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What Is an STO?
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Blockchain technology opened the door for ICOs, an innovative fundraising model where a project sells blockchain-based tokens to secure funding. When the cryptocurrency market was booming, ICOs were thriving as well, raising astronomical amounts in record times. When the 2018 bear market hit, however, the appetite for ICOs diminished as people were less willing to purchase ICO tokens, which are perceived as even more speculative and risky assets than Bitcoin and other established cryptocurrencies.

With interest for ICOs cooling down, a new type of blockchain-powered funding mechanism is gaining a lot of buzz – security token offerings, which are commonly referred to as STOs.


First things first


To understand what an STO is, we must first understand what a security is. A security is a financial asset or instrument that is both tradeable and has value. Some of the most common types of securities are bonds, stocks and derivative products (futures contracts, options, and so forth).


Securities can be broadly divided into equity securities and debt securities. Equity securities (such as stocks) represent ownership interest in an entity, while debt securities (such as bonds) represent borrowed money that needs to be repaid to the security’s holder.


Each country has its own regulations that need to be followed when securities are issued or traded. If we take the USA as an example, these regulations are enforced by the Securities and Exchange Commission (SEC). The European Union has established a regulatory body called ESMA (European Securities and Markets Authority), although there are differences in securities regulations between individual EU member states. 


What does this have to do with blockchain?


Blockchain can be leveraged to create tokenized securities – these are securities that exist as tokens on a blockchain. Therefore, an STO is simply when tokenized securities are offered for sale to investors.  


STOs are still a very new model and the infrastructure for conducting STOs and potentially trading the tokens on a secondary market is being developed by multiple companies. 


While tokens sold by ICO projects are, in the vast majority of cases, designed to be used on the platform that is being developed by the project, security tokens have no such utility but are merely representations of securities as described earlier. For this reason, it’s not too helpful to think of STOs as an evolution of ICOs. The main similarity is simply that both models use a blockchain to issue tokens. 


Why put securities on a blockchain?

Potential benefits of the STO model as opposed to a standard securities offering include increased liquidity, as the tokens can theoretically be traded on a 24/7 basis around the globe if the necessary infrastructure will be established. Another potential benefit is flexibility – security tokens can make it very simple to, have a stake in the ownership of a real estate property or a piece of fine art.


Security tokens can also reduce or even eliminate the need for middlemen when it comes to investment transactions, making the process both faster and cheaper. Smart contracts can make the management of securities easier, automating processes that usually require costly paperwork.


Companies that conduct security token offerings can also potentially reach a more global investor base, depending on the regulatory environment.


STOs are exciting, but common sense shouldn’t be abandoned


If the STO model takes off and grows in popularity, investors should keep in mind that STOs should be registered as securities offerings with the relevant regulatory agencies and follow all of the established regulations. In the future, it’s certainly possible that dishonest projects will try to label their token sale as an STO in order to add legitimacy to their sale without actually taking on the responsibilities that come with a regulated securities offering.


Also, the fact that a company is raising funds through an STO shouldn’t influence one’s judgment about the viability of the investment itself. Josh Stein, CEO of Harbor, a company that’s building a platform for STOs, explained in an interview with Fortune:


Quote:“And of course, at the end of the day, the investment’s got to be good. If you take a bad investment and you tokenize it, you have a highly liquid bad investment. So we’re being very cautious with our clients in the first year or two. We want to deal with investments that will be successful with reputable owners of capital and who are doing things the right way.”


source coincodex.com

by Peter Wind
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