Tokenised securities: what are they and why they matter
As ICOs are gradually fading away, newly born STOs are taking their place. The decentralised nature of blockchain won’t save cryptocurrency projects from falling into the jurisdiction of securities regulators. Is it for better or worse? Let’s see what we know about a new regulatory-compliant offering.
Mechanics behind blockchain: what are ICOs?
Blockchain is all about tokens or coins. Almost every blockchain transaction usually involves the transfer of coins or tokens. Coins serve as the “building blocks” of blockchain platforms.
ICOs presume that the released coins would gain more value over time, similar to Bitcoin. Startups could sell them at an early stage in order to raise initial capital.
Initial coin offerings provide founders and investors with seemingly enormous opportunities. Startups get a chance to raise millions within a short timeframe. Initially, ICOs were not regulated and could easily reach out to the public to crowdfund their ideas. Investors were expecting the repetition of Bitcoin’s returns and hoping it would happen to them. Of course, it didn’t.
Some ICOs turned out to be frauds and other honest and trustworthy projects just failed. Various jurisdictions began regulating ICOs, while others simply banned this practice.
However, ICO regulation caused an ongoing debate over whether it is correct to refer to ‘tokens’ as ‘securities’ or ‘utility tokens’. Many claimed that blockchain’s decentralised nature has nothing to do with the regulation of securities. Still, some projects cooperated with the SEC and the Security Token Offering (STOs) were born.
STOs vs ICOs: what’s the difference?
Experts say that security token offerings (STOs) are different from initial coin offerings (ICOs). Analysts predict 2019 to be the year of the security token offering.
First of all, a security token is a blockchain-powered tradable financial asset, which meets all the regulatory requirements of the country in which it is born.
You can trade tokenised securities through a dedicated tokenised securities exchange with the help of your crypto holdings without the need to exchange them to fiat money. Besides, tokenised securities enable crypto investors to trade the tokenised versions of popular traditional markets with the same economic benefits.
Moreover, tokenised securities can be broken down and fractionised at sizes, suitable for any investor.
A security token offering (STO) is the issuing of a security token at a specified price before the tokens become available on an exchange. Typically, they have restrictions on who can invest in them and the “discounts” for the initial crowdsale. In the US, a securities offering should be registered with the SEC or filed for an exemption.
STOs are sometimes stated to be the “grown-up version” of the ICOs. Keeping the tokenised side of initial coin offerings, but observing the legislation requirements, STOs hope for even greater market demand.
Though running a security token offering can be very expensive (from $50,000 to over $100,000) and can experience a lack of liquidity, here are some of the major advantages of STOs:
Tokens can be fractioned (divided) into smaller pieces. It means that investors can part-own tokens (similar to buying a particular portion of a share, which is impossible).
STOs are fully compliant with the regulations, unlike the ICOs with the risk of being classified as unregistered securities,
It can help to raise thousands to millions of dollars.
According to Andrew Bull, partner at Bull Blockchain Law LLC: “Physical and digital asset industries will slowly adopt tokenisation, and those industries are significantly larger than the current cryptocurrency market, which leads me to believe STOs will grow significantly over the next 2 to 4 years.”