How Is A Security Token Offering (STO) Different From An Initial Coin Offering (ICO)? |
Posted: April 17, 2019 |
Cryptocurrency investors can’t stop talking about their newest obsession, security token offerings and security token offering platforms, even though the buzz around ICOs haven’t yet died down enough. ICOs have been going through a tough time turning the minds of critics about its potential to deliver on its promise. This is because ICOs are utility tokens most of the times, and these utility tokens don’t really represent the shares of a company. They are meant to be used only on the networks or the platforms which they represent. For example, most of the tokens in the top 100 on CoinMarketCap are utility tokens. Even for Ethereum, some people say it’s a cryptocurrency, whereas it could be said that it works more like a utility token. It is used in its network to build on Ethereum, it is used for transactions etcetera. ICOs and the Issues it needs to address:So, utility tokens are used in particular companies and their platforms, and that is what ICOs represent right now. This situation has presented a few obstacles in its path of growth, mainly a dearth of regulations and a slow success rate. The general idea is that there are not enough regulations for ICOs, which leaves the door open for about anyone to start an ICO, and many a times this is done without the coin having any true potential value addition. In certain cases, some of the ICOs that raised a lot of money in the last two years subsequently stopped developing or simply couldn’t materialize their vision. The problem of insufficient regulations is directly related to the performance of the ICOs. If there were better regulations, the option for an ICO would be available to only authentic players. Additionally, some utility tokens don’t represent anything and can be used only on the platform of its own company which could be doing well in the market. Now a lot of voices are coming up to change all of this, and one of the developments that have emerged from such conversations is the introduction of Security Token Offering. Although the ICO space raised over five billion dollars in the last few years, not all went well with the process which was often riddled with lawsuits. So what are Security Token Offerings or STOs?The essence of it is evident in the name itself. It offers securities instead of utilities. The security it represents is like any other security, be it stocks, bonds, or real estate. Security tokens too, therefore, are justifiable representations of actual wealth. If you hold security tokens of a company you could receive dividends, have a right to vote, and get more security overall. Any company can have a Security Token Offering as it would indicate profit sharing and dispersion of voting powers which were missing in Initial Coin Offering. Another advantage a security token offering will have over an initial coin offering is that it will attract smart money and institutional money which have reservations about investing in initial coin offerings as they have no security at all. STOs are bringing in new markets into the space and encouraging financial instruments as we know them to be now to tokenize. Security token offering is steadily bringing in a multi-trillion dollar industry into the crypto space in a much easier way than it was possible before. Similar to the many ICO platforms which have come up in the last two years, STO platforms too are now being sought after. Polymath is the most known name in this area, and the security token offering platform by blockchain company HashCash Consultants is also gaining traction. Is there an actual competition between Utility Tokens and Security Tokens?Let’s have a little comparison between security tokens and utility tokens, and, also the third group - cryptocurrencies. Cryptocurrencies are the most popular ones as they have been around for the longest time of the three. Utility tokens are the ones which came about after the creation of Ethereum which was also the first platform to offer ICOs and create utility tokens. Security tokens behave like a security. Holders are therefore regarded as part owners of the company that offered it. Since all three categories have their pros and cons, there seem to be no actual competition among them or the existence of a survival-of- the- fittest sort of situation. Despite their differences, it is possible that all three will coexist without one replacing another.
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