Security token exchange is making a significant impact in the evolving crypto trading industry. But when it comes to wide acceptance of security token, liquidity emerges as a major challenge.
In the case of STO, liquidity denotes to the easiness and constancy with which a token/asset can be purchased/sold in the marketplace.
If you have invested heavily in the 2017 crypto space, you probably did really well. But it’s 2018 now. With the emergence of SEC and its regulations, the functioning of ICO might change. So, we are going to dive in and take a look at how things are going to be different with security token offerings. Let’s start with the challenges.
Most crypto projects refer their tokens as utility tokens which are designed to offer holders a way to take part in the network. However, there are plenty of these tokens are still used to increase money for different projects. In return it expects high ROI for investors who then trade it on secondary platforms.
The market will be drowned with more experienced investors who take advantage of smaller investors. They are dominating & suppressing decentralized finance, block attempts at major crowd funding networks.
Large investors receive deals from private sales, dump tokens as they have got listed, generate an instant profit while decreasing the price for less experienced and smaller retail investors who funded more and expecting for a return.
“A token, a digital asset, where I give you money and you go off and start some venture…and in return for giving you my money, you say, ‘You know what? I’m going to give you a return’, or you can get a return in a secondary market by selling your token to somebody… That is a security and we regulate that. We regulate the selling of that security and we regulate the trading of that security. That’s our job, and we’ve been doing it for a long time,”
– said SEC Chairperson Jay Clayton, in a June 2018 CNBC interview.
With ICO’s being utilized to dump different schemes without providing any path for redemption, it is being very problematic for investors to establish trust and participate in any crypto project. This is the scenario where we need Security Token Offering.
What exactly the Security Tokens & STO
Securities are defined as tradable financial assets, and security tokens are blockchain based digital assets that are stored cryptographically. It enables investors to own a tradable asset. They offer the investors a range of financial rights, like dividends, profit share rights, equity, buy-back rights, and much more. It is the same as ICOs, but the difference is that STO provides security tokens instead of utility tokens. STOs are introduced to provide legal protections for investors in the crypto community. We can expect a boost in the number of STOs in the latter half of 2018.
Differentiate Security and Utility Token
A legitimate STO will endure different procedures for registration and establish itself as a trust-able security offering. If anyone wants to differentiate a security token from any other tokens, Howey test would be helpful. After this test one can confirm that transaction can qualify as an investment contract or not. If all the conditions are satisfied, the token is qualified at security and ready to move further for additional disclosure & regulation needs. The token must come across the following circumstances to be categorized as a security token.
- The user is investing money. (however, later cases have expanded this to include the investment of assets)
- The user expects to profit from the investment.
- The investment is in a ‘common enterprise’ (this term has not been precisely defined. Many courts have used different interpretations)
- Any profit comes from the efforts of a third-party or promoter. (if an investor’s actions have a large influence on whether or not the investment will be profitable, it is likely that the token will not be classed as a security)
Benefits of STO
Issuing security tokens that backed by regulatory frameworks is low-priced and more effective than conducting an ICO with the use of utility tokens. More importantly, it can also decrease risks and safeguard the company as well as the contributors — notably since the SEC has improved their implementation initiatives.
- Lessen legal risk and protect both the company as well as the contributors.
- Particular parties can be banned from trading these tokens. By turning ICOs into security tokens, a lot of regulatory audits can be skipped.
- Online exchanges offer around-the-clock (24/7) liquidity support.
- As there is fractional ownership, it draws a wide pool of investors in secondary markets.
- Because of the rapid transactions settlements takes place within seconds compare to multiple days.
- Lower cost of liquidity, lower fees and lower operating costs.
- Security Tokens are smart and take Dynamic updates.
- It offers the possibilities to tokenize more than one organizational assets. Provide wide-ranging tokens to align better with investor strategies.
One of the major STO platforms, Polymath, assesses that security tokens will rapidly beat the utility tokens. Polymath realizes security tokens are blowing up to a value of $2 trillion in 2018 alone and $10 trillion by 2020.
Features of Security Token Offering
- The digitization of asset empowers to manage illiquid asset into an equity issuance via a programmable code.
- The STO represents a company’s stock, so the company can disrupt their more considerable assets and offer it as STO.
- Each Security Token preserved by the company would have the said asset liquefied so that it can be purchased or sold at its decided rate.
- The U.S Security and Exchange Commission is liable to encompass the listing needs of exchanges. STOs are compliant with SEC rules & regulations.
- The Security Tokens offer reliability for institutional investors to dive into the crypto-market, heading to a huge pool of capital investment.
- Offer high security to investors with its identifiable structure and its allied technological advancement.
- There is no middle-man amongst a company and investors. So it reduces commission cost for intermediaries.
- The development of Security Tokens can be performed on your own blockchain. So it will give you complete control.
The future of security tokens offering
It’s said that, security tokens would-be the go-to form to fund for more recognized startups and for organizations who want to tokenize the securities offering rather than just listing shares on a stock exchange..
Security ICOs expected to be a tough competitor to traditional outdated IPOs as the expenses for an ICO continue to stay cheaper and as new investors understand the benefits of digital tokens over “real shares”.
2017 was the year for ICOs and 2018 could be the year of securities.