Investment is complicated. Crypto investing is far more complex. So many users are intrigued with questions like “What is STO?” or “How to properly invest, so I won’t lose my money?”. That’s why I am here for you with the details about security tokens, crypto industry features, and how they will change traditional finances for good.
STOs are a pretty recent invention, so it can be complicated to understand all its details. At the same time, it is fast evolving, becoming an integral part of the finance industry. Buckle up to find out what STO hides for you, the advantages of those tokens, and how they can benefit you both as an investor or company representative!
The Intersection of STO, ICO, and IPO
Security Token Offerings, Initial Coin Offerings, and Initial Public Offerings are ways to raise money to invest in crypto projects by selling tokens or ownership shares. And that is where their similarities are gone.
There are three different methods with dissimilar approaches to raising money. To ease the comparison, I gathered crucial info about them in this table.
(зробить її як картинку - по унікальності НЕ перевірять)
Accredited and retail investors
Accredited investors only
Cost and complexity:
More costly and complex than ICOs, but less so than IPOs
Less costly and complex than STOs and IPOs
The most costly and complex of the three
Time to completion:
Faster than IPOs, but slower than ICOs
The fastest one
Slowest of the three
To raise capital for a company by selling security tokens that represent ownership of something of value
To raise capital for a company by selling utility tokens that give holders access to a product or
To raise capital for a company by selling shares of ownership to the public
As you see, STOs are the most regulated ones. In most domestic and international cases, STOs are regulated: lawmakers see this process as stock and bond sales with all its challenges and laws. Businesses should comply with all laws when conducting an STO.
ICOs are not as regulated, because they are not considered securities offerings. They may not be backed by physical objects or assets. You can support coin offerings by assets, but it’s not obligatory. It may be harder to raise money, as ICOs don’t have as many interested investors due to a lack of backup support.
Regulators see IPOs as security offerings, so they are THE MOST regulated on the list. It will take a lot of time and effort to comply with all IPO regulations, but it is worth it. Investors understand that it’s the most secure option for them, so you will see many accredited investors as well as rich individuals.
Dive Deep: What Are Security Tokens?
STO tokens portray ownership of pre-chosen underlying assets. It can be fiat money, stocks, bonds, cars, real estate, etc. The main thing is that they are secured with something outside the crypto.
Utility tokens need to take some action, but they don’t represent ownership. At the same time, security tokens are crucial because they show that you own something. In this case, the company tokenizes an existing underlying asset.
They virtually split this asset into parts, just like when a company shares its stocks. When you buy Coca-Cola or Apple stock, you buy a small part of this corporation. Even if it’s 1/10000000000%, it is still partial ownership.
When you buy a secure token, it’s the same. You buy a piece of ownership for some product or company. Later, you can trade security tokens on security token exchanges (STEs).
Due to their accessibility, security tokens can revolutionize the asset market, making it more appealing to the middle-sized investor’s team. They are efficient and secure while running on a transparent network. Crypto is international, so you don’t need to open a bank account in the desired country.
Key Features of Security Tokens
So what is an STO offering, and how do they benefit the finance industry in general? Security tokens are digital assets, symbolizing ownership like a classic stock. But at the same time, the security token market offers advantages over traditional options due to blockchain architecture.
One of them is transparency. Security tokens are blockchain-based. It’s a distributed ledger technology that records all transactions in a long sequence. It’s impossible to retrospectively remove the record from the chain as you need to cancel all subsequent blocks and remove all of them from all computers in the network. It’s virtually impossible in real life.
At the same time, anyone can see the transaction history as well as the terms and conditions of the underlying asset. Transactions here are regulated by smart contracts, which eliminate the potential bribery part. If one of the parties doesn’t fit contract requirements, no one can launch it.
Investors can be confident in the asset that they are buying. They can ensure everyone runs on the same terms, without unfair privileges. It improves market efficiency since everyone can freely work in these circumstances.
Another feature of security tokens is instant settlement. The crypto market works worldwide 24/7. It doesn’t have holidays or any local work hours restrictions. It improves access to international capital: you don’t need to wait until the working hours of the desired country to start investing.
Let’s imagine that you are an investor from Kazakhstan and you want to invest in business from the USA. These countries have a 10-14 hour difference, meaning that you need to wait at least 5 pm or even 6 pm to initiate the transaction in the traditional finance world.
Security tokens can also be divided into smaller units (fractional tokens). Investors can exchange fractions of assets without purchasing the entire asset. It increases market liquidity while making the investment industry even more accessible.
