From ICO To STO, An Overview Of What Could Be An IPO Alternative
By COLLAS on ALTCOIN MAGAZINE
Let’s start with the very basics. What is a crypto token? It’s a digital representation of any asset or utility, stored, used and potentially exchanged over a distributed ledger called Blockchain. Tokens are separated into two families: Utility tokens, and Security Tokens. The image below presents the main differences between these tokens, and regulators as SEC or FCA provide frameworks to help to define them.
In the graphic below, we present the main Initial Coins Offering (ICO) which have recently taken place, the size of each bubble representing the amount raised. ICO permits companies to raise money quickly and cost-efficiently, but the lack of regulation resulted in scams and legal issues like those experienced during Telegram’s ICO. These negative aspects of ICOs brought Security Tokens Offering (STO) in the spotlight.
Before jumping into STOs, we recall that an Initial Public Offering (IPO) is complex to set up, costs money and takes sometimes more than a year. Only some companies can go through this elitist process. We will, therefore, examine STOs as a potentially sustainable alternative to IPOs.
An STO allows a company to raise money by issuing a security token that represents an investment contract. First, intermediaries (brokers, banks, central depository) are no longer needed thanks to DLT. Also, using smart contracts ensure that the STO will meet regulatory’ requirements, reducing compliance costs. Security tokens are also more flexible, due to their ability to fractionate ownership efficiently. Smaller investors can then participate. Moreover, an STO is global (borderless, no opening hour) and potentially more liquid according to Carruthers B.G. & Stinchcombe A.L. Still, compared to traditional markets, this is an emerging market with concerns from investors about volatility. Assuming that tokens issued through an STO are then exchanged on the secondary market, for now, the value will depend on Bitcoin’s price rather than the company’s performance, bringing uncertainties. The graph below shows the total market cap of cryptocurrencies.
The 2017 peak gives us an overview of both the opportunity (as new investors quickly entered the market) and the threat due to high volatility. Actors such as the SEC try to provide frameworks allowing the sustainable secondary market, more permissive but to control volatility and making the market more liquid. However, grey areas remain concerning “legal uncertainties”.
I would conclude by reminding that the IPO market is a liquid market and considered stable. But events like those in 2008 prove that even mature markets are subject to crashes, and it is not a coincidence if Bitcoin’s whitepaper was released during that time. Blockchain brings disruptive solutions, and Security Tokens Offering is a good example of what could be a sustainable alternative to the aging traditional IPO. However, I would promote several cautionary principles. Blockchain, crypto-assets, and tokens offering are still at an experimental stage. Regulators, centralized institutions and states see the efficiency of this technology as an opportunity, but also feel threatened by this distributed ledger technology. Policy networks need to make sure that we create a fair and reliable legal framework for everyone, not only policymakers. Meanwhile, companies need to use Blockchain for the innovative aspects it brings, not for the interest of investors, these buzzwords offer.
