Security Token Offerings (STOs) are frequently named as the the next step in token evolution. In this article we take a look at STO’s to find out why they are being used, along with 7 key advantages of this token type.
What Is a Security Token Offering?
Security Token Offering (STO), is a process similar to an Initial Coin Offering (ICO), where an investor exchanges money for coins or tokens representing their investment. However, unlike ICOs, STO’s take it a step further and distribute tokens that fall under the status of securities. They are linked to an underlying investment asset in a way like stocks, bonds, real estate investment trusts (REIT) or other funds.
Security Token Offerings distribute securities. These are tokens that are fungible, negotiable financial instruments with attached monetary value, like a part of property or company.
Source: CryptoNews
Security tokens are not traded on regular token exchanges. Exchanges that want to offer security token trading need to fully comply with regulations, including extensive investigations into token listings, data sharing, and investor onboarding procedures. Thus, security tokens trade on specialized exchanges.
Why are STOs used?
During the Initial Coin Offering (ICO) craze of 2017-2018, many token issuers have sold investors bags of tokens without any economic rights, value or regard for existing securities laws.
Security token offerings are meant to be a regulatory compliant alternative to regular token sales. They aim to correct perceived inequalities on the investor side, such as granting security token holders rights to dividends or other predefined revenue streams.
STO tokens are beneficial to the issuers, too. There is no need to proclaim tokens as being without any intrinsic economic value, and they typically have clearly defined stakeholder obligations regarding the token distribution, issuance procedure, and secondary trades.
Advantages of STOs
- Credibility
ICO space is chaos, to say the least. Many people were scammed, even more projects did not deliver what they promised, and most investors remain stuck with useless tokens – in contrast, STOs follow all regulations and allow blockchain and cryptocurrencies to restore credibility - Improving traditional finance
While traditional securities are slow and expensive due to their old infrastructure and layers of intermediaries, security tokens facilitate services at a lower cost - Programmability
Security tokens can be programmable and enforced by smart contracts - Free market
Borders or local regulations do not limit security tokens - Multiple investors
Traditional security deals involve only local individuals, while security tokens are open to anyone on the internet - Reduced institutional manipulation
Free and open market with fewer mediators should reduce market manipulation, at least in theory - More liquidity
Security tokens will trade on specialized security exchanges so investors will have a convenient way to liquidate their assets
Most importantly, security tokens and STOs allow companies to create a new set of stakeholders with novel permutations of debt, equity or contributor roles. As such, security tokens are generally considered an improvement over ICOs. They address the fundamental flaws surrounding utility token sales and have the potential to improve traditional securities.
Security Tokens Realised Global Summit
Security Tokens Realised Global Summit recently gathered together market experts, financial institutions, digital asset vendors and innovative blockchain solution firms including Citi, Rabobank, ING, Archax, Tokeny and many more.
Over two days in London the event focused on:
- Digitising capital markets for banks and financial institutions
- Blockchain technology and trading infrastructure
- Innovation Investment STOs – new offerings and fundraising
- Digitisation of Currencies – Institutional crypto and systems
supporting their management
Key industry findings at Security Tokens Realised Global Summit
- Global infrastructure needs to be created to hold, use, manage, pay, receive Central Banks Digital Currencies
- Alternative assets could have more appeal for investors to adopt STOs, having not been historically available as an Asset Class
- Unregulated securities are another area to explore for STOs – especially unconventional debt
- STO platforms are slowly getting traction with interest from Family Offices, Alternative Fund Managers and High Net Worth Individuals
Retained ditto client LAB577 were delighted to be shortlisted for the Security Tokens Realised Awards for ‘Biggest contributor to leading institutional adoption of digital currencies’ due to their product DASL – Digital Asset Shared Ledger being adopted by institutions.
DASL is the robust, cost-effective infrastructure for tokenisation and trading of assets across Corda network blockchain. Find out more about DASL here.
Join the upcoming ‘Dawn of the Digital Capital Markets’ webinar on 5th March at 12pm exploring digitized financial services – register here.
