Understanding the Purpose and Potential of Security Token Offerings
The last couple of months have been fairly damaging to the Initial Coin Offering market (ICO), following stricter regulations, a large percentage of failed projects, fraud attempts and an overall decrease in the initial popularity.
This quickly led to the appearance of alternative crypto-based investment instruments, meant to provide methods of crowdfunding that wouldn’t require following strict bureaucratic procedures. As such, security tokens were born.
To put things better into perspective, a security token is listed as such, if it derives its trading value from a separate asset that can be traded. Following debates on whether initial coin offering tokens classify as securities, it has been established that any asset capable of passing the Howey test is to be regarded as a security token. In other words, security tokens are similar to traditional shares, and are financial securities.
The investment method, commonly referred to as a security token offering, or STO, is subject to more regulations when compared to your standard ICO. This mandates that businesses looking to start their own STO are required to complete the registration process associated with Initial Public Offerings (which used to be the norm before the ICO craze). While additional regulation may seem bothersome, financial experts believe that this will actually improve the crypto investment scene. The decentralized fundraising model will be retained as long as regulatory frameworks are designed to encourage innovation, rather than curb the market.
STOs can create a link between the blockchain tech space and the traditional financial market, while also improving the latter. Therefore, credibility can be restored.
Several other benefits can be expected with the introduction of STOs. Firstly, investments can be made over the internet, and by using cryptocurrencies, banks will no longer play a role in executing securities issuance, or transfers. In return, this leads to quicker investment speeds and considerably lower fees, as middlemen become obsolete.
Additionally, the STO market can encourage worldwide investments, similar to ICOs. This is good news for start-ups, but also for investors, thus creating a win-win situation. With the introduction of more advanced fintech, such as STO smart contracts, the market can be further automated and securitized.
So far, STOs have already generated hefty sums. Yet, financial analysts believe that this new regulated, yet decentralized crypto fundraising instrument, will bring along a trillion dollar market for the blockchain ecosystem.