ICOs vs STO: We Don’t Need to Get Rid of the ICO, But We Should Embrace the STO
There’s no doubt that the initial coin offering (ICO) has absolutely taken over the world of cryptocurrencies in recent years. 2017 was an incredible year for the newfangled crowdfunding model and even though we’re not yet through 2018, the current amount of funding raised from ICOs has already surpassed the amount raised last year by a significant amount (over double, in fact).
Unfortunately though, ICOs raise concerns from regulatory officials all over the world broadly, and the United States specifically. Because of the ill-defined status of cryptocurrencies and the tokens being offered by startups (and some pre-existing companies) in their launches, regulators aren’t entirely sure how to deal with the coins/tokens. Some serve purely as a utility token on the platform they’re intended to be used on, in which case the defining characteristics of the coin seem rather obvious, but other tokens aren’t so easy to classify.
Oftentimes there can be a significant amount of confusion about what the token itself actually does. Does it represent value? Do you have any type of rights for voting/controlling the future of the project you purchased the coins from? Can you actually use the token on the platform, or are you only purchasing it so that you can sell it at a higher price once the coin gets listed on an exchange? These are all the types of questions that need to be asked but, in certain cases, may not actually be easy to answer in an honest manner. Because of that, the crypto community is introducing a new initiative that may just be exactly what we need: Security token offerings. [I know a lot of readers may not be a fan of the increased cooperation with regulatory officials, and clearly I’m no cypherpunk, but just hear me out for a minute.]
Security token offerings (STOs) are similar to ICOs but, at the same time, incredibly different. Unlike an ICO which is typically offering a utility token, or is at least purporting to do so, STOs are incredibly transparent and upfront about the fact that the issuing project/company/team is issuing a security in the eyes of the law and it should be treated as such.
STOs mean that the team will be consulting legal advice and counsel from experts familiar with securities laws and will be registering the offering with the SEC. In return, STOs all have to be backed by some sort of tangible asset. That asset that’s backing the security tokens can be anything from real estate, to precious metals, to a company’s profits. In effect, investors are purchasing “tokenized” securities rather than cryptocurrencies. Certainly, the cryptocurrency purists and enthusiasts are likely to not want to engage with this sort of asset, but that doesn’t mean it won’t serve a valuable function.
With the current regulatory state of cryptocurrencies, especially in the United States, STOs will allow new startups (and existing companies) a means of truly identifying what they’re offering. Rather than trying to debate the facts of whether a specific cryptocurrency is a “security” or not, STOs allow issuers to explicitly state from the beginning that a security is exactly what they’re looking to issue.
Of course, that will mean that the tokenized assets are no longer “cryptocurrencies” in effect, but that they’ll belong to a more generalized group of “crypto assets.” The implications of being able to identify an assortment of “crypto assets,” rather than an actual currency, are still incredibly important for a few reasons.
- Adoption and implementation of blockchain technology (i.e. legitimacy): As already stated, these tokenized assets aren’t going to be treated as cryptocurrencies. Instead, they’ll be much more akin to a share of a company or other securities (derivative markets of tokenized assets anyone?). With that in mind, it will be significantly easier to help grow support for the blockchain movement. We’ll start seeing more companies and people willing to engage with securities issued via blockchain technology who may not have ever been interested in cryptocurrencies because of their legal gray area status.
- Clarity: With STOs, there’s no more wondering about whether an upcoming ICO is a security or not. No longer will analysts, investors, and crypto enthusiasts need to run through the Howey Test to try to decipher whether or not authorities will classify a token or coin as a security. Instead, all parties involved will know immediately from the beginning what type of asset they’re dealing with. If you’re looking into investing in an STO, then you’ll already know that the token isn’t going to be serving a utility function on an upcoming platform.
- Security: This last advantage can actually be fit in with adoption of blockchain technology as well, but has independent benefits included with it. Unlike traditional securities exchanged through centralized sources leaving investors reliant on a trusted third-party, tokenized securities running on blockchain will be trustless. When it comes to transferring ownership of a security or buying and selling it, the community will have an immutable record of what transactions have occurred. In addition, smart contracts and multi signature wallets can replace the need for escrow in over-the-counter (OTC) trades and, again, create a more trustless financial climate.
There are likely other benefits that we haven’t yet realized about STOs as well, but the main ones are quite obvious. Though they certainly aren’t for everyone, the idea of being able to definitively sort out the security tokens from the utility tokens is an incredibly attractive one to this writer. If we can effectively sort out the different types of tokens offered, it will make things easier for all parties involved: regulators, investors, and issuers (and your tax guy/girl, too). After all, so many teams are constantly trying to prove that what they offer is not a security, why not embrace the ability for those who are offering a security to do so in a legal, clear way?