A security token offering (STO) is a public offering in which tokenized digital securities – security tokens, are sold in security token exchanges. It is a unique token on a permitted or permissionless blockchain, demonstrating a stake in an external asset or business. Like the initial coin offering (ICO), an investor gets a crypto coin or token which shows their investment. Unlike an ICO, an STO represents an investment contract into an underlying investment asset, such as stocks, bonds, funds, and real estate investment trusts (REIT). Because STO overlaps with these two investment financing methods, it is also a hybrid approach between cryptocurrency ICOs and traditional IPOs.
What Is the Difference Between an ICO and STO?
ICOs and STOs follow the same process; however, the token characteristics are different. ICOs and STOs represent the initial issue of coins associated with a particular investment mechanism. They differ in the features of the tokens.
STOs are asset-backed, while most ICOs are utility tokens that give users access to the native platform or decentralized applications (DApps). The aim of ICO coins is the usage and not the investment. As a result, ICO platforms avoid particular legal frameworks and do not have to register or correspond to the strict governance of managerial bodies.
The aim of ICO coins is the usage and not the investment. As a result, ICO platforms avoid particular legal frameworks and do not have to register or correspond to the strict governance of managerial bodies.
Launching an ICO is much easier than running an STO because there is no need to do all the upfront compliance work when launching an ICO.
How Do Security Tokens Work?
Security tokens are for raising money for a startup or a business. In raising capital for startups or established companies, the STO is a logical continuation of the concept behind ICOs and IPOs. Security tokens are also helpful for tokenizing or securitizing existing real-world assets. The process of tokenizing of real-world assets represents another potential opportunity for security tokens.
Global stocks’ value is at around $ 70 trillion, and real estate assets are over $ 230 trillion ($ 180 trillion for residential real estate, $ 32 trillion for commercial real estate, and the rest for agricultural real estate). These stocks form the basis of security tokens and develop the market just under development in 2018.
The large-scale introduction of security tokens will replace much of the current paperwork in securities trading. Security tokens minimize the overall cost of managing today’s financial system. If security tokens have large numbers on the stock market, the world can save up to $ 6 billion annually on paper-based economic systems.
What makes an STO so beneficial for businesses?
1. Global capital access
2. New techniques to market products and services
3. More favorable conditions
4. Low entry charges for investors
5. Prices are hundreds of times cheaper for the issuers
6. Opportunities that go ahead the field of the usual security
Statistics
The study for STOs shows that the amount of Security Token Offerings rose from 35 in 2018 to 55 in 2019, with the finance and banking sector holding the most projects. The total funding raised grew to $452 million in 2019.
Another statistic shows that from 2019-2030, the Security Token Offering Space will have growth at a CAGR of 59%, following the institutionalization of the digital assets ecosystem around 2025. Even though there are distinctions in the stats, various analyses guide in a likewise direction. The tokenization of assets and consequently the Security Token Offerings market will experience a rapid increase in the next years.
Conclusion
A security token offering (STO) is a public offering that sells security tokens in security token exchanges. It is a unique token on a permitted or permissionless blockchain, representing a stake in an external asset or company.
Unlike launching an ICO, launching an STO is a complicated process. However, they follow a similar procedure, but their tokens have different features.
Security tokens are mainly for raising money for a business or a startup. They have many benefits for companies, such as low entry costs for investors, better conditions, new methods for market products and services, and so forth.