Updated: Sep 7, 2019
There is an intense debate going on within the cryptocurrency community. Do you know what the subject of this debate is? It’s centered around a new method of raising fund for blockchain projects, and it is called Security Token Offering (STO).
The primary concern of some people is that this method will eventually replace Initial Coin Offering (ICO), as a method of raising money to finance blockchain projects. While for others, they believe STOs in their present form has taken away a lot of the original positives that sourcing fund through ICO provided.
In this article, we will discuss the key differences between STOs and ICOs, so that you can be informed about the methods of raising funds in the cryptosphere.
INITIAL COIN OFFERING (ICO)
Let’s start with the first fundraising concept, ICO. What is an ICO?
An ICO can be likened to an IPO in the traditional investment world. ICOs are a method of raising fund for companies who are looking to create a new product or services and need outsiders to invest in their new ventures.
In exchange for their investment, investors who buy into an ICO receive a particular amount of cryptocurrency tokens that serve as a share of the company doing the ICO. As with traditional shares traded on exchanges, investors hope that the value of the token will increase as time goes on so that can later sell it for profit or hold it for higher ROI.
Unlike traditional IPO that attracts strict regulatory procedures, it’s relatively easy for a company to launch an ICO as several platforms are willing to host ICO projects for some considerations.
And what’s more? This ease of launching an ICO led to a boom in the blockchain industry. In 2017 alone, funds raised through various ICOs amounted to $6.2 Billion, an amount dwarfed by the over $13.7 billion raised in 2018.
But here is the dark side of ICO. Due to its unregulated nature, a large number of investors have been duped by shark-like businesses who launch ICOs, take investors’ money and disappear into thin air. Besides, lack of regulation in the ICO world made it difficult for stolen funds to be recovered.
Here’s more damning statistics that proved that several ICOs are scam medium. A study by Satis Group LLC found out that 81% of the ICOs they analyzed are scams, 6% actually failed, 8% went dark and only 8% of the ICOs went to trade on exchanges. As an investor, this is an odd stat that you must consider, won’t you?
No matter the potential returns that you could make on ICOs, the risk of being scammed is very high.
SECURITY TOKEN OFFERING (STO)
Now, let’s go into brief detail about STO. It’s important to know what a security is when discussing STO.
Companies offer securities as a way of offering part of their investments with outsiders – investors for short term fund that can help them to achieve their latest plans and goals. In return, investors are entitled to dividends, profits, and interest rates.
So let’s talk about what STO is to crypto-community. A security token is a crypto token that can entitle an investor to either a stake in the business itself, a share of profit or any other form of reward in exchange for the money they invest.
Security Token Offerings are always backed by tangible assets, and that helps protect investors from being scammed by fraudulent business enterprises. And the fact that STOs are classified as security means they must abide by the securities regulations of the country where they launched and for the country of their investors.
In the US for example, a company needs to provide SEC with the following information before it can be allowed to trade its securities.
A description of the company’s business purpose and property.
The details of the security the company is offering.
Details of the company’s management structure.
Company’s financial statements that are confirmed by an independent accountant.
This process required to launch an STO means businesses would need to enlist legal support before offering their security to investors.
In addition to protecting investors against fraud, STOs have also created a better reputation for the cryptocurrency world. Unlike ICO that have a reputation for being a haven for scammers, the more regulated nature of STOs made token offerings more credible to investors. This growing reputation is expected to scale investment in cryptocurrency in the future.
STOs are already making significant impacts for businesses. And it is as a result of these factors that several people believe it will replace ICOs in the future.
However, so many people argue that STOs will defeat the purpose of ICOs to raise fund since they are subjected to strict regulations and red-tape.
THE DISTINCTIONS BETWEEN ICO's AND STO's
Now that you’re here, you have probably realized that there are obvious differences between an ICO and a STO, not minding the fact that they are both used to raise fund for projects. So here is a table that will help you understand what separates STOs from ICOs and their similarities.
Entry Barrier for Investors YES NO
High risk of fraud and illegal activities NO YES
Backed by tangible assets YES YES
Business operation determine value YES NO
Value is based on speculation and token value YES NO
Protection in place for investors YES NO
It can be seen from the table above that Security Token Offerings (STOs) presents less risk to investors than Initial Coin Offerings (ICOs), and they will be more present in the crypto industry, they are costlier and more difficult to implement, however, being difficult especially for less funded projects.