Why Security Token offerings legitimize the blockchain and crypto industry
While some hodlers flinch at any sign of regulatory intervention, the truth is, it will most likely be beneficial for them.
The problem with the currently untamed world of ICOs is that investors take a lot of risks and are not protected in case the project collapses. Even in the case of exit scams, it’s hard to pinpoint and prove fraud, like in cases where project founders claim to have been hacked.
At the same time, most ICOs in existence can be considered securities under the Howey test. Some package their tokens as utility tokens, which means the tokens can be used to redeem the issuer’s service or product when it goes live. Utility token holders “pre-purchase” the company’s products; at least, that’s how it’s supposed to work. Yet, most of the time when people buy these tokens, it is not with the intention of purchasing it’s underlying products or services, but instead, to flip it for profit when its value rises.
Founders insist they are not selling securities. But saying so does not necessarily make it true. Like some say, “code is law” is not a valid defense in court. Violations can lead to fines and even imprisonment — which could subsequently collapse the entire project, along with the money invested in it. These uncertainties are enough to ward the majority of the population away from cryptocurrencies.; the good news is, this is about to change.
One big step for legitimacy: no more faceless founders
Lately, some companies have been working on tools to better police cryptocurrency users and issuers to crack down on fraud and other illegal activities. But it will still take some time before these tools can be perfected. Until then, investors have to look out for themselves.
Luckily, another development that has quickly been gaining attention is the security token offering (STO); this will help even the most conservative investors dabble in the space, and with full regulatory protection.
An STO is a mix between an IPO and an ICO. STOs are asset-backed tokens that are registered upfront as securities, and therefore, subject to the SEC’s regulations. STO’s trump traditional stocks in that they are more liquid, they are traceable, and they are easily accessible to everyone. Tokenization of real-world assets makes it easy for anyone, anywhere to buy and share ownership of assets, as well as trade them.
With more legitimate options, exit scams, pump and dump schemes, sh*t tokens, and the likes will not be as tempting for investors, or lucrative for their instigators.
With the advent of legally recognized and authorized security tokens, conservative investors who are not willing to take risks with today’s ICOs can still get into the space through legal tokens — ones that are under the watchful eye of regulators. Unlike ICOs — which can be launched by faceless, nameless entities whose locations may not even be known, companies launching an STO have to register legally — names, addresses, and all — through the SEC. Should there be anything suspicious, regulators know who to hold accountable, and would have a good idea of where to find them.
The Domino effect for hodlers
Because STOs will increase investor confidence, this will increase activity in the cryptocurrency space — which equates to better market values. Additionally, crashes and panics caused by scams being exposed may not have as much impact; investors can be confident knowing founders won’t just disappear.
Every step that minimizes risk benefits cryptocurrencies in general, including the portfolios of those who hold them. Security tokens could bring the next big bull run for crypto — one that may substantially increase the value of cryptocurrencies across the board.
Remember when CBOE included BTC in their futures trading? It sparked the legendary bull run of 2017, where BTC almost hit $20,000 and dragged all other cryptocurrencies up with it. However, the spike was fleeting and was followed by a massive crash. Uncertainty and fears regarding regulation contributed to the crash; China continued its crackdown on cryptocurrencies as well as any activities associated with them like mining, expanding its “Great Firewall” to completely shut crypto out.
It was a confusing time — one riddled with chaotic clashes between regulators in different territories around the world and cryptocurrencies. Russia and South Korea, at the time, were also in the middle of assessing regulations, and several countries followed suit. As those who have been following the cryptocurrency space know, that this resulted in a messy, panic-drenched bloodbath — everything went red.
But this time, regulatory intervention in the cryptocurrency space will be favorable. The tokenization of real-world assets through STOs is sort of like an alliance — a handshake between cryptocurrency trading and regulation. It’s a legal acknowledgment of cryptocurrencies, and with regulators greenlighting the tokenization of assets, it’s highly likely that things will go green on the trading board as well.
Unlike December’s bull run, this may not be a fleeting movement. Instead of pure speculation-driven values, we will now have less volatile tokens that are as secure as they are legal. Because ICOs — in the form of STOs — are legal and clear-cut, and with regulations starting to solidify, cryptocurrencies are gaining a higher level of legitimacy; a level of legitimacy that could raise trading values for good.
