The past decade has seen a handful of organisations and firms move their businesses onto the Blockchain and the Crypto space to explore the available potentials it tends to offer onboarding projects. This reoccurring practice birthed different crowdfunding mechanisms practised by new and existing businesses in the crypto space today.
After the mercurial rise of ICOs in 2017 and the numerous scams associated with such crowdfunding technique, various government systems sought after measures to curb the menacing act by different businesses on unsuspecting citizens and crypto enthusiasts.
It is also noteworthy that ICOs generated well over 14B U.S Dollars for Blockchain startups since 2017 and that figure continues to increase on a daily basis, leading to more groups and individuals trying to milk the system at the slightest opportunity.
THE BIRTH OF STOs
After increasing pressure from different governments on businesses that intended to raise funds via ICOs, the norms were changed and hugely impacted. STOs widely came into existence in 2018 after several ICO funded businesses had relatably gone down the drain with the pacey crypto bear market that lasted for over 12months.
Even though this crowdfunding system was hugely frowned at by crypto enthusiasts and believers due to the rigorous measures they had to pass to get accredited for a token offering, it was seen as the best possible means to keep businesses and individuals that intended to participate in any crowdfunding in check.
After much consultations and law citations by the SEC on token offerings, strict rules were laid out in 2018 for US citizens participating in any sort of Crowd fundings or offerings (for reference – https://www.sec.gov/ICO). This quickly spread to various other countries and was adopted by different institutions in order to safeguard the interest of their citizens.
WHAT ARE STOs?
‘Security Token Offering’ is a form of public crowdfunding where issued digital tokens are backed legally in real time. In other words, STOs are public offerings where the token issuer mints tokenized assets on the Blockchain with solid backing from any viable government or its institutions.
A security token offering also represents crypto-based stocks that are allotted in the form of tokens with ‘utility’ that meet various requirements stipulated by the government in the issuing country. Such public offerings go through various red-tape measures and their issuers adhere to strict rules that involve KYC/AML checks at different levels of operation.
Notably, after the debut of STOs, the number of presumable token ‘pump and dumps’ scheme by various project teams and other public offering end games by scam artists joining this space has been drastically reduced to the barest minimum.
WHY ARE STOs DIFFERENT FROM ICOs
An STO is different from an ICO because of its underlying asset-backed regularity by the SEC and various governments. It is seen as a regulated financial security asset that complies with the rules and regulations of The U.S. Securities and Exchange Commission and other notable financial bodies.
Initial Coin Offerings (ICOs) on the other hand, are mostly unregulated and the value of issued tokens are based on ‘thin air’ or misconceptions. Most ICO issuers circumvent or bypass financial systems and publicly issue digital tokens that are neither value backed nor have any form of collateral.
Often times, Blockchain projects issue these digital coins or tokens via ICO with promises stated on a project Whitepaper, but that is clearly not enough. Words on a piece of a document are fallible and hold zero substance and it has been proven over time because most projects tweak these documents bit by bit after a successful ICO to suit their taste or new found style.
ICOs also preceded the dreadful pump and dump schemes various projects suffered throughout 2018. Drastic actions had to be taken to curb these actions and an STO was the most convincing system or method Blockchain projects could use to raise funds legally and within the confinement of various government financial regulations.
With the fast changing digital world and all the regulations coming into Crypto, especially with the introduction of Facebook’s Libra project and the recent tweets of US President, Donald Trump on Cryptocurrencies, more tight red tape measures will definitely get shipped into crowdfunding systems at every level.
In a few years from now, expect STOs, ICOs, and even IEOs to be strictly tied to several government bodies and financial security scrutiny with an introduction to a broad range of moving parts that would adhesively constitute crowdfunding at every and any level of public token offering.