What do you need to know about Security Token Offerings

Many industry professionals have stated that STOs (Security token offerings) are preferable to ICOs (Initial Coin Offerings) in the wake of the scandals that followed the ICOs bubble's collapse back in 2018.

To contrast with the mostly unpredictable nature of ICOs, STOs are digital assets that are conducted in a lawful and safer manner.

In this article, we will provide an overview of what you will be need to know regarding STOs.

1. Why Security Token Offerings (STOs) are Needed

With the advent of ICO (Initial Coin Offering) back in 2017, multiple corporations are able to raise funds via their this emerging trend. 

Unfortunately, unscrupulous market players took advantage of the unpredicatable ICO sector to swindle investors due to the ease with which funds could be generated. Several high-profile scandals caused massive financial losses for investors. The stability and reliability of such cryptocurrency is extremely open to speculation since it is not backed by underlying assets.

As a result, STOs were being introduced. STOs combine the advantages of blockchain for financing in a regulated setting, with the added attraction of possible exchange-based and asset-backed structures. In other words, STOs can also be understood as digital currencies which were designed to meet regulatory requirements for securities.

2. What is STOs

In simple terms, STOs are digital tokens backed by blockchain technology that reflect ownership claims in an asset. Similar to stock certificates, each digital token represents ownership in a company or asset. For security tokens, the only difference is that the data is stored on the blockchain and represented by a token.

3. How does STO work? 

A security token is functionally equivalent to a traditional security, except that it may verify ownership via blockchain transactions and enable fractional ownership. To some extent, investors are safeguarded by the federal rules that regulate securities, which also apply to security tokens. Tokens used for security may be updated with new features. Tokenizing securities on a blockchain enables "smart contracts" to direct the behaviour of the tokens without a trusted third party. When a loan is "tokenized" on a blockchain, for instance, payments may be made on time and without the need for a third party (such as a bank) to process the transaction.

4. What is the difference between an ICO and a STO?

Tokens representing investments in a STOs are distributed to backers in a manner similar to that of ICOs. However, they are different in their utility.

ICO is a popular method for startups to generate capital in exchange for a variety of cryptocurrencies. To get past regulations, ICOs are often claimed to be designed for utility, not investments, allowing users access decentralised apps. To the general public, ICOs have a lower barrier to entry and more accessibility since they are not required to stay compliant with laws and regulations.

The primary focus of an ICO is on the token's usefulness, but it may also be used as cash to purchase goods and services if the business it represents is successful. Initial coin offerings (ICOs) are riskier than conventional financing options because of the lack of oversight, but they also provide more freedom of design.

When compared to ICOs, STOs are investment contracts for assets such as real estates, stocks, bonds, or real estate investment trusts (REITs). Security token offerings (STOs) have to adhere to security rules that ICOs do not have to worry about.

5. Types of Security Token 

Asset-backed Tokens

Blockchain-based tokens that represent physical assets are referred to as asset-backed tokens. Real estate, stocks in a corporation, commodities, and even diamonds are all examples of such assets. Users are granted legal rights over digital representations of physical or intangible assets.

Equity Tokens

Tokens representing equity in a corporation are called "equity tokens." A holder of an equity token may be eligible for dividends and/or voting rights. Its mechanism works similar to stock, the terms and conditions of such investments are set down in a contract.

Debt Tokens

Debt tokens function similarly to investor loans made to companies for shorter terms. The loan's collateral will be a smart contract that lives on the blockchain. The price of the debt token will be heavily depending on the payout model and risk involved in the loan.

Utility Tokens

Companies, startups, and other organisations working on blockchain projects may use utility tokens to attract investors and finance their operations. Tokens are issued by the cryptocurrency's issuer and may be used to buy products and services from the issuer in the future.

6. Benefits of STOs

For Asset Owners:

If you possess assets, STOs allow you to trade them online and capitalise on the advantages of blockchain technology and distributed ledgers to increase your capital and liquidity. Through STOs, owners of illiquid tangible and intangible assets may increase liquidity by making such assets tradeable. 

Certain illiquid assets such as real estates may be very valuable, but there would likely be only a limited number of people having the affordability in purchasing them. With STOs, illiquid assets may be split into smaller, more easily traded pieces in the form of tokens, much like asset-backed securities, or investment pools can be created, similar to a mutual fund. It is possible that STOs will allow issuers to obtain capital without having to sell the whole asset. 

Due to the nature of security tokens, an unlimited number of tokens may be produced, allowing a huge number of investors to potentially share in the ownership of the underlying assets. Because STOs may be split up in this way, asset owners can use them to attract investors while still retaining control of the asset. 

Investors 

At now, a person may only invest in a corporation by purchasing shares or bonds. More investors, especially institutional ones, may be able to get in on STOs because of the wider range of assets they provide. Tokenization allows for fractional investments in assets like collectibles, real estate, and intellectual property. Tokens representing fractions of the artwork or antique may be purchased by investors to spread out their potential losses. That is to say, STOs provide an additional way to invest and grow one’s portfolio.