The End of Blockchain’s Wild West is on the Horizon — Why STOs are Poised to Take the Lead
While the metaphor of “the Wild West” has proven apt in the cryptocurrency and blockchain community thus far, as the technology matures we are seeing the tail end of that metaphor come into play: regulatory action. The Wild West, after all, is now just the west.
While interest in Initial Coin Offerings (ICOs) reached a near frenzy after their introduction, the market has cooled as more and more compliance issues come to light. Ethereum World News recently detailed how 7 out of 10 ICOs are now operating at a loss — in other words, their current valuation is lower than the total raised from the initial offering. Pump and dump ICO schemes have proliferated. And over a third of tokens released in 2017 has yet to appear on any exchange.
Regulatory Oversight Shows No Signs of Slowing Down
Compounding these poor coin management practices, ICO utility tokens are operating on a fundamentally shaky legal ground. BitcoinMarketJournal has published an exhaustive list of ICO regulatory oversight by country and notes that in the U.S. it is “allowed, but heavily regulated,” and because many coins can be classified as securities, the regulatory aim is similar to that of Initial Public Offerings (IPOs). Some individual states have additional oversight — Massachusetts recently halted the sale of five ICOs, requiring them to register as securities.
The SEC confirmed today [June 14] that ICOs are securities. The problem with this statement is that most Ethereum based ERC-20 tokens can be traded freely between people on crypto exchanges and wallets. This means that someone who has not passed Know Your Customer (KYC) and Anti-Money Laundering (AML) checks can buy and sell securities freely.
This breaks federal laws and at some point, the SEC could come down on this and stop it altogether.
ICOs frequently suffer from a “gold rush mentality” where investors are eager to cash in on anything and everything, opening the door to irresponsible, poorly conceived coins that ultimately erode trust in the cryptocurrency ecosystem. On Wired, Joi Ito’s article “The Big ICO Swindle” points out that many ICOs only have value if investors get in early, and sell higher:
“Many cryptocurrency speculators are banking on the theory that someone dumber than them will buy their tokens for more than they paid. That’s a pretty good bet … until it isn’t.”
With all this news, it might seem like the days are dark ahead for the cryptocurrency market indeed.
But that’s where STOs (Security Token Offerings) come into the picture.
Why STOs Promise a Stable, Growth-Driven Outcome
There is value, of course, to what ICOs are offering. They bring in necessary funding for the future development of cryptocurrency and the blockchain ecosystem. And regulation isn’t the enemy of the good: cryptocurrency arguably needs oversight in order to help stabilize the market and open it up to more players.
For this reason, STOs have been gaining traction — and many think they are poised to overtake the ICO model.
STOs capture the benefits of ICOs, while minimizing unreliability. How?
STO values are an investment in equity — real assets. The buyer owns a percentage of whatever asset the token is tied to, whether that’s company growth or real estate investments. Think of them as an investment contract in coin form. This is in contrast to ICO utility tokens, which have no real-world backing. Because of this, ICOs only hold value if the token’s value continues to rise — rather than investors, utility coin holders are essentially coin collectors. It can be more useful to think of STOs are crypto assets, rather than as traditional cryptocurrencies.
The word “security” in the name can be taken literally: being backed by tangible assets translates to better assurance for investors that their coin will not lose total value overnight. STOs can build regulatory checks into their protocols, such as the Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements. Having rights already written into a smart contract with tokens traded on a blockchain exchange helps investors avoid many of the regulatory headaches ICOs are now facing.
Because STOs represent clear investments, they are regulated, and must be registered with the SEC (or qualify for an exemption). Because ICOs are in a gray area, investors can be left holding an empty bag — and have no recourse — if a company decides to take their money and leave the market.
It’s important to note that utility can’t be guaranteed by any company. If regulators determine that a utility coin is acting like a security — regardless of how the coin’s creators wanted the coin to be used — they can impose fines and regulations. STOs, by contrast, have already been set up to adhere to rules and regulations, reducing the risk that unexpected regulatory interference will alter the value of the coins.
Once the Wild West Shootout is Over, Who Survives?
We don’t predict that ICOs will completely fall out of favor right away. They continue to hold appeal for investors looking to get rich quick and, essentially, mine the gold rush before it bottoms out.
STOs better adhere to a core tenant of the cryptocurrency world: increased transparency. As CryptoCoinMastery points out in a recent article about the rise of STOs,
“We’ll start seeing more companies and people willing to engage with securities issued via blockchain technology who may not have ever been interested in cryptocurrencies because of their legal gray area status.”
Moving away from a pure ICO approach will help open the market up to new players and encourage the widespread adoption of the blockchain movement.
Hacker Noon goes further in predicting that the ICO model will, essentially, die out as STOs gain traction as a result of providing a more secure fundraising platform, and that the opportunities available for those willing to work with STOs are only going to grow:
“A range of service providers for the security token market will emerge soon. STO investment advisers, insurers, custodians, I-banking, lenders, all of these fields will grow into multi-billion dollar opportunities with at least the same level of complexity as the traditional securities markets of today.”
ICOs: Are They the Lone Cowboy Riding Into the Horizon?
America’s own Wild West didn’t come to an end because the cowboys disappeared. It came to an end because the country’s transportation infrastructure fundamentally changed, and because, as historian Marshall Trimble points out, the rampant lawlessness that defined the area was over. Sheriff Carl Hayden chased down horse-riding train robbers in his car circa 1910, a definitive first for the era.
All technologies experience a Wild West, and all Wild West stories eventually end in regulation and a more stable ecosystem. It’s not a matter of if, it’s a matter of when. The STO blockchain ecosystem holds the key to secure infrastructure and future regulatory compliance.
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Sea Foam Media is a blockchain, ICO & STO agency headquartered in San Francisco, with representation in New York and London. I work out of our New York office as Lead Content Creator.
Sea Foam Media provides end-to-end services for our clients, including whitepaper development, technology vision and architecture, token economics, digital marketing, PR, web and mobile app development, private blockchain network development, and smart contracts.