Security tokens offerings: To replace ICO?
Security token offerings! If you’re familiar with the blockchain-crypto space then there’s a high chance you’ve come across this term. I’d be surprised if you haven’t. Since the downfall of Initial Coin Offerings last year, partly due to the actions of regulators, regulatory complaint STOs took the limelight as the next significant market trend. And it looks like the buzz around security tokens were accurate, as during Q1 2019 the number of STOs surged by over 130% when compared to the previous quarter.
# of STOs: Quarter-wise
Security Tokens: What are they?
Security tokens are, in essence, are utility tokens that are backed by a real-world asset of value. It could represent stocks of the company, real estate, and even fine art. Offering security tokens to investors in return for capital is what is called a Security Token Offering or STOs. Investors in Security Token Offerings are by law, granted ownership rights over the company’s assets. STOs are often subject to federal securities laws as they satisfy the Howey test, and this means that investors are protected by law against fraudulent actors.
Security token landscape: Current scenario
Security Token Offerings could quickly replace Initial Coin Offerings as the go-to method of fundraising, especially since the number of ICOs the world over is tanking. During Q1 2019, the number of ICOs dwindled by as much as 61% when compared to the previous quarter and during the same time period, the number of STOs grew by 130%, which clearly demonstrates the market disparity between ICOs and STOs.
Funds Raised ($MM): Country-wise
A data-driven study of the STO landscape reveals two things. Firstly, a majority of the STOs launched during this quarter were by US-based companies, making the US the leader in terms of the number of STOs. But these STOs were collectively only able to raise $2 million which represents less than 2% of the total funds raised.
Secondly, STOs launched from the Arab country of UAE managed to raise a whopping $67 million in funds even though the number of STOs were significantly less when compared to the US. Indicating there is a huge disparity in the investor attention STOs receive.
Security token offerings: The benefits
STOs offer many benefits over traditional ICOs, let’s look at some of the major ones.
- Enhanced compliance with regulations: Security tokens could help alleviate the risk of running into trouble with regulators as they are by default compliant with regulatory norms.
- Far greater outreach- As security token offerings often allow investors from around the globe to invest in their project. This means STOs provide a huge opportunity for issuers to gain access to an international pool of capital, which can help grow their business at a faster pace.
- Increased efficiency and convenience- Smart contracts are programmable computer protocols that are intended to facilitate the negotiation of a contract. Smart contracts can be integrated while trading security tokens which saves time and money while at the same time eliminating financial intermediaries. In essence, smart contracts can help make trading security tokens and tokenized securities much more convenient and seamless.
- Increased liquidity for certain assets- Liquidity is defined as the quantitative discount a seller has to accept in order to liquidate their assets. Certain assets like Real estate and fine art have been traditionally been low-liquidity assets owing to the limited demand or accessibility. A tokenized form of these assets
In the future, the numerous benefits that STOs bring to the table will likely have a profound impact on how financial securities are issued and traded. With STO numbers quickly gaining momentum, it’s just a matter of time before we start observing the ramifications.