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What Is a Security Token Offering: Are STOs the New ICOs?

  • Alex Morris
    📚 WikiCoin

    Security tokens, a new strain of cryptographic tokens, have been an emerging trend in the industry. Will security token offerings (STOs) eventually outduel ICOs?

What Is a Security Token Offering: Are STOs the New ICOs?
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2017 was the year of ICOs — investors would blindly throw money at each new project without even doing basic research. As soon as the great ICO bubble popped (with 70 percent of all coin offerings not even exceeding their initial valuation) the so-called security token offerings (STOs) have become the next big thing in the crypto space. In this article, U.Today will determine whether STOs have a serious shot at replacing ICOs.

Understanding security tokens

Before grasping the idea behind security tokens, beginner-level investors should clearly understand what a ‘security’ is. It is a basic financial term that denotes a certain financial instrument that holds some monetary value (stocks, bonds, etc.).

What is a security token then? A security token is a share that happens to reside on a distributed ledger. All the information pertaining to one’s individual investment is stored on a distributed ledger instead of a single PDF paper.

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Companies can consider raising funds with the help of STOs if their annual revenue exceeds $10 mln, or they have a highly scalable business model. They can also opt for an STO if they are supposed to have transferable shares of an asset.  

The main difference between security tokens and utility tokens is that the latter typically function as an investment (the value of security tokens is determined by external assets). Meanwhile, utility tokens are not supposed to be an investment – they simply give access to a certain product. Case in point: Basic Attention Token (BAT), the 29th biggest currency by market capitalization, underpins the Brave browser ecosystem – users are able to earn the BAT token by watching content or performing other contributions to the network.

Security  token

ICOs vs. STOs: The uncomfortable truth

In such a short span of time, more than 4,000 ICOs have managed to raise a whopping $12 bln. Everyone with ETH was able to participate in the funding of new startups. Prior to that, this market was only opened to venture capital firms since they are able to afford the risk.  

However, the uncomfortable truth is that the majority of these ICOs didn’t have anything to offer their FOMO-driven investors (apart from their white papers). Now, we are in the post-euphoria stage when ICOs are slowing down, and ‘private’ coin offerings became a popular trend (when tokens are sold to accredited investors).

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While the cryptocurrency industry is still going through its ‘growing pains’ stage in terms of regulations, STOs arise as a more legitimate option since they are not more venturesome than the ICO space that is plagued with pump-and-dump schemes and other kinds of speculations. It is mandatory for STOs to be approved by the Securities Exchange Commission (SEC), which basically makes them fraud-proof.

(thetokenist.io)

The regulatory framework of security token offerings

China, with its infamous crackdown on cryptocurrency trading, remains vigilant of STOs with Huo Xuewen, Beijing’s Municipal Bureau of Finance chief, recently defining STOs as illegal. Last year, the country also banned ICOs.  

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However, in the US, the regulatory framework for security tokens is rather straightforward. The first thing that any issuer is supposed to do is to pass the Howey Test in order to determine whether you are dealing with a security or utility token (the Howey Test examines investments, profit expectations, work efforts of other individuals, etc.).

After that, there are two options: register with the SEC or apply for an exemption (listed below). Going for full registration with the SEC is not an easy feat since one will have to overcome a slew of financial and legal hindrances. Not surprisingly, the overwhelming majority of companies prefer the second variant.      

SEC Exemption Type

Explanation

Reg D

The exemption rule that allows a certain company to cut the costs that are attributed to hosting your own private offering. Those that meet certain rules that are specified in the Red D section are not supposed to be registered with the SEC in order to offer securities.    

Reg A+

Under these regulations, securities that were approved by the SEC can be sold to retail non-accredited investors. Long story short, it allows an average Joe to invest in private companies.

Reg S

This particular exemption type pertains to the transactions that are conducted outside of the US. Subsequently, security tokens (as well as bonds and stocks) can be sold to non-US investors that meet the Regulation S requirements.       

Reg CF

This is by far the simplest option for a token issuer but the amount of capital is strictly limited to $1.07 mln. For comparison, Reg D and Reg A+ allow raising a significantly bigger amount of capital.

Picture 3Picture 4

NB! Failing to comply with the federal securities laws will result in a potential derailment of the project. Eligibility for exemption still means that any given STO is subjected to federal regulations.  

Outside the realm of traditional IPOs

  1. Programming securities. With security tokens, you are able to include additional features in already existing securities since programming code gives much more flexibility.

  2. Fractional ownership. Some markets remain available only for high net worth individuals. For instance, U.Today recently covered Miami Art Week 2018, where tokenization became one of the focal points of the discussion. Not everyone is able to shell out $100 mln for a Picasso but dividing one picture into numerous different pieces (‘tokens’) would make it easier for different kinds of investors to dive into this multi-billion dollar market.

