What Is An STO? Is It Legal?

An STO is a security token offering, similar to a stock offering but represented by tokens on a blockchain rather than certificates on a traditional market. The water is still murky as government officials struggle to understand what blockchain is, but while it’s like finding a needle in a haystack, there is such a path.

Blockchain developers are keeping their fingers crossed, hoping that the government does not move too heavy-handed on regulation, which could squander innovation.

STO technology could be a big step in bringing traditional financial assets to the blockchain. Platforms like INX they are working to make this technology available to institutions that are connecting with cryptocurrencies.

What are STOs and how do they work?

The key thing to understand is that an STO represents a stake in an underlying security. Whether that value is earnings, bonuses, shares, or income depends on the token.

The STO came after the initial ICO craze. Both are used to raise funds for projects or companies, but the ICO is much less regulated. Fear of an unregulated path prevents companies from choosing it, although they should not rule out this option because one company is already working under SEC regulations: INX.

This could benefit investors as there is more clarity on what they are buying; the ICO has been plagued with many scams and rug pulls. This could help rid the crypto space of scammers and bad actors looking to prey on investors for a quick dollar.

Benefits of STOs

There are a couple of benefits of STOs; is it so:

  • Greater clarity about what is being purchased.
  • clearer regulation
  • Greater difficulty for scams to occur.

While there are clear benefits, there are many in the space who don’t like STO. This is because it is a step back from the old system. The original purpose of cryptocurrencies, at least with Bitcoin, was to get unregulated money out of the hands or to control government corruption. An STO returns power to these forces.

This blockchain technology has developed beyond the original notion of Bitcoin maximalists and can be useful to traditional financial players. But it’s unlikely that many Web3 natives would be very interested in this style of offering. It will largely be the traditional financial players trying out blockchain technology, not blockchain developers who want to branch out into the old traditional financial ways.

How is an STO different from an ICO?

The key difference in STO technology is that it has underlying security tied to it. This is different from an ICO (Initial Coin Offering) which represents a utility token, used to access different technologies. As governments continue to learn about blockchain technology, they will be able to better regulate the two different offerings.

Currently, governments are still clueless about blockchain technology. A great deal of effort is being made to educate government officials so that they can properly regulate the space.

The United States has taken a hands-off approach as it continues to navigate, but a lack of regulation is not necessarily good for cryptocurrencies. Once regulated, much more capital can be put into crypto-based investments.

There have been countries that have been adamantly opposed to blockchain technology; China, for example, banned Bitcoin. This could prove catastrophic as technology continues to develop and change around the world.

Just as governments now knew how to regulate cars in the 19th century, they are unsure how to regulate blockchain technology today. This should not influence constructors to delay development.

Adapting technology to the world of regulation is harmful; rather, regulation must adapt to technology. STOs are ultimately an effort at this, trying to fit new technology into traditional securities regulation.

How are STOs defined and regulated around the world?

An STO is regulated much like an IPO (Initial Public Offering) in the stock market. Ultimately regulated by a governing body that manages issuance, supply, and any other necessary factors.

final thoughts

There are two potential paths for STOs to really grow in popularity. The first is for traditional financial players who want a bridge to cryptocurrencies. This will come as blockchain technology is better understood. The second way that STOs could become mainstream is if ICOs start to become heavily regulated. A lot of ICOs are really securities that avoid playing by the same rules that normal public or private companies follow.

Image sourced from Shutterstock

This post contains sponsored advertising content. This content is for informational purposes only and is not intended as investment advice.