Diploma in Financial Strategy
STOs: An Innovative Compromise
My last post about cryptocurrencies triggered a vast response and I received many thankful messages, which I am grateful for. The cryptocurrency market is booming and attracting more and more attention of not only investors but people who are intereste d in technology, innovation and start-ups.
In 2017, start-ups raised an impressive $3.7 billion through initial coin offerings (ICOs). The EY research shows that, in some cases, ICO investors are investing at an average rate of over US$300,000 per second. The most successful projects are within finance or infrastructure for other blockchain projects.
As ICOs continue to gain popularity and leading players emerge globally, there is a risk of having the market swamped with quantity over quality of investments.
With such a big amount of ICOs getting launched every day, it is difficult to differentiate a good ICO from a bad ICO. Also, a lack of fundamental valuation and the due diligence process by potential investors is leading to extreme volatility of the initial coin offering market.
Most projects use existing platforms: Waves and Ethereum, with Ethereum being an absolute leader. As the demand is growing, the Ethereum network is overloaded, raising the cost of Ether and the cost to run ICOs.
Most ICO white papers lack justification for blockchain and token currency usage so that many projects never turn to implementation. Projects that do go ahead, quite often start to accept fiat currency, reducing the value of the token.
The risk of investing in ICOs remains very high. The scale of the ICO market draw hackers’ attention. EY research shows that more than 10% of $3.7 billion raised in ICOs has been stolen. The funds are lost because of the hackers’ attacks. Phishing is the most effective approach to hacking ICO proceeds. It involves emailing, calling, and text messaging potential investors posing as legitimate organisations.
Regulatory risk comes from the jurisdictions, where regulators take a light touch approach toward ICOs. For those looking to conduct illegal activity with an offering is easy to move to such places.
“Fear of Missing Out” drives token valuations, rather than the standard valuation in accordance with the market fundamentals.
Security Token Offering (the “STO”) is a new way to fundraise with cryptocurrencies. Security tokens are a natural bridge between the traditional finance sector and blockchain – one of the fastest growing ideas in recent history.
In a utility token model, ICOs can just accept investors’ money and offer nothing in return, apart from the often quite vague hints about the future income and token price. It is well-known that ICOs are largely untouched by government regulations and this liberal environment brings both opportunities and risks, some of which are described above. ICO tokens are not designed to be an investment. They give access to a company’s future product or service but do not give its holder the rights or stake in the company. If a crypto token derives its value from an external, tradable asset, it is classified as a security token and becomes subject to regulations. It is likely that regulators all over the world will eventually acknowledge utility tokens as securities. This is a reality, which is much better to addressed up front.
STO tokens offer more rights compared to regular ICO tokens, which are mainly focused on utility rather than actual benefits. They are backed by revenue, profits or assets generated by companies. This means these tokens will have tangible value from day one, rather than be based on speculation.
The main benefit of issuing STO tokens is that they abide by regulatory framework, which makes them cheaper and more efficient than ICO’s tokens. A business that issues tokens, that are complaint with the regulatory requirements, has by far more chances to raise the required capital. STO tokens need to comply with securities laws, which are well-developed and defined in most of the countries. It means that there is a ready-available legal framework and structure in place, that would support token buyer rights and protect them from the undesirable situations.
Conclusion: STOs could be the Future
STO tokens provide investors with an array of financial rights, such as equity, dividends, profit share rights, buy-back rights, and other. Because of all its advantages and applicable regulatory framework, it is anticipated that STO tokens will see widespread adoption across numerous asset classes in the coming years.Back to top of article