Folks are rightly skeptical of the new kid on town, the Security Token and the Security Token Offering (STO). While nobody seems to want to be associated with ICOs anymore (perceived rampant fraud and bad government attention have gutted the ICO’s reputation and made both entrepreneurs and investors skittish), people are addicted to the quick, unrestricted, and unaccountable fortunes that were raised by companies for projects since it caught fire back in 2014.
Security Token Offering (STO)
So, enter the STO. Security Tokens are a hybrid product, somewhere between the Utility Token issued by ICOs, the pre-IPO shares that are issued by companies going public, and actual, literal, and physical securities that have the same innate and guaranteed value and worth that are analogous to debt securities, equity securities, hybrid securities, and derivative securities. Since Security tokens are programmable, STOs can issue debt tokens, equity tokens, hybrid tokens, or derivative tokens for purchase. And since the underlying blockchain of any STO is essential an application, they can be programmed to obey anti-money laundering laws, they can also follow security laws, and make decisions autonomously, making the sort of decisions programmatically that would normally be held hostage by executives and management. While news of the latest billion-dollar IPO hits the wire and goes global in seconds online, IPOs are often restricted to a single exchange such as Nasdaq or the NYSE. STOs, however, are not only always available for trade they’re also up 99.99% of the time and trades can be handled automagically between buyer and seller anywhere around the world. STOs maintain the same decentralized global nature that all crypto-products do that have underlying decentralized ledger technology (DLT), Blockchain.
The Institutional Investor
One of the biggest reason why folks are pushing so hard is that there’s an interest in moving the crypto “offering” space and all the investment opportunities into the traditional investment space. Until now, ICOs have been mostly invested in by retail investors; now, however, Wall Street, The City of London, Singapore, Hong Kong, Tokyo, Zurich, Shanghai, and developing markets are becoming extremely interested in the cryptomarket and are rushing in and so there’s a strong interest in creating a safe space for the institutional investor who is already looking for a safe space to place their money. The STO and their associated Security Tokens might offer a more industry-compliant, respectable, negotiable financial instrument that doesn’t spook the market as much as the ICO wildfires did in 2017-2018.
ICOs Broke the Internet
While the Initial Coin Offering (ICO) was very much the height of disruption when it came to raising capital and possibly the riskiest. From its inception in 2013 through to its peak heyday in 2017 to its walk of shame during the crypto winter of 2018, and now to being essentially toxic, the ICO burned bright. I noticed back in September and October that folks were transitioning from calling them ICOs to Token Sales. Even the UBAI is not the University of Blockchain and Investing instead of ICO. The ICO is toxic the fundraising framework is besmirched with the reputation of being run by fraudsters with the goal of making a lot of money and then defrauding investors. This reputation isn’t earned. Most ICOs were initiated in good faith; however, a lot of them failed. That’s the risk part that’s mentioned in every ICO’s white paper prospectus. Still, people don’t think that losing all their money from a sure thing will ever happen to them (I live near a Casino and there’s always a fresh supply of sad-sack losers who blew their rent and paycheck MGM and it was always a sure thing).
The ICO Was too Hard and the IPO Was too Soft
The ethos behind the Initial Coin Offering is a pure as the driven snow. It was the direct response to the frustration that developers have with the douchebags of Silicon Valley: the venture capital bros. Before a company comes to maturity and either gets sold or goes public, it’ll be similar to what a dead wildebeest looks like a couple hours after the proud lioness fells it on the Serengeti: hyenas, jackals, and vultures. Ask anyone who has followed the tradition business fundraising path from friends and family to IPO. A more apt analogy: If you’re a founder, you’re like Santiago from the beloved book The Old Man and the Sea. By the time you successfully bring your company to shore, after all the sharks take big bites of the giant Marlin you put everything into the landing, there’s nothing left but the spear-like bill.
Now that nobody is willing to even touch an ICO for so many reasons (from being afraid of fraud, yes, but also being afraid of regulation) even if it’s called a Token Sale, something needs to be born in its place. That thing seems to be the Security Token Offering, the STO.
The STO seems to be a perfect compromise between the ICO and the Initial Public Offering (IPO) model of “going public.” Unlike the “dumb” utility token that the ICO uses to compensate their investors, that have no intrinsic value, stable tokens can be programmed with automated dividends, compliance, KYC procedures, votings rights, and interest. And, unlike IPOs, STO benefit from the immutable blockchain allowing instant disintermediated trades. Also, unlike an IPO which goes public on only one Stock Exchange, trading only on NYSE or Nasdaq, security tokens benefit from interoperability across exchanges and also can be traded with other crypto assets. Also, unlike stock shares resulting from an IPO, Blockchains never sleep, unlike stock markets, which often close during weekends, holidays, and during closing hours.
Trading in the security token market is 24/7/365 with 99.99% uptime. And, because STOs and Security Tokens are, in many ways, decentralized autonomous organizations (DAOs), most administrative duties that are usually performed by executive, stakeholders, board members, brokers and financial analysts in the analog world of the human-run public company, are automated. Issuance, registry, exchange, underwriting, clearance, settlement, reporting, and compliance do not require human intervention in an STO security token project. And, unlike public shares of stock, STOs and security tokens can, like crypto, be bought in fractional tokens. So even expensive Tokens can easily be purchased in even the smallest proportion. I don’t know if you’ve ever tried to access a pre-IPO stock sale. It’s not only limited to license brokers and other industry insiders but it can also be limited to one market or one country.
Act Locally, Trade Globally
Unlike provincial IPOs, STOs are global and can open access to investments to a global market; and, because one can purchase fractional Security Tokens, investors with far less capital or who live in less resource-rich countries can participate and have access to project and offerings that would otherwise be too rich. Finally, one of the most innovative and disruptive aspects of the STO over the IPO is that Security Tokens retain all the transparency of the decentralized ledger technology, not requiring third-party ratings. Because of automated processes programmed into Security Tokens and because they built in transparency and immutability of the underlying blockchain technology, there is no need for trust between parties when performing a transaction via security tokens–it’s called a trustless environment.
Yellow Stripes and Dead Armadillos
The STO and its underlying Security Token promise all the best of both worlds without any of the provincial, low-tech, intermediated, unregulated, dangerous, risky, and inaccessible parts of the ICO and IPO. Sadly, nobody’s currently that excited about the STO. Maybe, as they say in politics here in Washington, DC:
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“There’s Nothing in the Middle of the Road but Yellow Stripes and Dead Armadillos”