Are Security Token Offerings (STOs) the solution to the ICO problems?
An Initial Coin Offering (ICO) is a new way to fundraise with crypto-currencies (coins or tokens) for start-ups that exploded in 2017. ICOs raised $6.2 Billion in 2017 (875 ICOs). And $7.8 Billion in 2018 (1257 ICOs), according to ICOdata. However, the picture is not so rosy, if you look at the monthly figures.
ICOs vs Ether
ICO raises and Ether went up and then down together:
Generally, coins refer to crypto-currencies that have their own blockchain, while tokens refer to crypto-currencies built on top of an existing blockchain. Ether is the coin of Ethereum, the second generation blockchain (the Bitcoin blockchain was the first).
Most ICOs offered tokens using Ethereum, which makes it particularly easy to create new tokens. Coins and tokens are not the same things, but the C in ICOs could mean either. Therefore, for most ICOs a better name would have been Initial Token Offering (ITO).
The monthly chart above shows the Ether price in USD (orange line) over 2017 and 2018. Ether tracks quite well the fundraising of ICOs (blue bars) over the same period. Both exploded in 2017 and then crashed in 2018. (Bitcoin and virtually all the other crypto-currencies did the same.)
It is not clear what the root cause of the 2018 crash was, but many in the space point to poor project planning and management, and scams. The latter led the SEC, the US financial regulator, to aggressively investigate many ICOs, killing the confidence in the market. Many investors panic sold, even good projects.
Classification of tokens and STOs
There are different tokens. But there is no generally recognised terminology for the classification of tokens. In fact, it is changing, as is the way in which these offerings are made. Companies as big as Overstock, a US internet retailer (1.8 Billion USD revenues in 2017), are leaning toward Security Tokens. Also referred to as Asset Tokens.
According to FINMA, Asset Tokens represent assets such as participations in real physical underlyings, companies, or earnings streams, or an entitlement to dividends or interest payments. In terms of their economic function, the tokens are analogous to equities, bonds or derivatives. (FINMA is the Swiss financial regulator and one of the first regulators to embrace crypto projects.)
The SEC claimed that most ICOs are actually securities, and therefore subject to securities regulations. As a result, companies that issued them broke the law by offering unregistered securities.
Security token offerings (STOs) start with a small private sale, followed by a pre-STO sale to larger group of investors, leading to a public STO. The target investor groups at each stage depend on the jurisdiction(s) where the company issuing the tokens offers them and the restrictions imposed by the national financial regulators.
The future
We believe that regulator-compliant Security Tokens may just be what the market needs to restore confidence and possibly change the world of finance.
In 2018, Spin, a US e-scooter hire company, aimed to raise $100+ Million with an SEC-compliant STO, but was bought by Ford. (The US carmaker did not reveal the purchase price for Spin.) However, TZero (a subsidiary of Overstock) raised $130+ Million with an SEC-compliant STO for a securities trading system, blockchain-based.
The FCA, the UK financial regulator, has begun the process of defining the crypto assets. Its guidance is expected to be released over the summer. Other regulators are expected to follow with similar initiatives. These will help to further increase confidence in the crypto-coins/tokens market as a legitimate option for companies and investors.
Therefore, we think that STOs are not just the new name for ICOs. They are the next step in the evolution of crypto, which is preparing for prime-time finance.
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