  3. No need for an IPO. Launching your own initial public offering (IPO) will cost you top-dollar. However, the gargantuan cost of hosting your own IPO can be practically reduced to null by hosting your own IPO.

  4. More liquidity in the market. Unlike traditional stock exchanges that have specific trading hours, you are able to trade security tokens 24/7. Apart from creating a more global market (there are no restrictions pertaining to the time zone), it also brings more liquidity to the market given that there are many buyers and sellers of different ranks. It doesn’t matter if you are an 18-year-old newbie who has just $100 worth of BTC – you don’t have to be an accredited investor in order to participate in this market.   

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The growing security token ecosystem

While security tokens are gradually entering the mainstream, a great ecosystem is being built by a few companies that are willing to capitalize on the buzz around ‘the new ICOs.’ Crowdfunding behemoth Indiegogo has also embraced security tokens by tokenizing the luxurious St. Regis Aspen Resort in Colorado. The company’s co-founder, Slava Rubin, predicts that we will see more security tokens in the future, gradually disrupting a crowd-financed world. Despite the fact that major exchanges are yet to list security tokens, major players like Coinbase are already pouring big money in the STO space.

Mainstream cryptocurrency exchanges are not suitable for trading STOs given that they can’t perform proper due diligence. There are fully regulated alternative trading systems (ATS) that create a market for security tokens. Apart from issuing a security token, ATS is useful for picking a KYC/ALM provider and tackling legal hurdles with the SEC.       

Polymath, which is also dubbed ‘the Ethereum of security tokens’, is a platform that is designed to make it easier for companies to issue security tokens (everything from stocks to real estate can be tokenized). The Polymath ecosystem unites issuers, developers, investors, and legal experts. The platform functions on the Ethereum Blockchain, giving its users an ability to issue ST-20 tokens.

Poly 

POLY, with its native ERC-20 token, is used as an economic unit for conducting all operations. It can be bought on all major exchanges, including Binance, Huobi, and KUCoin.      

How to register an STO with Polymath?
Here’s a quick guide on how to register a security offering with the help of the Polymath platform.   

Step 1.  Go to the main page and click the corresponding button to issue your ICO (considering that you’ve already connected your wallet to an email wallet).     

Step 1.

Step 2. Once you’ve done that, you have to choose your token name along with token symbol, entering them in the given fields.

   Step 2.

Step 3. After completing the reservation of your token, you are required to choose your payment provider (they won’t be notified since the token is running on testnet).  

   Step 2.

Step 4. You are required to get your offering details (the timing, the coin (POLY or ETH), and the rate).

Step 4.

Step 5. During the last stage of your registration process, you are required to fill out all a CSV file with all the necessary information pertaining to your whitelisted investors.

Step 5.

Polymath is considered to be the leader in the STO market, but there are also some alternatives:

  • Harbor;

  • Securitize;

  • Securrency;

  • tZero;

  • Bancor.  

The bottom line

Looking at the present-day situation, the market share of security tokens remains minuscule compared to traditional STOs. Moreover, the whole idea of a security token may sound confusing to an uninitiated investor who asks questions like, ‘How do security tokens work?’ and so on. Some aren’t even able to differentiate them from initial coin offerings.  

Generally speaking, STOs represent a hybrid of traditional stocks for institutional investors and cryptocurrencies, satisfying the needs of both camps. There is every reason to believe that STOs could eventually become huge, potentially disrupting the current equity market in a similar way to Bitcoin threatening fiat currencies.

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Still, there is a possibility that we won’t see any competition at all. Security tokens could be utilized as a fundraising tool while utilize tokens could be useful for interacting with the dApp. Hence, there a possibility that we will see a strong coalition in the form of one ‘security-utility’ token. A dual token could fix the pain points of the cryptocurrency industry.

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Is BTC and Cryptocurrency Crash 2018 Similar to the Dotcom Crash?

  • Denys Serhiichuk
    📚 WikiCoin

    Lots of people compare cryptocurrency market growth with the Dotcom example. This topic was extremely discussed in 2018 when most of the coins decreased in their value by dozens of percentages. Prominent figures of the industry shared their opinions that Bitcoin would face the same crash as it happened with Dotcom. In this article, we will analyze the similarities and differences between them.

Is BTC and Cryptocurrency Crash 2018 Similar to the Dotcom Crash?
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Many analysts compare Bitcoin with the largest bubbles in the economy of countries, such as “tulipmania”, which in the 17th century led all of Holland to a crisis, or an unjustified increase in the value of shares of Internet companies in the late nineties. In the latter case, the Dotcom bubble burst in 2000, and $1.5 trillion literally disappeared in a short time.

