Over the last few years, we’ve all witnessed the dawn of a whole new financial market. Crypto, beginning with Bitcoin, came from out of nowhere to create (and then destroy) trillions of dollars of new wealth. At the same time, they enabled a whole new form of venture capital – the initial coin offering (ICO), which provided tech startups everywhere a whole new way to access the resources they need to grow.
It’s hasn’t all been smooth sailing, though. From the beginning, ICO markets have been plagued by fraud, uncertainty, and abuse. A lack of government oversight paired with existing financial regulations that are too outmoded to accommodate new technology has created a market that’s more ‘wild west’ than most investors are prepared to deal with. All the while, large, institutional investors have largely remained on the sidelines, waiting for the cryptocurrency industry to grow up. Now, that may finally be happening, as a new kind of token is starting to gain traction with investors.
A Troubled Market
One of the primary issues with ICOs is the fact that they are promissory in nature. That means companies issuing tokens (usually utility tokens) in an ICO to raise capital are doing so while promising investors that they will one day be worth something. That something could be access to a future product or service, or simply the appreciated sale price of the token. They’re similar to traditional stock offerings but without the oversight of a stock exchange (or for the most part, regulators). That hasn’t worked very well.
A study of the ICO market has revealed that as many as 80% of the ICOs launched in 2017 turned out to be scams, and that doesn’t paint a picture of a mature and stable investment market. All the while, government regulators like the US Securities and Exchange Commission have been slow to issue concrete guidelines as to the legal environment surrounding ICOs, sowing further uncertainty. Not content to wait any longer, the cryptocurrency community has fashioned an answer: the STO.
A Better Way
An STO, or security token offering, is the latest vehicle that crypto-businesses have created to engage investors. Security tokens, as the name implies, function like traditional investment-grade securities, in that they represent real, tangible assets, and not just a promise of future returns. That means that investors have some measure of assurance that they won’t be left holding the bag if the venture doesn’t pan out because their security tokens are tied to the real property.
That also means that STOs must be licensed and approved by the SEC or other governing financial bodies (depending on the location), and are subject to the same kind of oversight as traditional stocks, bonds, and other securities. This immediately puts the new STO market on par with existing financial products in terms of reliability and safety. That can only be good news for the crypto industry as a whole, and for individual investors that can now get involved in a whole new investment market with less trepidation.
The Next Phase
Although STOs are still fairly new, they already appear promising enough to be attracting the attention of serious investors and businesses alike. For example, there’s already an STO exchange that has registered with the SEC and FINRA and obtained a broker-dealer license – a first among crypto-exchanges. Other registered exchanges like Overstock.com spinoff tZero and Open Finance are expected to follow suit in the near future. That should provide a stable and reputable environment for STOs to flourish and become a viable mass-market financial instrument. Once that happens, it will be an indication that cryptocurrencies have grown out of their infancy, and into a world of legitimacy and acceptance – and the sky will be the limit from there.
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