Security Token Offering(STO), the new ICO?
The past two years have seen an impressive amount of capital raised by blockchain-based startups via initial coin offerings (ICOs) which generated over $6 billion in 2017 and over $20 billion in 2018. Despite the remarkable success of raised capital and explosive growth, success rates were extremely low and it was estimated that over 80% of them were scams. In pursuit of something less associated with scams and fraud, the industry has come to a safer alternative for companies aimed at raising funds-regulated security tokens offering (STO) which is making its entry and provides protection at a whole new level to blockchain investors.
Problems With ICOs
The purpose of most of the ICOs is to use investor funds to furthering its goals, launching its product or starting its digital currency. While the use of the tokens is hypothetical, they essentially represent the ability to pay for a product that may or may not have already been built. These tokens have very little long-term value until that company launches their product, an event that often does not take place. The reality is that most ICOs are pre-sales of specific company tokens and are not functional at this point. Because the buyer does not own anything with real-world assets backing it and for investors, this might just mean nothing more than a promise, you are simply putting money into products that don’t exist yet.
Defining security token
A security token is a physical device used to gain access to an electronically restricted resource and they act like an electronic key to access something. There is a prerequisite to qualifying as a crypto token as a Security Token, and as a requirement, the token must pass the Howey test, and as a result they are subject to federal securities and regulations. The community considers security tokens as an investment contract that is similar to traditional financial instruments.
Why are tokenized assets important?
The hype around security tokens isn’t based on the idea that some existing tokens will now be considered securities,
Purpose – strengthening economic creations, smooth user experience
Features – work rewards, voting, product access
If the tokenization reaches global saturation, many different real assets will be included in the blockchain system and it will be likely that the tokenization of assets will cause a significant movement of prices for some of the assets as the arrival of new players to the real estate market will increase supply.
Benefits of Tokenizing Assets
Blockchain is changing the habit of buying and selling securities. To understand why the market is moving towards this technology, we need to understand the current limitations of securities, and the benefits that tokenizing an asset brings.
Fractional ownership – is a method in which several unrelated parties can share in, and mitigate the risk of, ownership of a high-value tangible asset, usually a piece of real estate. As an example, let’s say that you’re a real estate merchant. One of your properties has a value of $100,000 and with asset tokenization you can represent its value in terms of tokens. Let’s say that 1 token value is $10, which means each token represents 0,01 % shares of your asset.
Cost reductions – tokens eliminate middlemen, who may limit investment accessibility by restricting investments to accredited investors only, demanding high fees and requiring access to stock-trading accounts.
Rapid settlement – the potential of blockchain can increase settlement speed for securities, a solution to automate these processes through interoperable smart contracts which determine the speed of the settlement.
Divisible – the increased liquidity allows more people to participate in the asset class which increases the expected value from trade and eliminates the need for minimum investments.
Accessible – tokens can be accessed from any place in the world, 24/7.
Automated compliance – regulations can be coded into security tokens through smart contracts.
Interoperable Assets –
STO platforms at the moment
Despite being a newly invented concept, a lot of companies are now adopting to tokenize their securities to be able to trade on global exchanges. We can bring up names such as Polymath, Own, Securitize, Swarm, Securrency, Harby which are being urged to take advantage of this model of doing business due to its numerous advantages.
Tokenizing assets creates a huge opportunity because of its enormous potential to redefine the crypto financial system and to change the traditional concept of ownership. Companies who wish to do legitimate business with their liquidated shares, assets or equities can make use of the security token offering and its underlying market. The future of security tokens looks extremely promising as the long-lost trust in cryptocurrencies or ICOs is being succeeded by security tokens. We believe that security tokens will play a transformative role and that it will be the new rising star of venture capital.
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