Like this situation, an unprecedented influx of funds greatly increased the capitalization of Bitcoin from the end of 2017, and by the end of January 2018, the fate of the great crypto-bubble became similar. But for all the similarity of the model, it is still early to compare Bitcoin with the Dotcom bubble and fragile economic systems.

What is the Dotcom bubble?

In the late 1990s - early 2000s, the sphere of high technologies was on an unprecedented rise. During these years the popularity of the Internet among ordinary users and among large companies reached a peak. In the wake of the HYIP, more and more new companies opened, and the old ones issued their shares to the stock exchange, seeking to attract as many investments as possible. Intensive growth in stocks continued for several years, but then almost all companies lost more than half, and about 90% of capitalization.

At this time, there was a rise in the stock market, and the NASDAQ index, determined by the rate of shares of high-tech companies, rose from a value below 1000 to above 5000 in the period from 1995 to 2000.

NASDAQ index

The Dotcom bubble has grown out of a combination of speculative investment or investment in popular products, an oversupply of venture financing for startups and the inability to generate revenue. Investors poured money into the Internet projects in the second half of the 90s, hoping that someday these companies would shoot up.

The bubble, which was formed over the next 5 years, was fueled by cheap money, easy capital, excessive investor confidence in the market and blatant speculation. Venture capitalists who were looking for a new great opportunity invested in any company whose name used the “.com” domain. Such investments could pay off only after several years of successful existence of these companies; however, investors, embraced by the desire for easy profit, ignored the fundamental calculations. Companies that were yet to start generating revenue, and often finish the product, went to an IPO, and their shares soared 3-4 times a day.

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Within a few weeks, the stock market lost 10%. Investment capital began to flow from the market, and along with them began to dissolve the viability of the Dotcoms. The market capitalization after having reached hundreds of millions of dollars lost all value in a matter of months. By the end of 2001, most of the Dotcoms whose shares traded freely on the stock exchanges had closed, and trillions of dollars in investment capital evaporated.

The similarity and differences between the Dotcom bubble and the cryptoсurrency crash

Dotcom bubble

The main similarity between the Dotcom bubble and the cryptocurrency market is the correlation of the graphs. In both cases, the explosive growth and the repeated overcoming of the historical highs were followed by a strong decline.

In the early 2000s, Internet companies were “in vogue” and in the West, any average citizen could buy a stake in such companies. Now the whole world is talking about digital currencies and the process of buying coins has become easier.

On the other hand, the capitalization of the entire digital market even at its peak was several times lower than the capitalization of the NASDAQ stock exchange, where most high-tech companies trade. Many experts argue that digital assets have not become such a popular financial instrument so that they can be compared with stocks traded on one of the largest stock exchanges in the world.

NASDAQ and Bitcoin graphs)

In the 2000s, the Dotcom bubble burst; in 2018, the crypto market collapsed. The main question is: how to avoid major losses, using the experience of past years?

How to avoid losses when the market collapses

We should admit that at the moment the opportunities of investors are limited. The market has already managed to take off and collapse. And in the most unpleasant situation are those who bought cryptocurrency in December 2017 - January 2018, at the very peak.

Some experts argue that even in this situation, universal tactics of HODL (a distorted buy-and-hold option) will save investors.

Billionaire-businessman Tilman Fertitta, founder and CEO of Landry’s, a multi-brand corporation, expressed his point of view about the similarities between cryptocurrency growth and the Dotcom bubble, but noted that Bitcoin is real and “here to stay”.

Fertitta, who is also the leading reality show “Billion Dollar Buyer”, compared the growth of the entire cryptocurrency ecosystem with the Dotcom bubble and mentioned that people most likely just forget that the addition of “.com” to the end of the company name helped grow stocks.

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Despite numerous statements by skeptics and opponents of Bitcoin, Fertitta believes that digital currencies are not going anywhere. The main risk of cryptocurrency lies in the fact that governments of different countries do not regulate it in any way.

“Go to the bank and try to withdraw a million dollars, they don’t have the money. It’s just paper. That’s all bitcoin is, is paper, but it’s not insured by the FDIC today. And until it’s insured, a lot of people are never going to buy it,” stated the billionaire.

Another famous person in the financial industry is the co-founder and partner of the cryptocurrency company Crypto Oracle, Lou Kerner. He is confident that cryptocurrency will succeed as Amazon did, and Bitcoin investors should calm down and follow the lead of technology giant, which lost 95% of its value in two years but has now become the world's largest online store by market capitalization.

