In a period of less than 5 years, the global financial market experienced a sudden rise and fall of a an unique trend. ICO, Initial Coin Offering emerged as a trend raising considerable amount of funds in public sphere. Although backed by a technology not popular among masses, ICOs were successful to gain good consideration as an investment opportunity. Ethereum was the first successful ICO raising bitcoins equal to US dollar 2.3 million back in 2014. Starting with Ethereum’s success, ICO became a bandwagon for businesses and enterprises reaching incredible peaks in terms of fundraising. Until January 2018, Filecoin was the ICO with highest grossing funds backed with token sales worth US dollars 257 million.
However, within a year of this bullish trend, by 2019, now ICO reduced itself to a failed buzzword. Although the trend of failing ICOs was quite rampant in the beginning of 2018 as well, the recent market fell to a state that it does hesitate to align ICOs with words such as ‘RIP’ and ‘90% ICOs are failing’. Citing ICOs as a bubble, there were strong criticisms indicating it as a mechanism of scams. This happened because either most of mushrooming ICOs were not backed with adequate technology to support their claims, or they prioritised the objective of rising public fund rather than adding value as a problem solving mechanism. A major reason to this is also the approach of ICO enterprises to align themselves with IPOs.
ICOs are based on crypto tokens and currencies. They are not merely shares with a purpose of rendering profit to shareholders. Most ICOs fail ignoring this fact. While, tokens and ICOs with a purpose of utility are still with much relevance in the market. For instance, tokens like Ripple, IOTA, Steller are serving strong purposes in several industries.
This is where the concept of ICOs is gradually beginning to transform to STOs, the security tokens. A Security token may not be similar to Utility tokens like Stellar or IOTA, they are based on credible securities, bonds, revenue or even tangible assets belonging to the ICO. More importantly, it hits the bullseye solving the most important lacuna related to ICOs, Regulatory Compliances. Since, STOs are based on securities, it is under direct purview of licensing and security compliance authorities.
STOs are gaining a good traction in the financial market for its credibility. There are two primary reasons for this. First, the underlying mechanism behind a security tokens is simply the smart contract which ensures the proportional relation of its value to the value of the asset or securities it is connected to. Thus, they are transparent and simple compared to ICOs, which often require massive information to convince investors with wordy whitepapers and technology jargons. STOs are comparable to cryptographically secured digital representation of share or revenue of the promoter enterprise.
Second, STOs are under the ambit and scrutiny of state laws and regulatory bodies. The technology mechanism behind Security Tokens must align with the security laws and regulations of the state or the country of its origin. Thus, it naturally increases its credibility as an investment avenue.
STO is the connection between SEC and Cryptocurrencies. It provides a legally authorised identity to crypto tokens. From investment perspective, STO is comparable to digital representation of stocks and shares. There is a strong probability of their official adoption across the globe, as digital currency became an irreplaceable development in finance.