Investor
What Is An STO?
STO stands for security token offering. It is a process similar to an ICO where an investor exchanges money for coins or tokens representing their investment. However, unlike ICOs, STO’s take it a step further and distribute tokens that fall under the status of securities. They are linked to an underlying investment asset in a way like stocks, bonds, real estate investment trusts (REIT) or other funds.
As such, security token offerings distribute securities. These are tokens that are fungible, negotiable financial instruments with attached monetary value, like a part of property or company.
Security tokens are not traded on regular token exchanges. Exchanges that want to offer security token trading need to fully comply with regulations, including extensive investigations into token listings, data sharing, and investor onboarding procedures. Thus, security tokens trade on specialized exchanges.
What Are The Benefits Of STO?
During the 2017-2018 ICO mania, many token issuers have sold investors bags of tokens without any economic rights, value or regard for existing securities laws.
Security token offerings are meant to be a regulatory compliant alternative to regular token sales. They aim to correct perceived inequalities on the investor side, such as granting security token holders rights to dividends or other predefined revenue streams.
STO tokens are beneficial to the issuers, too. There is no need to proclaim tokens as being without any intrinsic economic value, and they typically have clearly defined stakeholder obligations regarding the token distribution, issuance procedure, and secondary trades.
Other advantages that come with security tokens are:
- Credibility. ICO space is chaos, to say the least. Many people were scammed, even more projects did not deliver what they promised, and most investors remain stuck with useless tokens. In contrast, STOs follow all regulations and allow blockchain and cryptocurrencies to restore some credibility.
- Improving traditional finance. While traditional securities are slow and expensive due to their old infrastructure and layers of intermediaries, security tokens facilitate services at a lower cost.
- Programmability. Security tokens can be programmable and enforced by smart contracts.
- Free market. Borders or local regulations do not limit security tokens.
- Many investors. Traditional security deals involve only local individuals, while security tokens are open to anyone on the internet.
- Reduced institutional manipulation. Free and open market with fewer mediators should reduce market manipulation, at least in theory.
- More liquidity. Security tokens will trade on specialized security exchanges so investors will have a convenient way to liquidate their assets.
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