‘Security token offerings’ are the new buzz in crypto


Moving fast: A person holds up a visual representation of bitcoin at the 'Bitcoin Change' store in the Israeli city of Tel Aviv.  Photo: JACK GUEZ/AFP/Getty Images.

Moving fast: A person holds up a visual representation of bitcoin at the ‘Bitcoin Change’ store in the Israeli city of Tel Aviv. Photo: JACK GUEZ/AFP/Getty Images.

In the face of mounting regulatory scrutiny and falling prices, crypto enthusiasts are looking for reasons to be cheerful in 2019.

A positive potential? The ‘STO’.

STO, which stands for “Security Token Offering”, has recently become a buzzword in the cryptocurrency industry. At the MJAC & CryptoCompare ‘London Blockchain Summit’ in November, a keynote address was titled: ‘Will STOs Replace IPOs?’

Proponents hope that STOs will offer a legally compliant new growth area for cryptocurrencies that will allow companies to place everything from stocks to artwork on tradable crypto tokens.

To understand the STO, you must first understand an ICO. An ICO, short for Initial Coin Offering, is where a startup issues digital tokens in exchange for money to fund its business. It is essentially crowdfunding, but investors receive tokens instead of shares. They are usually linked to the project in some way. It’s a bit like raising funds to build a movie theater by selling tickets in advance.

These digital tokens are usually structured in a similar way to ethereum, the second largest cryptocurrency, in the sense that they are digitally storable, tradable, and crypto-based.

READ MORE: ‘Unsustainable’ Crypto Business Funding Bubble Has Burst

The first ICO was ethereum in 2014, but the fundraising method exploded in popularity in 2017, fueled by a general crypto boom. By the end of that year, more than 800 projects had raised more than $6 billion through ICOs. This momentum continued in the first half of 2018.

However, the rate of ICOs slowed down in the last six months as cryptocurrency prices tanked and ICO projects that had already raised money failed to live up to expectations.

“We have a massive bear market that is loosely intertwined with the capital cycle downturn and has created this negative reputation debt with this acronym ICO,” Edd Carlton, head of institutional trading at BlockEx, told Yahoo Finance UK. “If you say ICO now, you have the air between your teeth.”

Regulators have also cracked down on the fundraising method. In the US, the Securities and Exchange Commission said that most ICO tokens qualify as securities. As a result, the companies that issued them are breaking the law by offering unregistered securities.

Basis, an ICO project that aims to create a stable cryptocurrency, closed last month and blamed “generally burdensome” securities laws. The project had raised $133 million from investors including Silicon Valley venture capital firm Andreessen Horowitz and Bain Capital Ventures. (The remaining funds were returned to investors.)

“You can’t ignore the fact that regulators in the US are scaring people away with the stick approach, scaring people away with orange jumpsuits and subpoenas,” Carlton said.

However, while historical ICO projects appear to be in trouble, the SEC did not explicitly ban ICOs. As a result, crypto advocates and lawyers now see a new market for SEC-compliant ICOs. These have been called “securities token offerings” to reflect the fact that they are now classified as securities.

In addition to offering the potential for legally compliant ICOs, proponents argue that STOs allow companies to place existing securities, such as stocks and bonds, on a cryptographic blockchain. This would allow people to trade these securities without the need for a middleman.

In theory, any form of value could be tokenized: stock certificates, diamonds, even art collections. Jeremy Allaire, CEO of Goldman Sachs-backed crypto firm Circle, he likes to talk about the “tokenization of everything”.

BlockEx is currently working on the UK Financial Conduct Authority regulatory “sandbox” to develop a sterling-denominated bond token, an example of an STO. It will target small businesses that generally cannot afford the fees associated with subscribing to a bond.

“The benefits are clear: time to market and cheaper. You could also add the fact that they have complete oversight of who bought the bond,” Carlton told Yahoo Finance UK.

“In terms of the participants, the settlement is now instantaneous between cash and security,” he said. “We have a really strong narrative as to why this makes sense.”

Until now, STOs have been few and far between. But several projects currently announce plans to launch STO in 2019 and the Swiss Stock Exchange is building its own platform to issue and trade security tokens in anticipation of a boom. 2019 could be the year of the STO.

“LinkedIn is always a fantastic indicator,” Carlton said. “The number of people whose profile has now changed from ICO advisor to STO advisor makes me laugh.”

However, he fears that STOs could be subject to the same kind of hype and hype that ended up hurting ICOs.

“I think we’re really at risk of falling into the same trap now: Everyone’s like, ‘I’m going to STO this and then all of a sudden the clouds will part and people will drop gold in my lap and everything will be fine.’ . That is absolute rot.

“When people say, well, why don’t I do a capital increase through an STO? What’s the benefit?” he said. “For security tokens, there has to be a need.


Oscar Williams-Grut covers banking, fintech and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.

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