a project. In STO investors get security tokens which act almost exactly like a share of a company but they provide investors to financial rights, such as equity, buy-back rights, dividends, profit share rights and much more. All the investor’s rights are written in the smart contract, and the security tokens are traded on the blockchain. It’s termed as an early stage IPO(Initial Public Offering). STO also comes under the SEC(Securities and Exchange Commission’s) regulations which make it more secure and reliable than ICO. PolyMatch introduced the concept of STO initially. In general, Security tokens can revolutionise traditional Initial Public Offerings (IPOs) by issuing company shares, dividends, and voting rights over blockchain networks.
Advantages of Security Token Offering:
Credibility: ICO has lost its credibility due to lack of regulations, but STO is ICO with regulations which are made STO more credible.
Liquidation: It’s very easy to liquidate Security tokens via trading platforms.
Lack of Corruption and Manipulation: As organisations are providing security tokens to the users, there are fewer chances of fraudulent activities in comparison to ICO. In ICOs, organisations left there project incomplete after the token sale but in STO they have to complete their promises otherwise it could result in costly penalties.
Large number of Investors: STO is more safe and secure than ICO; therefore it can include more investors and investment is done via the internet which also increases the chances of global investment.
Initial Coin Offerings (ICOs) have gained attention over the past one year as a crowdfunding solution, but the lack of proper regulation has been a significant problem that has also paved the way for fraud. Then there is a new crowdfunding solution introduced called Security Tokens Offering(STO). Tokens issued in the STOs give investors some rights in the organization or firm. The registration with the Securities & Exchange Commission(SEC) is one of how STOs offer more security to the investor than ICOs because the registration with the regulator reduces fraudulent individuals, thus giving allowance only to the projects that are serious about their pursuit. Market experts are highly optimistic about STOs, and they believe that the market cap of the STOs will be more than $10 trillion by 2020. In comparison, ICOs have raised roughly 13 billion dollars so far. ICOs might have ruled the crowdfunding in 2017, but this year, the concept of STOs is expected to take off due to the massive advantage of providing investors more secured investment opportunities. Many crypto experts believe that it might finally be the solution for crowdfunding through the cryptocurrency market.