Cryptocurrencies are a rapidly growing market, so it is not surprising that it quickly acquired it’s own investment mechanisms. However, this was the main problem - many of the traditional advantages of cryptocurrency tokens directly contradicted the values of modern investors. And with this, it was urgent to do something.
The initial coin offering was a fairly innovative concept. The investment of cryptocurrency assets not only helped support a new promising project but also made it possible in the future to use the investment for the purchase of goods or services of the company. If this “future”, of course, came up, almost half of the services actively offering their own utility tokens did not go beyond the framework of “hypothetical projects”. Investors were losing invested assets and were not going to put up with it. The solution to the problem was the creation of security tokens.
What are security tokens
This is a special kind of stablecoins tied not to real currency, but to the securities of any company. In fact, it is digital unique evidence of the ownership of certain shares, bonds and other assets from this category. And not only that - some security coins can be evidence of ownership of the real estate, works of art, and much more.
Since tokens are tied to tightly regulated assets, those legal norms regarding stocks and securities can be extended to this type of cryptocurrency. From the point of view of investors - a significant improvement in the situation, since at last a risk compensation mechanism appears.
Advantages and disadvantages
There are clear criteria that make it possible to understand whether a coin is a security token or not - the so-called Howey Test:
- The fact of real money investing - tokens are bought for real currency or its equivalent.
- Waiting for profits in the future - it is planned to sell them later in order to generate income.
- Investing in a working enterprise - a project in the future should work somehow and do something useful.
- The profit does not depend on the activities of the investor - only on the representatives of the company where the funds are invested, and third parties.
According to Oregon University professor and active investor Stephen McKeon, security tokens offer the following advantages:
- 24-hour market access
- Confirmed Ownership
- High speed
- Low associated costs
- Using the automation of many procedures
- Strong trade facilitation and partial abandonment of intermediaries
- Additional opportunity to create an accompanying ecosystem
As for the disadvantages, they include the following:
- High entry threshold. In order to participate in STO procedures, you must become an accredited investor in accordance with all the rules. And these rules are pretty tough.
- High costs for issuers. Relatively higher than in the ICO - solely because of the need to comply with bureaucratic norms. In the early stages, this can become critical, so most often STO is used in the later stages of development when the main points have already been worked out and launched.
- The need for personal control. Due to the lack of an intermediary, each of the parties should independently verify the compliance of the transaction with its own desires and capabilities. Or outsource it.
What is STO?
Security Token Offering is an investment mechanism involving the use of security tokens. In a simplified form, this is the same as the issue of secured shares of the company, only in digital form. This can be used as an investment strategy to reduce risk of “Simple Agreement for Future Tokens” - SAFT.
However, unlike ICOs, not everyone can work with STOs - there are strict conditions regulated at the level of the country's legislation. In the USA, for example, those who wish to work with STO must comply with the following:
- The presence of assets in the amount of at least $ 5 million, if we are talking about funds or other organizations.
- If for private individuals - assets over $ 1 million, excluding real estate in which the person lives. And the annual income of over 200 thousand dollars per person or 300 thousand per couple. Which is stable for 2 years, as it is predicted, that in the future will not decrease either.
- If we are talking about the company, then all its members must pass the accreditation.
As you can see, these restrictions block access to the STO market to the vast majority of connoisseurs of traditional cryptocurrencies, but it opens up for classic investors.
Despite the fact that STO is subject to many rules and laws relating to classic securities, in some countries of the world there are still some problems with their regulation. For example, in China and South Korea, this method of investment, as well as ICOs, are recognized as illegal. In Russia, there are some regulatory barriers that impede the development of this market, in the UAE, despite the weak regulatory framework, the market is expanding, and the Thai authorities have almost adapted their laws to the active use of security tokens.
As for countries such as Singapore, Japan, Israel, Australia, Brazil, Canada, USA, Switzerland,United Kingdom, Germany and the European Union as a whole, there is a normal legal regulation of STO.
Where is it traded?
The benefits of the new investment method were quickly appreciated at all levels. So, for example, both Binance cryptocurrency exchange representatives and figures from the Nasdaq stock exchange took up this matter. However, a massive transition to the use of these tools did not occur.
On the other hand, new platforms that are actively involved specifically in STO began to appear. An example is tZero, launched in January 2019. Characteristically, the first security token sold there was KODAK Coin, which confirms the right to own certain graphic information - photographs.
As for security tokens specifically, they began to be implemented very actively. And there are many examples of their use. For example, Broch Pierce's Blockchain Capital, Polymath, Securitize, Templum, Securrency, OpenFinance Network, and Orderbook from Ambisafe.
Traditional investors have accepted STO with great interest since this investment strategy successfully combines both the advantages of using cryptocurrency and thorough risk insurance and regulation specific to securities. So in the STO sphere, more and more money is starting to spin, so the idea will only expand further. However, this may be connected to the need for even deeper regulation of the cryptocurrency market, and most countries still have huge problems with this. Moreover, both technical and legal in nature.