According to Kerner, the current weak position of cryptocurrency in the market can be explained by the fact that digital assets lack confidence. Meanwhile, the expert calls Bitcoin “the greatest savings that ever existed”.

“It should surpass gold over time. It won't happen overnight”, Kerner predicts.

What is more, it is foolish to sell an asset that has already lost 80-90% of the cost. The compensation will be scanty, and with long-term retention, there is a chance that, although not soon, the asset will restore its value and the investor will be able to recoup the investment. On the other hand, even leading high-tech companies took 10 - 15 years to update their historical highs after the collapse in the early 2000s.

Investors who are well versed in digital assets can now try to purchase some of them at a relatively low price.

One of the reliable ways to eliminate the risk of losing capital is to invest in new promising projects while their assets are sold at a starting price.

It can also be an excellent option for diversifying investment assets that have a real product or service.

Reasons why Bitcoin is not a bubble

Bitcoin bubble

We selected the top 5 explanations why the main cryptocurrency cannot be considered a bubble.

  • Legal exchange

One of the most serious problems of Bitcoin so far has been a cautious attitude on the part of legislators and financial regulators. They are confused by its decentralized nature and connection with criminal elements in the darknet at the dawn of its existence. However, the position of the authorities is gradually changing. In April 2017, Japan officially legalized Bitcoin as a means of payment, which immediately spurred its cost and degree of distribution in the country.

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In the Philippines, people are increasingly using Bitcoin for low-cost remittances. The country stated that it would regulate Bitcoin, thereby giving the cryptocurrency legal status and approving the use of remittances. In the near future, Bitcoin may become a full-fledged means of payment in these countries. The trend is likely to continue, given the growing demand for Bitcoin from investors and users of online payment systems around the world.

  • Demand from commercial structures

In the early stages of the Bitcoin existence, it was used as a means of payment by only a few shops (usually owned by cryptocurrency enthusiasts). Currently, the situation has dramatically changed. Bitcoin can be used with leading technology companies and online stores. The rapid rise of the Bitcoin price, media attention, and acceptance in countries like Japan have led to increased interest in cryptocurrency from commercial structures. Arguments in favor of Bitcoin in online trading are very strong: the commission is lower than on credit cards; the risk of fraud with the return of payments is zero. Cryptocurrencies allow you to reach customers in regions with poorly developed banking infrastructure and attract new, tech-savvy customers. The more Bitcoin will spread, the higher and more stable will be the demand for digital currency. And given its limited distribution in the trading environment, the opportunities for growth are truly immense.

  • The preservation of wealth in countries with distressed economies

Another reason why Bitcoin is not a bubble is that cryptocurrencies are in high demand in economically disadvantaged countries. For example, in Venezuela, Bolivia, and Zimbabwe, Bitcoin is used to preserve savings and acts as an alternative means of payment in the context of a rapid devaluation of national currencies. This is evidenced by the increase in trade volumes, inversely proportional to the value of local currencies and economic growth in problem regions.

A look inside Bitcoin allows companies and people in countries with strict capital controls to receive remittances from abroad. In other words, wherever there is a crisis in the economy, the demand and distribution of Bitcoin are growing.

  • Bitcoin has become known relatively recently

2017 was the year when the public first learned about cryptocurrency. If you asked any passerby about Bitcoin five years ago, he probably would have looked with bewilderment. Today, most people have heard of Bitcoin, and some even know that it costs more than gold. Now that Bitcoin has gained popularity, the potential demand for it from new investors is huge. Institutional investors also have started to think about investing money in Bitcoin and other digital currencies.

  • The number of Bitcoin is limited

Finally, another key reason for such a high cost of Bitcoin is that growing demand is facing limited supply. The cryptocurrency was designed in such a way that the maximum number is 21 million. In addition, the rate of creation of new coins decreases with time. Thus, the growing demand for digital currency is faced not only with a limited amount but also with a constantly falling supply. Apparently, the debate about whether Bitcoin is a bubble will continue. However, comparing cryptocurrencies and shares of Internet companies should not be done given the serious fundamental differences between the two classes of assets.

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So, is Bitcoin a bubble or not?

“Bubble or not” logo

It is logical that everyone who enters the cryptocurrency market shows some caution, especially when it comes to investment and trade. At the same time, one cannot deny the innovations brought by Blockchain technology itself.

The consequences of the Dotcom bubble not only showed how dangerous bubbles can be but also demonstrated that truly innovative and technologically advanced companies can survive the crisis. For example, Amazon and eBay, which were able to stay afloat despite all market fluctuations thanks to the creation of new ideas and a good grip.

Of course, the situation with cryptocurrencies and Dotcom will be different. Businesses implementing blockchain technologies should be guided by the experience of Dotcoms, forming their own strategy.

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