In the early days of the industry, the InitialCoins Offerings (ICOs) emerged as the predominant funding tool known asCryptocurrencies, much of which was adopted by start-ups, entrepreneurs orbusinesses wishing to sell goods and services, usually linked to paymentsystems and blockchain space related projects.
With this instrument, an entrepreneur can raisemillions for his company, such as the case of Ethereum's ICO, which was one ofthe early pioneers back in 2014, beginning at a price of just USD 0.31 pertoken and raising almost USD 18 million in just 42 days.
Nonetheless, ICOs allow entrepreneurs to raisefunds without a real product or even a company, just a white paper that oftenhas only a few pages, leading to bad deals for investors. That is why theindustry has developed new methods, such as Security Token Offerings (STOs),that leave ICOs as their predecessors. The new strategy has a range of benefitsover the ICO funding model, but it still maintains many of the attributes ofthe initial coin offerings.
From an investor's point of view, the STO hasadvantages over the ICO. The latter are more unpredictable, and some of themhave been used fraudulently during their economic boom due to their lack ofcontrol. The cryptocurrency market remains extremely unpredictable, but the STOsystem contains real assets that must comply with the compliance criteria ofthe issuing legislation, which means that they have to complain about theregulation of the issuing country in general terms and are not only valued forspeculation.
Due to their digital nature, STOs can beprovided via digital platforms that are not only cheaper than an exchange butcan also reach investors all over the world. Relative to other forms offinancing, tokenisation has a strong added benefit for companies. There are sixdifferent criteria for identifying the sources of funding (Exhibit 1).
In his book "Assets on Blockchain,"Max Kops emphasises the importance of TRUST and TRANSPARENCY inthe transfer process of tokens. Ensure that the provided note is still validtomorrow, which is accomplished by the use of the distributed ledger, as oncethe information stored on Blockchain becomes unchanged and immutable. When thenote (in this case the token) becomes stored on Blockchain, it can be traced.
A full compliance is also required to theissuance an STO, some countries as United States, Luxembourg, Switzerland,Singapore, Liechtenstein, among others, are leading the new regulations toDigital Assets to protect investors and enable funds to include this form ofassets in their portfolios.
Some of the advantages of STO's is that itallows for the FRACTIONAL OWNERSHIP of an asset. In the case of RealEstate, this function opens up the market to low-capital investors, as if theasset can be divided into, i.e. 100 or 1000 security tokens, the price ofeach token would be a fraction of the full price of the asset, allowing forsmall (retail) investments. Nevertheless, the token would work the same as theentire asset it represents, and the returns from them will be proportional toits fractional ratio.
As comparison to legal contracts, the token hasthe advantage of providing ACCESS TO GLOBAL CAPITAL MARKETS. When thetoken has been established with an interoperable standard framework (theimplementations are completely harmonised to operate with other systems withoutany restrictions), it can be easily implemented globally and incorporated intovarious delivery networks.
From the company's perspective, tokenizing theirassets represents LESS TIME AND COST compared to traditional fundraisinginstruments. Unlike stocks, STOs do not need intermediaries, allowing lowerissuance costs and becoming the standard choice for many companies. On theother hand, due to the fact that the technical issuance process can be mostlyautomated, the time required from the decision until the issuance execution isreduced.
Nowadays, one of the qualities that generate themost value in the digital world is the possibility of having a SECURESTORAGE of your information. Hence, storing assets on a Blockchain in theform of a token is much safer and less useful for a single point of failurethan traditional, centralised systems sometimes have.
· One special kind of digital asset, thesecurity token, is on the rise.
· Security tokens are essentially digital,liquid contracts for fractions of any asset that already has value, like realestate, a car, or corporate stock.
· Using security tokens means investors canexpect that their ownership stake is preserved on the blockchain ledger
Kops, M. (2019). Assets on Blockchain:Security Token Offerings and the Tokenization of Securities . IndependentlyPublished.
Weimin Sun, Xun (Brian) Wu, Angela Kwok. (2019).Security Tokens and Stablecoins Quick Start Guide: Learn how to Build STOand Stablecoin Decentralized Applications. Packt Publishing Ltd.
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