The ICO boom, together with Bitcoin and other altcoins’ price explosion in 2017 rode the success of Ethereum, the go-to platform for a majority of blockchain projects. However, the regulatory concerns of authorities like the SEC over a number of fraud incidences has put a question mark over the future of ICOs. Complement this with falling cryptocurrency prices and you have an entire year that has been bearish at best.
The apprehension of the crypto industry over impending regulatory protocols has forced companies to look at a novel, more compliant process of fundraising – STOs, or Security Token Offerings.
Can STOs be the remedy for the crypto market?
When an institution like Nasdaq says that STOs “will take center stage in 2019,” you have to take notice. Experts project that the tokenized assets market will reach $24 trillion by 2027. This is because security tokens combine the goodness of being inherently compliant as well as being asset-backed. They offer real ownership of an underlying asset – shares, bonds, real estate, art – rather than a promise of use of services on a platform that may or may not be developed completely in the future.
As was the case in 2017 where more than half of the ICO projects fizzled out after raising funds, even in 2018, an estimated 58% of all ICOs failed to raise capital, disappeared with investor money or simply refunded it back citing an inability to go through with the project. ICOs often puts the entire responsibility on the part of the investor and in principle does not put any accountability on the company issuing tokens. This creates an uneven process with zero corporate accountability and investor protection protocols in place.
In an unprecedented move last month, SEC — the US regulatory watchdog that had so far been on the sidelines throwing its weight around and talking about impending regulations, forced two crypto startups to register their ICOs as security offerings. Many experts believe that the SEC is building its casebook that will eventually help it create additional regulations for ICOs.
In a public statement that is bound to clear the air on the SEC’s stance, it said that “there is a path to compliance with the federal securities laws for startups issuing tokens, even if issuers have conducted an illegal unregistered offering of digital asset securities already.” The SEC’s stance clearly means that past ICOs will be targeted to comply with security laws. This also creates a precedent for all future token offerings. This is one of the main reasons for companies looking at STOs as a remedy to the current problems in the crypto market.
Why STOs are the “in thing”
Experts are bullish on STOs. “Companies looking to raise capital benefit because they can now easily seek funds from investors who are located outside of their own legal jurisdiction, and it protects investors because their equity is now guaranteed by a smart contract,” says Aaron Wolko, Founder of Green Diamond Ventures.
Recently, Coinbase, the largest cryptocurrency exchange in the US announced that it was in the process of getting regulatory approval “for offering blockchain-based securities under the oversight of the US SEC and FINRA.” Asiff Hirji, President and CEO of Coinbase said that “Ultimately, we can envision a world where we may even work with regulators to tokenize existing types of securities, bringing to this space the benefits of cryptocurrency-based markets — like 24/7 trading, real-time settlement, and chain-of-title.” This comes as a major announcement for the crypto world when a major player has taken the regulatory path to compliance.
Pros and Cons of an STO
While everyone is going gaga over STOs, let us step back to understand what their cons are vis-à-vis their pros. While everyone is harping about their advantages like low barrier for entry for small companies, greater flexibility for businesses, ability to attract a large pool of global investors, in-built compliance and control of ownership; there are certain disadvantages as well that should be understood.
“The STO market is still young, with the first STO completed only a couple of years ago. There hasn’t been extensive testing and this increases the risk for both owners as well as investors. The regulatory dynamics aren’t set in stone and authorities can step in to change the legalities surrounding STOs if a bad actor finds a loophole,” says Anton Dzyatkovskiy, Co-founder of Platinum. A company that wishes to run an STO requires a platform to create and manage security tokens. Also, the compliance requirements to run an STO are very complex and require expert assistance.
Important developments are happening in the crypto world that will see a more structured outcome for the entire business lifecycle – fundraising, project development, equity sharing, expansion. STOs are a step in the right direction that will bring credibility to the field and also attract global investors, creating an influx of capital fueling further growth.