STO is Know as SECURITY TOKEN OFFERINGS, with a sudden rise in the sector of digital currency has garnered a lot of attention of the general public as well as of the people drawn towards investment and is now the most flaming “talk of the town”.
The number of investors is increasing exponentially and it seems that the masses have finally realized the potential of cryptocurrency and are ready to invest in this upcoming big trend and the biggest market change in crypto space. STO is such phrase that is heard during the discussion of digital currency. It is going to be a tremendous game changer and has market opportunities associated to it.
WHAT IS A SECURITY TOKEN?
Security tokens are a practically digitized or online representation of the conventional securities and are backed by real assets. They are not cryptocurrencies.
Breaking the term into two as security and token, security in distinct environs can be defined divergently but, in financial context security any financial instrument that a monetary value or, are any form of traditional investment. Securities are classified as:
- Putting company shares on blockchain (debt, equity or some other derivative)
- Tokenising a physical asset (gold, land, etc).
On the other hand, tokens represent the underlying security which can be an asset or utility( gold, equity, etc) and is then traded instead of trading the security. They can be depicted as the shares that we purchase, but the only difference in the shareholding and STO is that here, we create a token that becomes a proxy for that security (or share, in case of shareholding) and the token is then traded instead.
The security tokens cannot be used as utility tokens which means you can not use them as your platform currency.
ADVANTAGES OF STO?
1. Fractional Ownership: Let’s say you are wanting to invest in a land with high value because of its high ROI or maybe because it is a good investment for your current investment portfolio but, you can not afford to buy the entire asset. So, this asset is then split into multiple tokens and then is sold individually assuring numerous owners of that asset retaining a definite share of the asset (here, land). So here, abounding bodies are owning the same land in fractions by reserving tokens.
2. Increased Liquidity: Tokenised version of the asset makes it much more easy to buy and sell. Therefore, there will be raised and expanded statistics of the buyers and sellers which in occurrence increase the liquidity and fluidity of the market.
3. Programmable Asset: An individual is allowed to programme into the security token and then imply it which increase the participation of the customers not only in buying the products but also the company’s shares in like manner. Meaning, the stocks are available with additional features to existing security. As an illustration, a company might put forward an additional discount on products or services for the customers holding a certain number of their shares or holding shares for certain years as well.
4. 24*7 Trading: Unlike stock exchange being shut on weekends or night time, they are available and trade 24*7 and all around the world hence ensures global capital access. With help of blockchain, an exchange can be made anytime which does the justice.
5. Interoperable Assets: Tokenised securities can be traded in same exchange and can be stored in the same place as they all are tokens after all and does not matter whether they represent a bond or real estate or what so ever.
6. Regulations in Code: Standard orders, rules, and regulations can be coded and are not to be checked and verified manually time and again.
7. Cost Reduction: It implies low entry costs.
HOW IS STO DIFFERENT FROM ICO?
ICO offers the tokens without security whereas STO offers tokens to the investors with security. The huge heterogeneity amidst them is that STO’s being backed and regulated by the real assets, in different circumstances, ICO’s are not centralized by any agency or any government and can be scams. So, when you buy a security token, you are buying a part or share of the project or asset however when you buy an initial coin or a utility token, you are just buying some native coins on an unregulated platform.
STO’s are operated in a transparent manner which is not witnessed in ICO’s as the sources and addresses in ICO’s are hidden and private. The KYC (Know Your Customer) and AML (Anti Money Laundering) are compiled by the issuers making it easier to create a blacklist. Hence, the transactions are traceable, transparent, safe and secure.
High risk in ICO as there are no legally bound documents holding the company or the platform to its word but, there is low risk in STO as they are legally bound contracts between the issuer and the investor.
Investors of ICO have no contribution to the company’s decision making or the way the company chooses to proceed whereas, STO investors benefits by keeping their word in the progress of the company and its policies.