In the world of cryptocurrencies, the battle between STO and ICO is still raging. ICOs enjoyed a dream run between 2017 and early 2018 mopping up nearly $14 billion according to informed reports. Traditional Venture Capital providers have been shaken by this rapid expansion of the new fundraising route. To put it mildly, the financial world is rattled to an extent and right on the heels of ICO, yesterday’s market leaders in the investment world have now to contend with another newborn, the STO development or security token offerings.
The past, present and future of ICOs
As we write this towards the final quarter of 2019, the ICO development has tapered out and investors continue to grapple with the underlying technology that drives the coin world. A major reason that drove the ICOs southward has been the concern of many federal governments that saw the crypto world as a threat to the age-old system of federal currencies. To an extent, this concern was also right because if a currency collapses, there must be someone answerable to people who have relied on the currency. What happened in recent times in Venezuela is more an exception than the rule itself. On the other side, many of us have also seen how the Crypto world lead by Bitcoin behaved throughout most part of 2018 and early 2019. This sea-saw movement of different cryptocurrencies compelled the federal government to either ban cryptocurrencies in their respective territories or regulate them in some manner. With such sustained actions from federal governments, the ICOs 2108 in particular also saw a sea of ICOs hitting the market. This space was populated by serious players with a clearly established use case, the also-rans, and the fly by night operators. Many individuals and businesses saw ICOs as the simplest way to raise capital with a clear intent to leave investors in the lurch. Happily, the party did not last long though it did erode billions of dollars in investor wealth.
Purpose of tokens
We now shift to the purpose of tokens. People invest in tokens because they are seeking liquidity as well as the opportunity of speculation. Thus, if an investor could buy a token at the start of trading at say, $1 and sell it at $1.3 a few hours later, then the investor makes a small profit, small because the number of tokens he trades will generally be only in the hundreds and not thousands or millions. But, to make this profit, the token should have adequate liquidity which means there should be takers at a higher price. Thousands of day traders make a living just by doing this in the stock markets or commodity markets and others make money staking such as the case with HEX.
In the USA, the SEC has viewed most ICOs as securities as opposed to utilities that the ICOs claimed. It saw ordinary investors participating in a market riddled by fraud, scam and behind the curtain pre-sale activity with no protection of any kind. In the wake of these observations, apparent speculation and fraud and absence of regulation, the ICOs experienced a backlash from the technology space. Soon, led by Facebook, most social media platforms and even Google banned ICO ads. Consequently, ICOs entered the ICU and the very term ICO came to be scorned. In this scenario, predicting whether the ICOs can make a comeback is anyone’s guess.
The STOs arrive
With the ICOs relegated to the backyard, the STOs arrived although the idea itself had germinated long before the naming ceremony. During this gestation period, some of you would have noticed token offerings from ICO 2.0, regulated ICOs and ICOs that differentiated merely by structure and not name. But most changes were merely in the name.
There are limited similarities between ICO and STO in that both instruments are offered by businesses to intending investors who buy the crypto tokens riding on the blockchain platform. The similarities end at that point. ICOs represent the sale of tokens or coins with purported currencies or utilities. The STOs, on the other hand, sells securities.
In contrast to ICOs, participants in STOs are investors who receive security upon payment similar to equity, revenue share or debt, in the form of a token. Businesses offering SCO should be registered with the respective securities exchange authorities (expensive and difficult) or seek an exemption from such registration. Typically, in the US, STOs choose the exemption route that is open under specific conditions. Regulated crowdfunding is another option in the hands of those who consider the STO route for raising funds. However, limitations apply to the maximum amount of money that can be raised through STOs in any calendar year. In the US, the present limit is $1,070,000.
Yet another option available to STOs is Regulation A+ which is similar to regulation crowdfunding except for the upper limit which is set at $50,000,000 per year. However, this exemption will need to be qualified by the SEC and that condition does not apply to other exemptions. Interestingly, the SEC has qualified just a handful of STOs under Regulation A+. This is understandable since this exemption is reckoned as the gold standard to raise capital from the public and comes without a lock-in period.
With the marketplace becoming more and more sophisticated (lesser fraud and scams) STOs will see greater demand from investors since they provide protection as well as governance and every investor wants these. But the needs of investors in ICOs are different and their focus is on instant liquidity with unregulated websites defined as ‘exchanges’. Setting up these platforms involve little or no cost at all since the so-called exchanges do not carry the burden of rules or supervision and are free to carry out any kind of trade. Interestingly concepts like AML or KYC do not apply to them or are considered irrelevant. These unregulated exchanges also present a basket of other risks though many investors find this acceptable.
On the other hand, the STOs will trade on different trading systems or through broker-dealers supervised closely by federal agencies designated for the purpose. But, these alternatives are essentially expensive particularly with regard to employee costs. The mushrooming crypto exchanges will soon feel the heat and in turn, that should benefit the STOs over the longer term.
Investors should recognize the deep line between speculation and investment.
Author Bio: Bhawna is Sr. Digital Marketing Executive at One Stop Media by profession and storyteller by nature. A reader at night and analyst during the day, her area of focus are marketing, tech, and startups. You can follow Bhawna on Twitter, LinkedIn, and Medium for her invaluable marketing tips and recommendations.