What is an STO and How Will it Impact Businesses?

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When ICOs (initial coin offerings) became a more mainstream method of investing in blockchain startups in 2014, we saw a huge step in the world of cryptocurrency financing. However, the ICO funding model required low entry barriers which paved the way for fraud and other concerns around security.

The rise of ICO taught developers a lot, but the consequent fall taught them even more. The blockchain industry needed a crowdfunding solution like the one offered by ICO, but it needed more regulations. This demand led the way to the STO.

In this article, Blockchain Australia Solutions discusses STO and its positive impacts on businesses and the way they secure funding.

What is an STO?

An STO is a security token offering, where an investor is given a crypto coin or token that represents the funds they invested into a product, project or business. There are a number of differences between STO and ICO, with the main comparisons relating to the extra regulations and levels of security around STO.

An STO is backed by real assets, such as stocks, bonds or real estate investment trusts (REIT) and is recorded on a blockchain. Regulatory governance is required in order for businesses to raise funds, and STO investors must be accredited to be eligible to invest. The process is more reliable for investors – particularly traditional investors that want to tap into the crypto space without taking too much of a risk.

What are the advantages of an STO?

To get a clear understanding of the advantages of an STO, it makes sense to compare it to an ICO:

  • STOs have to comply with security laws and regulations, so are seen as lower risk
  • There is more transparency and accountability involved
  • As STOs are backed by real-world assets, it’s easier to assess the value of the token
  • Smart contracts make the process trustworthy, without the need for a middleman
  • 24/7 trading is possible, bringing added liquidity to the market

Funding businesses through blockchain

Security tokens could offer the revolution in crypto investing that the industry has been missing. As a progression from the introduction of ICOs, which allowed token issuers to raise capital for their startup by giving the tokens to investors, STOs are the next (more secure) step in the crypto fundraising space.

IEOs (initial exchange offering) came next. An IEO is essentially a cryptocurrency exchange that gives investors an extra level of certainty. They are a loose way of regulating ICOs in a partially-centralised manner, though the regulator would be a third-party cryptocurrency exchange organisation.

STOs are something like the more evolved, more secure ICO. This has become the most popular method of fundraising for institutional investors that want to make their way into the crypto space. Tokens issued by STO are backed by real physical equity, and are programmable via smart contracts. They’re not sold on traditional crypto exchanges; instead they’re traded on exchanges developed especially for STOs and are fully compliant with relevant laws.

Generating funding via an STO is only viable for larger companies that already have some capital behind them. Early stage deals are less likely to receive STO funding; a demonstration of a viable project is necessary to attract serious investors in this space. And, since STOs require smart contracts and regulatory compliance, money for lawyers and accountants may be necessary. That said – it is faster and cheaper than traditional funding models, which is why more businesses and investors are moving towards security tokens.

How STOs could change the crypto market

Thanks to their unique affordances, STOs could drive the next wave of blockchain innovation, and could even be the thing that encourages the widespread adoption of blockchain and cryptocurrencies. Below are just some of the reasons STO could change the dynamics of the crypto market across the board:

  1. It adds instant credibility to projects. Only projects that are registered with the Securities and Exchange Commission (SEC) can gain funding using the STO model – saving investors time and giving them added peace-of-mind.
  2. More traditional investors may turn to crypto. Thanks to the regulations and credibility involved, STOs will decrease the stigma around cryptocurrencies, making trading in the space more attractive to traditional investors and therefore enriching the ecosystem with more capital.
  3. Micro-investing could become more mainstream. More people may be encouraged to launch new startup ventures, when before they were limited to gaining funding from accredited investors only.
  4. Investors are given actual ownership. While ICOs were “utility tokens” that acted as an IOU for investors, an STO represents actual ownership of a real-life asset.
  5. Success rate is high. ICOs haven’t had the best run, but STOs are estimated to have a success rate of 99%, since they actually have something real to offer.
  6. Low fee model. Though more expensive than the ICO model, STOs offer a cheaper funding approach compared to traditional investing. This is mostly due to the elimination of the intermediary and the fact they are programmable by nature.

In summary, STOs are already having a massive impact on cryptocurrencies and we’re only expecting positive things from the tokens for the future. This means that businesses and investors can expect huge changes, though the exact outcome remains to be seen.

Contact Blockchain Australia Solutions on 1300 462 562 to discuss funding models in the blockchain industry in more detail.

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