Blockchain became mainstream in the year 2009 with the advent of Bitcoin. The cryptos as well as other blockchain-related financing earned the reputation of being highly volatile and speculative. But there is a wide concord regarding the value of blockchain technology along with the other forms of distributed ledger technology in the field of finance.
A number of giants in banking and technology, like Square, JP Morgan, and Facebook, have already entered into the blockchain space. In the time to come, it is expected that more names would be associated with the blockchain technology as it starts to play an ever-growing role in payments systems, including stablecoins & CBDCs, and the context of liquidity, through asset tokenization via STO or security token offerings.
Concept of Initial Coin Offering or ICO
Whenever we hear the term tokens, ICO or initial coin offering is the thought that comes to our mind which is a method for raising capital for various crypto projects and came into fame in the year 2017. So, let us first understand the concept of ICO before proceeding into security tokens and security token offerings.
ICO, short for Initial coin offering or ICO is a concept that is similar to IPO or initial public offering. Both of these offerings allow start-up companies as well as entrepreneurs to raise funds. In an IPO, securities are issued in return for investment. On the other hand, tokens or coins are offered in initial coin offerings.
The process of offering ICOs by a company is easy, but lack of regulation has led to fraudulent illegal airdrops, crowd sales, and outright scams. The craze of initial coin offerings began in the year 2017 which in turn corroded blockchain’s and tokens’ reputation for a short span of time.
But through these unstable times, the utility of blockchain as a transformative technology remained quite strong. The blockchain industry and distributed ledger kept low, on the lookout for an improved combination of technological advantages to bring about newer methods as well as value to legacy security offerings. The convergence of these two brought together innovative tokens in the form of a “security token.”
Understanding a Security Token
A security token is nothing but a unique token that is issued on either a permissioned or permissionless blockchain. It represents a stake in any external asset or enterprise. Different entities such as businesses, governments, etc. can issue these security tokens that can serve the same purpose as bonds, stocks, and other equities.
What are Security Token Offerings?
STOs or security token offerings, which are also sometimes referred to as tokenized IPOs are a type of public offerings. Here tokenized digital securities which are also known as security tokens, are sold in security token exchanges, or cryptocurrency exchanges. These tokens can be used for the purpose of trading real financial assets like bonds, equities, and fixed income. It uses a blockchain virtual ledger system for storing as well as validating token transactions.
STOs are much more vulnerable to regulation because these tokens are classified as securities and hence represent a more secure alternative to investment as compared to initial coin offerings or ICOs that have been associated with a number of fraud cases & schemes. Moreover, initial coin offerings are not held in any traditional exchanges, and hence can be a cheaper source of funding for small as well as medium-sized businesses when compared to an IPO.
A security token offering on a regulated stock exchange has the capability to deliver high efficiencies as well as cost savings. By the end of the year 2019, security token offerings already found a wide range of applications including the trading of company stocks listed on NASDAQ, FIDE’s official broadcasting platform of FIDE, the pre-IPO of World Chess, and the creation of own STO market of Singapore Exchange that was backed by Japan’s Tokai Tokyo Financial Holdings.
Common Types of Security Token Offerings
Here are a few types of security token offerings that are very common in use.
Debt Tokens – These tokens represent a loan for a short-term on an interest rate in the total loan amount given by the investors to any firm.
Equity Tokens – These are almost the same as the traditional stocks but there are differences in the process of recording and transferring ownership. Traditional stocks are recorded in a database and ownership of shares is printed on certified paper certificates. Equity tokens on the other hand and recorded on an immutable ledger and maintained by a vast network of computers connected globally.
Utility Tokens – These tokens provide the users with access to any product or service. Utility tokens can help companies raise funds.
Asset-Backed Tokens – These tokens represent ownership of a wide range of assets such as real estate, art, carbon credits, or commodities. Since blockchain is immutable, secure, and transparent, it plays a vital role in enabling a trusted record of transactions.
Benefits of Security Token Offerings
Here are some classic benefits of security token offerings.
- The tokens are transparent in nature because they are based on the blockchain network.
- They are highly divisible.
- The security token offerings come with enhanced liquidity.
- Tokens can be settled instantly.
- They are cost-effective in nature.
- Fractional ownership is possible with these tokens.
- They are available round the clock.
Is 2021 the Year of the STOs?
Blockchain is undoubtedly one of the digital technologies that is growing at a rapid pace in recent history. Blockchain’s revolutionary decentralized model has proved to be extremely useful and hence is used by various industries in a range of applications. A part of blockchain’s popularity is derived from cryptocurrency which is now more than a decade old after the first established cryptocurrency was launched in the year 2009.
When Bitcoin came into existence, it was only a currency but at present, it is a cryptocurrency. The rise of ICO’s implies thousands of cryptocurrencies are existing with the coins generated by ICOs are referred to as tokens. The security tokens have already been on the rise over the past few years and the year 2021 is very likely to focus more on these tokens which undoubtedly provide one of the most encouraging cases for blockchain technology.
Future and Growth of STOs
The value of blockchain comes in the form of security, permanence, and transparency, each of which is responsible for integrating, trust, confidence, safety, soundness, and market efficiency. It has already been incorporated into the new standard for public security offerings with innumerable advantages. In the year 2020, the market cap of security tokens experienced about 500 percent growth and stood at 449 million dollars. In the month of January 2021 alone, the security token infrastructure companies raised over thirty million dollars in capital.
Another report by Plutoneo predicts a compound annual growth rate of about 85 percent in the tokenized market in the European Union from the year 2018 to 2024. But it is to be remembered that security token offerings are still a new concept since the infrastructure around these tokens is still at the budding stage. Nonetheless, these tokens are here to stay with more security tokens being launched soon since blockchain technology aims to bring about a revolution in the financial space, and hence the market of STO is certainly the one to watch out for in the time to come.