ICO versus STO: Will STOs Take Over in 2019?

March 8, 2019exchangeadminSecurity Token OfferingNo Comments

Around a couple of years ago, Initial Coin Offerings or ICOs were being traded in full swing. Remember Bitcoin’s iconic rise to $20,000 by the end of 2017?

Good times!

Unfortunately, soon afterward, ICOs took a tumble almost as quickly as they rose, leaving many investors clueless and penniless. According to a recent study, almost 81% of ICOs that went public in this golden era turned out to be scams, 6% failed, 5% went dead, and only 8% went on to trade on an exchange.
Enter Security Token Offerings (STO).

As investors started to question the integrity of ICOs, security token offerings emerged as an alternative to the ICO crowdfunding model. Still, there is a lot of confusion about how they differ from STOs and why they are the best alternative right now.

Read on to know more.

What are ICO and STO?

An ICO refers to the creation and sale of digital tokens. In this process, a company usually sells utility tokens in exchange for cryptocurrencies such as Bitcoin or Ethereum or with fiat currency such as USD or GBP. It resembles the traditional crowdfunding method called IPO or initial public offering. Anyone with access to cryptocurrency or money can invest in an ICO as usually there is no entry barrier for investors. Unlike traditional venture capitalists, it is a relatively easy, but an unregulated method.

An STO, on the other hand, stands for security token offering. It offers security tokens in exchange for crypto or fiat currency. Companies offering STOs sell asset-backed security tokens. Typically, a security token represents fractional ownership or an investment contract with an underlying asset such as equity, shares, stocks, rare metals, or real estate. As the ownership details are recorded on a blockchain, trading security tokens become a lot easier, quicker, and secure compared to their traditional counterparts.

Differences between ICO and STO

Both ICOs and STOs are used to raise capital for startups and companies in the early stage of development. However, the similarities end here. Both crowdfunding methods have a few distinct characteristics that distinguish them from each other.

ICO	STO
An ICO offers utility tokens which provide access to a service or a cryptocurrency. As a result, companies have to determine a use case for their tokens.	An STO offers security tokens that are backed by a tangible asset such as real estate or company shares. As a result, companies don’t have to define the use case for the token.
Though used for raising capital, ICOs don’t offer investment contracts. The utility tokens are not investments.	Being backed by underlying real-life assets, security tokens are an investment.
The inherent nature of ICOs allows the issuers to circumvent certain regulations. They require no lawyers, bankers or regulatory approval. So, government authorities such as the SEC (Securities and Exchange Commission) in the US or its equivalent in any other country don’t regulate ICOs.	Being tradable digital securities, STOs fall under the present securities laws in respective countries such as Regulations A+, D, and S in the US. Some countries such as Malta and Gibraltar have created specific regulations for STOs.
Being unregulated, ICOs are subject to financial frauds. According to Fortune Jack, the top ten of the most high-profile ICO scams have duped investors out of a staggering $687.4 million. Deadcoins has identified more than 150 ICO scams publically.	As they are regulated, STOs are almost unlikely to defraud the investors. As a result, companies offering STOs are more likely to attract better and quicker investment.
Owing to its nature, an ICO can be extremely volatile with sudden rise and drops in the coin value. In other words, it can lead to a landslide profit or loss.	The value of an STO is tied to the price of the underlying asset. So, the fluctuations in an STO are relatively stable. However, investors can make considerable profits in the long run.
No regulations mean ICOs can raise any amount of money from virtually any investors in a relatively short span and low cost.	Regulations can sometimes cause delays and also add to expenses in the form of legal fees, documentation, and registration.

Why Did the ICO Bubble Burst?

A. Lack of Regulations

The lack of regulations is perhaps one of the most compelling reasons behind the ICO bubble burst. It led to unethical practices and outright scams. The latest ICO scam saw a Vietnamese company called Modern Tech stealing $658 million. It was a classic pyramid scheme where one investor’s money was used to pay off the other.

On the other hand, unethical practices led to offering huge preferential discounts to select investors. Cousinhood, a Taiwanese ICO, came under intense fire for offering a 150% bonus to select investors, who purchased the coins in the pre-sale stage.

B. Technical Incompetence

Many transparent and ethical ICOs experienced technical issues such as scalability and security, resulting in an early demise. In many cases, the ICOs didn’t have the talent or couldn’t produce the technology needed to support their ideas. The failure of DAO ICO was the result of multiple coding flaws, including the recursive call exploit responsible for the historic hack. Hackers were able to steal 3.6 million ETH tokens, the equivalent of $70 million at the time.

Are STOs Going Strong in 2019?

The ICO bubble burst was partially responsible for the quick rise of STOs. They are gradually replacing ICOs. According to Inwara, 2018 saw the most number of STOs ever, with October registering 22 STOs.

On the other hand, ICO funding continued to go down in 2018.

Different industrial sectors have embraced STOs with the investment and trading sectors taking the lead, followed by technology and financial service sectors. Currently, STOs are also going strong with a success rate of 99% so far.

Many organizations have realized the benefits of security tokens. These include higher liquidity, fractional ownership, and lower entry barriers. As a result, they are using STOs to make different business components more liquid, tradable and investable for the mass investors. The ability to automate revenue-sharing contracts is also attracting an increasing number of investors towards STOs.

“Digitalization of real estate is the opportunity to invest with fractional ownership. Through security tokens, we can own assets in a granular way and build portfolios that invest in very specific types of assets,” says Lambert Despaux, the partner at Scheme investments, a Blockchain-focused fund based in Malta.

Security token developers are also setting up universal token standards for STOs, making the tokenization and trading processes easier. Currently, Ethereum’s ERC 20 (68%) and Polymath’s ST-20 (23%) token standards are two of the most popular ones in the security token market.

On the other hand, several leading stock exchanges like Gibraltar Stock Exchange (GSX), Australian Securities Exchange (ASE), Malta Stock Exchange (MSE), SIX Swiss Exchange, and London Stock Exchange Group (LSEG) are listing security tokens for trading. This emerging secondary market is further fueling the growth of STOs as we speak. In short, STOs will soon overtake ICOs, possibly by the end of 2019.

Wrapping Up

STOs offer the best possible legal, regulated and risk-free alternative to ICOs. The increasing number of countries offering security token specific regulations and the downward trend of ICOs will continue to fuel the growth of STOs. Due to this, their future looks bright. Hopefully, there will be bigger and better STOs from various industrial sectors in 2019.