The Otherside of STOs (Security Token Offerrings)!
Disclaimer: No financial advice is offered and no products are endorsed, whether mentioned or not! The aim of this article is to discuss STOs.
Initial Public Offerings (IPO) go back many centuries. Dutch East India Company (“VOC”) was the first IPO all the way back in 1602! The biggest IPO was Alibaba in 2014! Then IPOs were out-maneuvered by Initial Coin Offerings (ICOs) in 2010. ICOs become an innovative way of financing startups, especially in the cryptospace. It was a creative crowd funding mechanism for startups, especially for global investors, entrepreneurs, and the public. Security Token Offerings (STO) are predicted to be the new ICOs in 2019!
IPO vs Cryptocurrency
Cryptocurrency businesses have been looking at different models that will raise capital to fund their projects. IPO is the traditional model of raising capital for a business. When you consider it has been around since the 1600s, it is quite amazing that it is still one of the main options available.
The main reason cryptocurrencies have not gone with the IPO traditional funding is because cryptocurrency is a new, unique space. Fundamentally the first cryptocurrency, and most of the Altcoins that followed, did not really fit into the philosophical framework offered by IPOs. Another major disadvantage of an IPO for early cryptocurrency companies was regulatory issues. Cryptocurrency certainly began its journey very much apposed to regulation. That was actually the point, no one owns the cryptocurrency and no one regulates it. It is completely decentralised. The theory is that we do not need governance or middlemen, who take their cut and raise the price of the product.
ICO: The New IPO for CryptoCompanies
Cryptocurrency companies therefore turned to a new form of crowd funding and funding from investment capitalists and private funders from around the world. The ICO was born. This was a very effective solution to the funding problem. The major advantage of an ICO is that the owner of the company retains control, unlike IPOs. Of course, the owner’s, or owners’, intentions are to decentralise their product. However they maintain the control over the company until it is released on main net and then decentralise the product.
ICOs were rife in 2018. There was much hype created around cryptocurrency. Everyone wanted a piece of this new technological pie, cryptocurrency, and ICOs and make a quick profit. An obvious consequence was that many ICOs were just that, hype, and scams. It was difficult to differentiate between a real opportunity and a scam. Things settled a bit as the year progressed and it became clearer who the real players were. Hype fell, but real investing continued and continues. ICOs are not gone, they are more settled and still play a significant role. The question is will STOs become the new ICOs?
STO
In order for an STO to launch you need a custodian, an exchange for liquidity, and most importantly they require registration with regulatory SECs. These are the challenges facing STOs. The infrastructure is not ready yet for such a system to work, but many people and companies, such as Polymath, are working hard to set this structure up.
Trevor Koverko is the CEO of Polymath. Polymath has developed an actual product to deal with STOs. Its aim is to do what Euthereum did for ICOs for STOs. That is, to make the process easy for companies to launch STOs.
Cryptocurrency and Regulations: The Stumbling Block for STOs
It could be argued that the most fundamental stumbling block for cryptocurrency startups wanting to use the STO model, is regulations. This is because the origins of cryptocurrency, Bitcoin, started opposed to regulation, with its aim to build an autonomous system for the people run by the people without any leaders. The decentralised nature of a cryptocurrency is one of its unique and defining characteristics. The question is: are STOs in breach of this philosophy?! Will STOs provide a new, or alternative, way of funding cryptostratups. STOs are certainly promising and might be a way into mass adoption because it opens the door to institutions and investment capitalists.
Summary
Traditional businesses looking to expand had IPOs as a main option. This option has spans many centuries. When cryptocurrency was introduced to the public and started becoming a known entity in 2017, many people wanted to invest in cryptostrartups. ICOs were created, in the 2010s, as a means of solving the funding problem. These ICOs started funding startups and attracted many investors. However there was much hype and along with that came many scams. Investment has slowed in the ICO world and many cryptostartups are re-examining ways to fund their companies. Enter the STO. STOs solve a number of issues, but regulations are integral. Regulation is a major obstacle to investment in cryptostartups as securities. There are many issues to resolve and government bodies, such as the US (United States) SEC are major obstacles. Exchanges for liquidity need to be worked out too. Exchanges are starting to address this new model’s needs. Custodians are another block that need to be worked out. Probably all three models will co-exist side-by-side. There may be more solutions that come out as alternatives. Smart contracts might play a bigger role in eliminating the issues of regulation in the future. Can STOs work effectively and are they even a desired solution? Everything is still speculation in the cryptospace, so time will tell.
