by Trent Rhode
In part 1 of this series, we looked at the emerging class of blockchain-based fundraising vehicles called Security Token Offerings (STOs) and explored the difference between STOs and Initial Coin Offerings (ICOs). We’ll take a look now at just how STOs might be able to pick up where ICOs left off before their recent market crash and explore more of the shortcomings of ICOs that likely led to this crash.
To start with, traditional investments must meet very specific requirements in the information they share with investors (e.g. risk disclosures, detailed timelines, financial projections, precise descriptions of how money will actually be used, etc.). As an investor, you don’t have to read it all, but it’s nice to know it’s there, and to at least skim through the important stuff.
In contrast, white papers, the main document associated with ICOs, are more like promotional material than business plans: short on detailed financial projections, actual plans, and other useful facts and long on hyperbole and (sometimes) not particularly useful technical information.
Add to this the facts that, according to statistics from research performed by Satis Group LLC, up to 81% of ICO projects may turn out to be scams, and only 8% are successfully traded on exchanges.
Sure, the few cryptocurrencies that have real utility may be… well, useful, but that doesn’t mean even they are good long-term investments unless their demand is certain to go up. Even then, blind speculation has already driven the price of such tokens up so much that no one can say for sure what price they will settle at.
When awareness begins increasing about these issues, it may very well be that we will see an exodus from many so-called utility tokens and into security tokens that offer investors well thought out business plans, investor protections, and real, tangible value.
While regulation may be somewhat of a dirty word in the cryptocurrency community, it does bring with it a lot of potential for more mainstream adoption of cryptocurrencies and for more money to enter the space, particularly from institutional and larger investors who require this legal certainty.
This, in turn, could help popularize security tokens and STOs, bringing them into the mainstream where more retail investors could also get involved.
To be sure, regulation certainly has its downside. As tokens and exchanges begin to be more tightly regulated, there is a threat of overregulation, and hijacking of a fintech decentralization movement by big business, financial institutions and government.
If decentralized organizations can successfully navigate the emerging regulatory environment, though, there is an opportunity for creating a whole new, much more legitimate and more decentralized way of raising funds.
Some of the benefits that security tokens can bring to traditional securities markets include:
- Access to more investor capital when STOs become popular (Americans included, unlike in most ICOs these days)
- Dealing with smaller amounts and fractional ownership are easier, making it possible for smaller investors to get in on the action
- Potential for bypassing venture capitalists and investment banks
- Less intermediaries and more automation = lower fundraising costs
- Better security if handled properly
- 24/7 markets
- Nearly instant settlement
- Automated compliance (e.g. automated Know Your Customer and Anti Money Laundering mechanisms)
- Potential for automated, semi-automated and evolving interactions between assets
- Easy access to affordable contract templates for individuals and organizations
- Potential to create more diverse types of enterprises and technologies by offering people from all walks of life the ability to more easily pool their money to invest in things wealthy individuals or institutions are not interested in. (e.g. a community investing in a sustainable energy infrastructure counter to the interests of nuclear or coal power players in a region who may control a lot of the capital and political clout).
Despite all these advantages for STOs or any other type of digital securities, potential alone won’t lead to widespread adoption of blockchain-based financing. This may require both addressing the problems of substance-lacking ICOs to cater to early adopters, and the issues that bringing more large investors from existing securities markets could bring.
In part 3 of this series, we’ll take a look at some of these dangers that this emerging class of investments must overcome if they are to create a more fair and decentralized investment mechanism to challenge the current venture capitalist and institutional investment model that dominates finance.
Author BioTrent is a professional writer and editor with over 10 years of experience writing on various topics. With a background and education in Journalism, and a passion for decentralization of global power structures, his writing has recently focused on making blockchain and cryptocurrency related topics easy to understand at Unhashed.com, but he also enjoys writing about ecology, agriculture, sustainability, health and wellness, homesteading, business, economics and finance.