Security Token Offerings – The Hype of 2019 and also the catalyst of the cryptocurrency market?

Housewives generating content, Geert Wilders, bananas and managing your own grave. These are just some bizarre examples of focus areas of the many thousands of so-called “Initial Coin Offerings” (ICOs) that took place in 2017 and 2018. Although many blockchain experts initially saw ICOs as a way of setting up a community around an organization, most organizations mainly used their ICO to quickly and easily raise money from investors. Therefore it has become a form of crowdfunding for blockchain projects, where investors can participate for small amounts and receive “coins” or “tokens” in return. According to research from PWC, ICOs raised $10 billion in 2017 and $11 billion in 2018, which amounts to an average of $25 million per ICO. The largest ICO, EOS, raised no less than $4.2 billion.

The combination of the ease with which organizations collected money, the poor due diligence from (mostly new and inexperienced) investors, and the lack of regulation from governments lead to an enormous amount of fraud. Of the many thousands of projects, 81% ultimately turned out to be scams and always almost left the investors empty-handed. Many large investors are calling for measures to prevent scams and to restore confidence in the cryptocurrency market. Many studies confirm this and indicate that regulating the market will also result in a significant increase in investment. This would not only be from current investors, but also from the large established financial service providers that currently wait for this to take place.

The Next Step In Cryptocurrency: STOs

One of the most frequently-cited trends in cryptocurrency for 2019 is the Security Token Offerings (STO), which is also referred to as the solution to the above-mentioned problems and which is expected to facilitate $10 trillion in transactions in 2020. The concept was introduced by PolyMatch and there are now around 150 STOs active worldwide.

When talking about obtaining crypto or token in exchange for financial investment, Security Token offerings are very similar to the well-known ICOs. However, where an ICO does not have any voting rights, has no underlying value and is mainly used for access to an application or speculation on future growth, an STO makes you the owner of a real investment product, which is linked to an underlying asset, such as a share.

Performing an STO is a lot more complex since you have to comply with a lot of regulations and have to go through all sorts of complex procedures in order to comply with these regulations. This is also the main reason why most startups convert their plans for an ICO into an STO. It also prevents a lot of scams as the many background checks almost make it impossible for a scam to survive such procedures.

Why Not A Regular IPO?

Many traditional financial experts wonder aloud why STOs are needed instead of simply continuing to work with regular IPOs that have been used successfully for decades. I personally consider ICOs a great step towards more financial inclusiveness. Where regular IPOs, such as those of Adyen, can only be entered into by large institutional investors, most ICOs can already be supported with just a couple of tens. In addition, it makes it a lot easier for startups to raise money and grow a community, without having to search long for the right Venture Capitalist or bank.

There are a number of differences between IPOs and STOs, which make the latter very interesting. STOs can be traded 24/7 and are settled almost immediately, whereas IPOs can only be traded only during opening hours of the stock exchanges and, as a result, it sometimes takes days before the transaction is settled. By using so-called “smart contracts”, it is possible to pay out dividends and acquire treasury shares automatically. In addition, smart contracts remove many intermediaries and their work, which in turn saves a lot of time and money.

But Why Don’t We Immediately Switch Completely To STOs?

During the training sessions on blockchain and cryptocurrency that I am allowed to give, financial experts often ask me why STOs are not already more well-known and why they are not being used more often. I find Security Token offerings a very interesting tool for protecting the sector from scammers, making it a lot healthier and more trusted. However, it completely contradicts the decentralization for which blockchain was originally conceived. As STOs are under the strict supervision of the financial authorities, such as the AFM in the Netherlands and SEC in the United States, Security Token offerings are a no-go for many blockchain enthusiasts. One of the best-known cryptocurrency exchanges, Binance, has announced that they will not support STOs.

Other big names in the industry, such as Coinbase, state that they will start doing so from the end of this year. Some countries, such as China, have prohibited STOs because they see them as “illegal financial activity”: “I want to warn those who are promoting STO fundraising in Beijing. Don’t do it in Beijing. You will be kicked out if you do it. You can only engage in such activities with the approval of the government” (Huo Xuewen — Hoofd Financial Bureau Beijing)

What Are The Next Steps?

The first Dutch STOs have already been announced, such as van Ockel and Blockport (update: the last one was aborted). Various sites show in easy step-by-step plans how you can establish an STO, such as that of the “inventor” of STOs, Polymath. There are also several nice overviews of STO projects worldwide. Ultimately the investor is the smiling third; they can invest in companies easier, faster, safer and cheaper.

Jan Scheele is active in the web3 (blockchain, crypto, NFTs, DeFi) industry since 2013. Besides (former) CEO of a web3 scaleup and founder of an advisory boutique (working for governments, family offices and several multinationals), he is Digital Leader at the World Economic Forum and Board Member at the Blockchain Netherlands Foundation (BCNL). He is writing, consulting, speaking and training regularly about everything web3, all over the world. Furthermore, he is currently finalizing his book about the rise and global impact of blockchain technology.

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