Delving into Different Types of Security Tokens
There are three main STO crypto asset-based types: equity, debt, and commodity tokens. Utility tokens only grant you access to an offered product. They don’t represent ownership, so they can’t be considered as security tokens.
You can also categorize tokens based on their regulatory approach: regulated or unregulated. Regulated tokens are issued in compliance with securities regulations. The issuer must register the tokens with the relevant regulatory authority and provide investors with certain disclosures.
Unregulated security tokens are easy to get and sell, but they don’t have a full compilation of the latest securities regulations. You are still risking while investing in those assets.
As I said, these token offerings represent ownership of an underlying asset. In most cases, it’s the partial company ownership. In rare cases, that can be rights to asset ownership: usually, it happens if this asset acts as active and makes profits to the company.
However, mostly, equity tokens are similar to the stocks on the stock market. Each interaction is recorded on a blockchain, making it a transparent and secure way to save and trade your ownership rights.
Equity tokens are protected by blockchain’s security features, making them almost impossible to counterfeit or steal. No one can retrospectively cancel the deal. Equity tokens eliminate the intermediaries, reducing the operating costs of the ownership certificates.
Equity tokens are still a new asset class, but they are rapidly gaining popularity as a way to invest. Many companies are now using equity tokens to raise money and to offer investors a new way to invest in their businesses.
If you are launching your blockchain project, you can use equity tokens to raise capital. For example, the company Overstock.com raised over $100 million through an equity token offering in 2017.
You can also use those tokens to offer investors a new, more digitized way to invest. For example, RealT uses equity tokens to offer the opportunity to invest in fractional shares of real estate properties. You can try it with other industries that allow partial ownership.
They embody a debt obligation owed by the issuer to the holder. If you are familiar with traditional finance, you can find many similarities with bonds, as they both entitle the holder to receive interest payments and repayment of the principal amount at a predetermined date.
You can get interest payments or repayment of principal, just like in the bond. You also face the risk of the issuer’s default, so you may not receive your payments back. However, they are not the same. You can easily trade debt tokens on decentralized exchanges wherever you want without any intermediaries. If you decide to send bonds, you need to call your broker during their working hours and wait until they decide to sell your bond on the exchange.
Debt tokens are recorded on a blockchain, which makes them more transparent and secure. No one can retrospectively cancel the transaction. Companies can sell debt tokens as well as equity tokens. There may be even ways to bridge those tokens in the future.
They can use these tokens as a new way to invest in government or corporate bonds. Usually, in those cases, the client will need to buy a pre-described amount of bonds. If they don’t have money, traditional institutions are rejecting this offer. Crypto unlocks partial ownership for small investors, making this industry more accessible.
They picture ownership of a physical asset. While equity tokens can represent physical ownership only if the business is active, asset-backed tokens can symbolize any physical ownership.
Let’s imagine that you buy a house to live in. The developer will provide you with the house itself, physical documents to prove your ownership in the traditional institutions, and asset-backed tokens to confirm your purchase in the blockchain. Once you’ve decided to sell that house, you need to provide a new owner with the home, paper, and the token.
ABTs offer many advantages over traditional ownership certificates, including transparency, fractional ownership, security, and ease of trading.
The Inherent Advantages of STOs
Security Token Offering (STO) offers many inherent advantages to both investors and issuers. If you are an investor, you get access to asset fractionalization and try new opportunities to put your money in.
STOs are highly regulated so you can be sure of the deal's legitimacy. STOs embody ownership only in real-world assets, so you have higher chances of investment returns.
If you are an issuer, STOs unlock your capital access, as you can raise money from the international investors’ pool. And last, but not least, is the improved transparency. STOs are recorded on a blockchain, so you can track each interaction with your tokens.
Gazing into the Future: The Evolution of STOs and Their Platforms
I see the future of STOs as prospering. They can revolutionize the finance industry by making it more inclusive. STOs are far more beneficial than traditional fundraising methods.
I think that in the next few years, we will see increased institutional participation. Big business and institutional investors already tested the waters by implementing blockchain solutions. So, they will continue their digitalization.
It will lead to the expansion of the STO ecosystem and mix it with the traditional investing opportunities. We may see dozens of new STO platforms, each for a different investor size.
At the same time, we will see more regulations that make crypto investment stricter. There may be more centralized solutions and tight regulations on decentralized services. So, if you want to sense the freedom of crypto, you better start your investor journey now. Try Defiway services to begin your career in crypto!