Daria Generalova, Managing Partner at ICOBox recently talked about the two popular funding methods in the cryptocurrency market, ICO, and STO. She believes that STO will provide the calculable price points for tokens that ICOs have failed to make potential.
ICOs present a problem to authorities and investors
Initial coin offering (ICO) have become a popular means of funding in the cryptocurrency world over the past one year. It has enabled companies to launch their products and services in the crypto industry by selling those products and services directly to the ultimate users. They will, in turn, get a huge amount of capital to be used in funding other parts of the project. The funding process enabled blockchain companies to raise hundreds of millions of dollars but the process has caused some problems.
The ICO sector has witnessed massive fraud, with the unclear regulation in several countries affecting the market negatively. These factors have also played a role in scaring away potential investors from the market, with the funding process now somehow useless in the crypto world.
Despite all these negative issues, the enthusiasm surrounding cryptocurrencies and blockchain technology is still high. Wall Street to Silicon Valley companies are venturing into the industry, with several blockchain and crypto companies expected to be launched by next year. The launching of companies will require funds and with ICOs now something no longer being considered, startups are turning their attention to other sources of funding.
Here comes Security Token Offerings (STOs)
To solve the problems of ICOs, Security Token Offerings (STOs) were introduced. For this new funding mechanism to work, the areas that ICO failed had to be understood to ensure that STOs are not affected by similar problems.
The primary problem with ICO was that it had no regulation. In the financial world, coin offering is still a new term and regulators didn’t know how the model will fit into the current regulatory guidelines. Companies didn’t wait for securities laws to be put in place but instead rushed into the industry to grab as much money as they can. Scammers then joined the bandwagon to make a quick buck, which led to further damage to the market.
This led to several governments across the globe banning ICOs in their countries and this has led the market to decline and eventually grind to a halt. Legitimate companies and investors were affected by government crackdown on the sector.
STOs are now here to solve the problem by offering tokens fully compliant with securities laws. STOs are conducted with in-depth research as they rely on existing securities legislation while also registering their tokens as securities. By obtaining the proper registration, companies will be able to raise funds with confidence and make sure that their investors feel more protected.
ICOs were designed to be distributed and work not as securities and if done carefully, they are usually regarded as investment instruments rather than securities. Even though this is a good concept, the tokens were later traded like currency in exchanges with the hope that their value will appreciate with time. This makes them too close to securities and that grabbed the attention of regulators.
STOs meanwhile works differently. It enables companies to stop messing around and sell their tokens directly as securities. With that, investors will be able to gain the full benefits of traditional securities such as profit sharing, equity stake, or voting rights. STOs had a wider appeal to investors, making it possible for people who believe in the project to invest in it without necessarily having to use the network.
Tokens now considered as securities enabled startups to gain access to some markets again such as the United States where ICOs have been banned previously. Companies can now look to STOs to conduct their crowdfunding process and would gain funding without thinking of breaking government regulations.
With regulation expected to bring a high level of stability to the industry, STOs are currently bringing something extra to the industry. They are acting as a valuation ballast for tokens. Even though the cryptocurrency market has been known to be driven largely by wild guesses, hope, and speculation, STOs are expected to bring a little stability in terms of valuation.