Cryptocurrencies and blockchain technology are on an unstoppable march towards reaching mainstream audiences. From the fever-pitched hype surrounding people becoming Bitcoin millionaires overnight, to Facebook announcing stablecoin, Libra, cryptocurrencies have taken the stage and stolen the spotlight.
But their performance has so far only gotten mixed reviews.
While the technology itself is no doubt revolutionary, the unregulated nature of the cryptocurrency ecosystem has historically brought it a lot of negative press. Its past is rife with multimillion-dollar hacks, ICO scams, and other unscrupulous activities. It is no surprise that Libra’s unveiling faced backlash from concerned statesmen across the globe.
This backlash has made the ecosystem intimidating for newcomers, and is an obstacle in mass adoption.
Enter STOs. An STO, or Security Token Offering, is a method of fundraising similar to an ICO. However, whilst an ICO is unregulated, an STO involves issuing asset-backed tokens that are counted under the Howey Test as investment contracts. They may be the breath of fresh, regulated air needed to grow and scale the cryptocurrency ecosystem.
In fact, they have already made quite the splash. In the first half of this year, STOs raised over 108 million in the first half of 2019 alone. There’s no sign of them slowing down, either.
Here are a few reasons why we believe interest in STOs will only continue to grow for the future.
Regulation and Transparency
One of the biggest benefits of STOs that attract investors and brings legitimacy to cryptocurrencies is the regulatory compliance structures it adheres to. Other offerings like ICOs lack similarly formal regulation, and as such investing in one inevitably brings a higher level of risk.
STOs must comply with regulatory governance because they are considered to be securities. Different governing bodies around the world have their own regulatory agencies that would define what a security actually is. The US’ Security and Exchange Commission (SEC) defines an investment contract, and by extension securities, as including the following:
“…[an] investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
Not only that, any security offered in the US will have to comply with relevant securities regulations, including registering with the SEC. Registering with the SEC involves…
“disclosure of detailed ‘information about the issuer’s financial condition, the identity and background of management, and the price and amount of securities to be offered … .’ SEC v. Cavanagh, 1 F. Supp. 2d 337, 360 (S.D.N.Y. 1998), aff’d, 155 F.3d 129 (2d Cir. 1998).
And this is just for the US. STOs looking to draw in investors around the world will be working with a multitude of regulatory agencies for each country they wish to offer their STO in.
The regulated nature of STOs may raise a few eyebrows from those who are massive fans of blockchain technology for its decentralized properties. However, regulatory compliance has been a boon not just for projects to receive institutional trust and acceptance, but they also help increase the total level of funding in the space as well.
Compliance with regulatory agencies brings consistency and quality to the market. STOs allow potential investors to make a much more informed decision compared to the baseline of a white paper and a website for most ICOs – scams amongst them will have a harder time bringing in investors if more credible options like STOs exist. By lowering the risk traditionally associated with unregulated ICOs, it also lowers the barrier of entry for newcomers looking to invest and makes it more reasonable for the mainstream audience to adopt.
A regulated and legally compliant environment may feel like compromises for those who staunch ideological supporters of blockchain principles. However, the result of the regulatory and mass-market acceptance of STOs is beneficial for projects, investors at large, and the growth of the blockchain community.
New Market Participants in a More Accessible and Liquid Market
Regulation compliant cryptocurrency offerings are not only good for the cryptocurrency and blockchain ecosystem, but the benefits also go both ways. Bringing STOs to the mainstream also brings a wealth of positive changes to the world of finance.
To explain, a unique quality of security tokens is the ability to tokenize assets. An article published by Deloitte describes the tokenization of assets as digitally representing them with blockchain tokens, and goes into detail about the benefits tokenization can bring to the financial industry.
The report itself goes into the benefits of tokenization, of which two notable benefits are that it increases the liquidity and accessibility of the markets.
On liquidity, the report describes that typically illiquid assets such as antiques, fine art, and real estate, can be tokenized and easily traded on a secondary market. Additionally, the ability to trade them on secondary markets, which can be globally available on a 24/7 basis, makes them stand as liquid alternatives to current markets.
On the matter of accessibility, security tokens are widely divisible and are incredibly fractionalized pieces of greater assets. The authors of the report expect transactions to be cheaper and faster due to smart contracts automating certain parts of the exchange process. This, in turn, means that trading these tokenized assets can be done on a lower minimum investment amount compared to our current financial systems.
STOs have been an important step toward institutional and mass-market acceptance of cryptocurrencies. However, despite commitments to regulatory compliance, STOs are still matters of legal contention in certain countries, such as China and South Korea.
Lack of universal regulatory acceptance means that the ecosystem still has quite a way to go before truly being mass-market, but its transformative potentials for both the blockchain ecosystem and the world at large are undeniable.