STO Is New ICO
Initial coin offering for some years now has been preferred by entrepreneurs and visionaries to raise funds for their projects because unlike IPOs, ICOs are very flexible, liquid and allow contribution from any part of the world.
In the year 2017, IPOs in US declined by over 65% generating $3.4 billion (techcrunch), and in the same year ICOs reportedly raised over $5.6 billion. We can’t possibly talk about the success of ICO without mentioning EOS and Telegram that raised over $4.1 billion and $1.7 billion, respectively. ICOs have largely been successful as they have little or no restrictions for both investors and developers.
However, the ICO system, despite recording huge successes in various projects, is not without problems. ICO scams worth millions have been recorded, a classical example is PlexCoin that was halted by the U.S Security and Exchange Commission after raising about $15 million. A study, released by the digital asset advisory firm Satis Group, stated that 80% of ICOs are scams.
The Ethereum co-founder Vitalik Buterin has not turned a blind eye on this problem. In the article published on January 6, 2018, he proposed a decentralized autonomous organization for ICOs, called DAICO. The main idea of DAICO was to give investors power to use a voting system to release funds to developers as they reach milestones. However, it has not been implemented as significant loopholes exist. For example, investors can decide to vote down the project when the price of the token falls or when there is a bad signal from the crypto market just in a bid to get their funds back. This way the project won’t realize its potential.
STO is the new token paradigm
STO which stands for Security Token Offering can be described as the combination of useful qualities of both IPO and ICO. It mimics the way IPOs are registered, while tokens are given to investors as shares in a company.
The wonderful thing about STO is that it’s not limited to blockchain companies. It enables stocks, bonds, private equity, venture capital and virtually every aspect of traditional finance to become programmable tokens which will ensure liquidity and flexibility to investors.
The concept of STO is not new and it has been proven to be successful. For example, St. Regis Aspen Resort, which was hosted on the Indiegogo platform, successfully raised $18 million. However, just the way Ethereum simplifies the ICO process, Polymath creates a protocol that enables securities easily migrate to blockchain.
“Polymath is doing for securities what Ethereum did for token,”
Trillions of dollars worth of securities will be migrated to blockchain, as per estimation of Polymath.
ICO & STO: How are they different?
To an investor, STO represents safety and protection. But there are cons — investors have to go through the KYC/AML process and in some cases get accredited by the SEC, unlike ICO where investors might just need to transfer ethers or bitcoins from a wallet and get tokens in return.
The compliance process in STOs is complex and time-consuming unlike ICOs which are largely unregulated.
However, some similarities exist between STO and ICO. Both have a low-entry barrier and require no middleman, compared to the traditional IPO where investors are usually required a huge amount of funds to participate and several middlemen. STO and ICO attract global investors as token standards are uniform across the globe. Both are very liquid assets and largely tradable.
In conclusion, STO presents an opportunity for all illiquid financial assets to be tokenized. It clearly has the potential to make a good number of companies and securities migrate to blockchain. Will STO make ICOs obsolete? We will find out in coming years.