The difference between STOs and ICOs
ICOs and STOs are two fundraising mechanisms with certain functional similarities and differences. Just to clarify for any newcomers to the industry, ICOs in full stand for Initial Coin Offering while STOs stand for Security Token Offering.
ICOs are similar to crowdfunding in the sense that they raise money for a new project that uses blockchain technology through the issuance of these virtual currencies / digital assets to potential users of the project’s platform or ecosystem. The difference is that while with crowdfunding, investors do not readily have access to any sort of liquidity. On the other hand, purchasers of a virtual currency through an ICO can either use their virtual currency to utilize a product or achieve liquidity by selling their virtual currencies on one of the popular digital asset trading platforms such as Binance, Bittrex, etc.
The phrase “ICO” can be seen as a spin-off of the phrase “IPO” — Initial Public Offering, which have been used by companies to raise capital by allocating equity shares to IPO participants. Notably, ICOs are less regulated than IPOs since ICOs are a distribution of tokens which are not actual “securities” that give an individual the right to future cash flows and company voting rights. Instead, ICOs offer ownership rights to digital assets.
Security Token Offerings, on the other hand, facilitate the creation of a token whose value often is dependent on a real-world asset, existing security or revenue stream. These tokens are securities and must comply with the regulatory framework of the Security and Exchange Commission, creating more requirements for token purchasers and requiring more time and additional costs for companies conducting Security Token Offerings to comply with regulations.
STO Standards
Polymath was one of the first companies to popularize the notion of STOs. However, since Polymath’s Token Generation Event, ICOs have still been the dominant force in fundraising for blockchain related projects thus far. ICOs have led to the raising of billions of dollars over the past few years, yet the popularity of ICOs is now slowing as the unregulated and nascent nature of ICOs create a higher cost of raising capital due to regulatory uncertainty and legal fees.
Companies such as Polymath have come up with security token standards such as the “ST-20” standard, but adoption of these standards is far from mainstream. In fact, there is no clear winner in the current security token standard space. Because funding is a make-or-break factor in the potential success of any blockchain startup, STOs may be the necessary lifeline for the industry that gains adoption once ICOs are banned or strictly regulated in a growing number of countries. The company registration requirements of STOs will hopefully dissuade would-be scammers from venturing into this particular form of fundraising. However, the fact that only accredited investors in the U.S. would be able to participate in the purchase of these STOs would also shrink the number of potential purchasers of these tokens.
Conclusion
In summary, STOs are here to stay and can be seen as a steadily growing alternative to ICOs that mitigates a certain amount of regulatory and legal risk. An alternative to the ICO may be necessary to help players in the blockchain industry regain confidence, especially after the downward price trends of most ICO tokens on secondary markets. All in all, every crypto enthusiast can benefit by educating him or herself around the mechanics of Security Tokens and Security Token offerings in order to help usher in greater mainstream adoption of blockchain-enabled technologies.
