Crypto Glossary

Posted on September 13, 2021 in
Glossary

Security Token Offering (STO)

STO (security token offering) is an abbreviation for security token offering, which is a contract to invest in an underlying investment asset such as stocks, bonds, mutual funds, and real estate investment trusts. The goal is to connect blockchain technology with the needs of regulated securities markets in order to increase the liquidity of assets while also increasing the availability of funding. STOs are generally the issue of digital tokens in a blockchain ecosystem in the form of regulated securities, with the tokens being traded on the stock market. With the use of automation and smart contracts, the blockchain ecosystem helps achieve the securities regulation objectives of disclosure, fairness, and market integrity, while also fostering innovation and efficiency.

What is Security Token Offering (STO)?

Security Token Offering is similar to an initial coin offering (ICO), in that an investor swaps money for coins or tokens that reflect the investment. STOs, in contrast to initial coin offerings (ICOs), go a step further and distribute tokens that have the legal character of securities. Shares, bonds, Real Estate Investment Trusts (REITs), and other funds are used as underlying assets, and they are connected to the underlying asset.Β 

As a result, security token offerings are used to distribute securities. Typically, these tokens are fungible, tradable financial assets that have a fixed monetary value, such as a portion of a piece of real estate or a share in a corporation.

A security is a fungible, negotiable financial instrument that contains some sort of monetary value, which is an investment product that is backed by a tangible real-world asset such as a corporation or a piece of real estate. As a result, a security token reflects the information about the ownership of an investment product that has been recorded on a blockchain. Ownership information is put on a paper and issued as a digital certificate when you buy in traditional stocks, for instance. For security token offerings, the procedure is the same, but it is recorded on a blockchain and distributed as a token. 

Because of its overlap with both cryptocurrency initial coin offerings (ICOs) and the more traditional initial public offering (IPO), security token offerings (STOs) might be considered a hybrid approach between the two ways of investment fundraising.

ICO vs STO

STOs are backed by assets and operate in accordance with regulatory control. However, the majority of initial coin offerings present their tokens as a utility token that grants consumers access to the native platform or decentralised apps (DApps). They believe that the coin’s primary function is to be used, rather than to be invested in. As a result, initial coin offering (ICO) platforms are exempt from some legal frameworks and are not required to register or adhere to the stringent oversight of regulatory organisations. 

As a result, the barrier to entry for firms wishing to start an ICO is significantly lower, as they do not have to undertake all of the necessary compliance work up front. Furthermore, they have the option of selling their coins (and therefore raising cash) to the general public. 

When launching a STO, it is considerably more difficult to do so since the objective is to issue an investment contract under the provisions of securities legislation. As a result, these platforms will be required to perform preliminary work to ensure that they are in compliance with applicable rules. In addition, they would generally only be allowed to obtain capital from accredited investors who had themselves met a set of criteria.

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