What are the Differences Between ICO and STO?

Blockchain technologies continue to present innovative opportunities for the finance industry, thanks to decentralised finance (DeFi) and modern crowdfunding solutions that revolutionise how investors earn money on new projects. If you’ve followed the cryptocurrency space for the last few years, you’ll be aware of the rise of ICOs (initial coin offerings) and the challenges that ultimately followed. So, how does STO (security token offering) differ? Both ICOs and STOs were developed to represent an investment in a blockchain-based project or business, but there are some major benefits of STO that ICO can’t deliver. In this comparative guide, Blockchain Australia Solutions takes a look at ICO vs STO: the core differences you need to know about.

Regulation

ICO works by an investor offering funds for a project, which are traded for crypto coins and tokens that are then used on the blockchain. The lack of proper regulation around ICO opened the doors to a number of fraud cases. Since ICO is a method of fundraising in an unregulated environment, and cryptocurrency is highly volatile, investors have no legal rights if the funds are lost or the product/project isn’t completed. On top of that, ICOs don’t have assets behind them and the risks involved mean that many countries have now banned ICOs. STOs, on the other hand, are launched with regulations in place. They have to meet 100% of legal regulations with the necessary government bodies, and a significant amount of compliance is involved to give investors added peace-of-mind and security. Regarded as the next big thing in traditional finance, security tokens allow for less market manipulation and speculation.

Entry barriers

ICO has a low minimum entry barrier, making it attractive to amateur investors and small companies. It’s also much easier to launch an ICO in comparison to an STO. This low entry barrier means that investors must be vigilant before they part with their money; this should include researching the credibility of the project’s developers to evaluate how successful the project might be. With little information given to investors, this can be risky. A company has to complete a lot of upfront work if they want to launch an STO, and only companies that are compliant with regulations and investors that are accredited are allowed to trade security tokens. An STO is built on a security contract and for this reason, it takes time and effort to get the go-ahead for STO projects. As a result, they tend to be more mature and trustworthy – a safer bet for everyone involved.

Potential for fraud

A primary concern for ICOs is their potential for fraud. Since an ICO can be created by anyone, who can then quite easily collect money from another party, there’s a chance that projects will not go ahead and the money won’t be returned to the investor. With no legal documentation trail, hacks and stolen account information can mean that investors lose their money. Unlike coin offerings, security tokens need to be backed by real assets. With a higher level of protection that’s supported by a contract, STOs have a legal certificate of ownership which is recorded in the blockchain and can’t be tampered with. As a further security measure, STOs have to be registered with the Securities and Exchange Commission (SEC).

Cost

ICO is ideal for low-budget investors looking for fast cash-out options. As the cheaper investment option, anyone can start investing in this space – even with limited funds. Due to the time-consuming, complicated processes involved, STO is a more expensive fundraising method. However, they’re designed for serious crypto investors with large budgets who are more willing to pay the additional costs for the added security an STO provides.

ICO vs STO: Which is best?

When it comes down to it, the best option between ICO and STO depends on the type of investment in question. Amateur investors might prefer to start out with ICO, while more serious investors will appreciate the security and regulations that come with STO. We’ve seen issues come into play with ICO, which can cause crypto investors to feel wary about new developments, but market experts are confident about STO, thanks to the clarity it gives to investors. It is expected that this is the crowdfunding solution the cryptocurrency industry has been missing. For more information on the crypto investment industry, call Blockchain Australia Solutions on 1300 462 562 and our blockchain experts can help you out.