STO (Security Tokens Offering) is a new regulated type of ICO. Are security (SEC) tokens, combining traditional finance features with blockchain, able to rejuvenate the ICO market that is going through rather hard times? How are they different from traditional utility tokens?
So, what is a security token?
It is a cryptographic token that entitles its holder to realize his or her interests, for example, a stake in the project, share in the capital or dividends. Such tokens serve the function of securities and the SEC is doubtful about their legal status. However, should they be implemented successfully, they can become a cryptographic alternative to the traditional securities market.
What are the differences between security and utility tokens?
Back in 2017 the SEC ruled that security tokens are to be regulated as standard shares and stocks. This means that before issuing tokens they must undergo obligatory registration.
One can tell security tokens from the rest with the Howey Test: it is widely used by US investors and contains just 4 questions. If all questions return a positive answer, the token in question is indeed a security.
The Howey Test:
- It is an investment of money
- There is an expectation of profits from the investment
- The investment of money is in a common enterprise
- Any profit comes from the efforts of a promoter or third party
Then what are utility tokens? These are coins used for internal transactions within any given project meaning exchanges between users or payments for services, etc.
Will security tokens be able to transform the current market?
It is the difference between security and utility tokens that is the reason many experts believe the former is the revolutionary asset bound to transform the market. The potential of such coins can be gauged by the level of interest shown towards security tokens from various experts and specialists. For example Chad Lynch, a world-class expert in cyber security believes that ICOs will begin falling away in 2019. The future belongs to asset tokenization.
A simple example can be found in real estate: if a developer wants to raise funds for a project, they will do it via asset tokenization that will allow for advancing a tranche. The future where security tokens play a key role on the market is inevitable, partly due to the fact that the ICO market is oversaturated and all the worthwhile projects are drowned out by information noise. An STO can only take the lead thanks to its novelty and the potential of security tokens as an instrument, Mr. Lynch believes.
In fact, a considerable number of experts believe investment tokens are more legitimate — they are backed by assets, are due for obligatory registration with the SEC and on this basis alone are more attractive to potential investors. In order to attract more sophisticated, institutional investors, security tokens will have to offer solutions that copy the existing financial instruments such as exchange-traded funds (ETF), index funds, mutual funds, etc. This means that three main issues that hackernoon.com experts have already outlined, must be dealt with. These are:
- Liquidity: access for institutional investors to large pools of capital.
- Storage and insurance: safety and insurance of tokenized assets.
- Sophisticated investment products: creation of tokenized products, corresponding to the level of financial complexity of securitization products.
Should security tokens offer the market such solutions they can truly become a revolutionary instrument for the entire sector.
After all, security tokens combine both traditional finance and blockchain features meaning that if STOs do develop, the modern stock market will change tremendously. The interest towards IPO will wane over time substantially.
At the same time, the STO infrastructure will continue developing — related and additional services such as banking, insurance, loans and more will appear on the market. The services we have grown accustomed to nowadays in the world of traditional finance. This alone allows us to make a claim that investment tokens and STO do indeed have the potential to transform the market. They can make the crypto world more friendly to traditional investors and the ordinary people.
