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STO database: 5 Benefits of Security Token Offerings (STOs)

STO database

 

 

Before we learn about the benefits of a Security Token Offering, let's find out the definition of it.

STO, short for Security Token Offering, is when an ICO (Initial Coin Offering) and an IPO (Initial Public Offering) meet halfway. Simply put, an STO is an asset-backed token where the ownership details of the investment product are recorded on a blockchain.

The ‘asset’ is a real-world collateral that is represented by equity and holds monetary value. It is a ‘security’ token because STOs comply with regulatory governance.

 

Why are STOs preferred and what are its benefits?

 

Advantages of tokenization include portioning of larger assets, increased liquidity, reduced issuance fees, and greater market efficiency.

With regulatory bodies narrowing down hard on initial coin offerings, security token offerings pose as a worthy alternative. Given below are five reasons why STOs make an exciting proposition.

 

  • Regulatory Compliance

 

Although ICOs monopolized the cryptocurrency narrative in 2017, regulatory bodies like the United States Securities and Exchange Commission (SEC) rained on their parade and issued a majority of these ICOs as ‘unregulated security’. This caused a large number of ICOs to shut down and return the capital to the investors.

STOs on the other hand, don’t have to face such issues since companies list their tokens as securities from the nascency period itself. They need to file for exemptions from USA's SEC which protects them from future Cease and Desist orders, as has happened with many ICOs.

Both, startups and traditional corporations can garner the benefits of a tokenized securities ecosystem by attaining compliance with local and international regulations in the early stages. This edge gives companies an upper hand over other competitors who arrive late to the game.

 

A Security Token can be programmed to authenticate who can buy and sell it and therefore restrict Security Token holders from trading it to any address that has not been validated, assuring the issuer that their tokens will only be held by accredited investors.

 

Number of litigations on ICOs

STO database

Source

 

  • Transparency

 

STOs allow a company’s investor to get information about the issuer on a fully transparent basis – with complete visibility on all the tokens that have been given, promised, or otherwise discredited.

This secures the issuer as well as the investor. STOs by design provide fully mitigated but immutable transparency framework. This provides a powerful point of consideration for anyone when attempting to gain a foothold on the current landscape of the situation at hand, as it is directly in line with regulators’ agendas.

 

  • Liquidity

 

Security Tokens enable fractional ownership of an investment product and thereby lowers minimum investments. This allows more liquidity to come into the market.

As a higher number of people will be able to purchase smaller stakes, many assets that are considered to be illiquid, or do not have a resale value, can increase their liquidity on the blockchain.

Another advantage that STOs have over the traditional financial system is the 24/7 global access that customers have for trading and exchanging. This again brings in more liquidity into the market.

 

  • The entrance of new investors

 

Due to the regulatory benefits, authorities are beginning to understand the advantages of global Security Token standards and support its implementation. This provides big opportunities for issuers to gain access to an international pool of capital and reach out to a larger potential investor base.

Once Security Tokens are tradable globally, they will become accessible by anyone with an internet connection within regulatory limits and therefore democratize access to capital markets for companies and investors alike.

The regulatory framework that governs Security Tokens is another good reason for the crypto community to invest in them without being worried about getting scammed. When investing in Security Tokens, the major concern of the customer lies in the economic success of the company.

The fragmentation of larger assets will be another door opener for new investors to a prior exclusive market. Formerly, these were just accessible to those investors with large capital and the ability to take on longer-term investments.

 

  • Intrinsic Value

 

In contrast to utility tokens that are only calculated to represent future access to an issuing company’s product or service, STOs represent the underlying interest in equity, profit sharing, dividends, voting rights, and other benefits that their investors can have.

Security tokens represent a legal right to ownership of the intrinsic value of the issuing company. They provide significantly greater value to the holder, while potentially reducing the risk.

Put simply, a token has intrinsic value, meaning it already possesses worth based on the value it gives the holder, through the issuer, regardless of potential future value which may be accredited to that token.

 

Some popular STO issuance platforms include Polymath, a blockchain-based platform that simplifies the creation and use of security tokens, Harbor, an ERC20-based protocol that makes security assets legally tradable on crypto asset exchanges and tZero, a security token exchange that has partnered with Polymath.

 

Some other benefits of STOs are:

 

-- Recoverable: Properly constructed STOs provide the ability to reissue tokens to shareholders

-- Priority to KYC and AML: Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols are strictly followed by STOs. On a distributed ledger where wallet addresses are anonymous, it becomes a challenge to procure to these protocols. AML scoring with security tokens allows companies to track transactions and ensure they are complying with regulations.

-- It enables cross border trading.

 

Number of STOs Industry-wise

STO database

Source

 

The Investments and Trading sector leads the pack with the most number of STOs so far, contributing to over 20% of the total number of STOs. Financial Services which is the lead for ICO numbers, takes a step back for STO numbers, according to InWara’s ICO+STO database.

 

With over 360 companies that have raised ~$2.3 billion according to InWara’s ICO+STO database, STOs are currently booming and their market is only bound to improve.


Read more about STOs in InWara’s Security Token Offering Report.