What is Security Token Offering: STO Explained for Beginners

Hey there! My name is Nikolay Krasheninnikov, I am a Backend Developer at Platinum, the biggest crypto market player in the league. We provide STO and ICO marketing strategies and help startups and big companies to become more and more successful.

Security Token Offerings have become the center of attention for most of the people interested in the blockchain industry in general. Cryptocurrencies have become very popular, people have noticed their growth and a rising interest in them is experienced for a while lately. If you are familiar with cryptocurrencies then you must have already heard about ICOs and STOs. Our goal in this article is to make you familiar with both of these concepts, showing you the importance of each one and the reason why they are needed so much. Indeed, STOs have become very popular, and their popularity is continuing to grow in 2019.

So, what are STOs and ICOs anyway? What do you need to know anything about them? What are their main functions and differences? How do Security Tokens work? All of the answers to your questions will be explored in the further part of this article. If you are looking to getting in-depth information about Security Token Offerings and Initial Coin Offerings, then you are on the right track for finding out all that you need to know. 

Alt text: bitcoin cryptocurrency token

What are Security Token Offerings?

Before getting deeper into what the functions of STOs are, it is essential that its concept is clear to you, and you have that fundamental understanding about Token Offerings. Thus, what is a token? What are security tokens? What is a crypto token? The role of a token, or a security token in general, is not one and specific. When talking about token there are several functions that they may have. The security token definition can include the representation of the right to vote in organizations, they can represent a value, a stake, but not limited. They have become a huge leader in the market, and you are about to find out how this happened and why.

Alt text: Security on a screen for Security Token Offering.

When you possess a token, this means that you have a certain asset or utility within a certain organization, for instance. Consequently, you may have already understood that a Security Token Offering is something very similar to financial securities. If you have assumed this, you are not wrong. However, there is one thing you need to keep in mind: the main difference in regular financial securities and Security Token Offerings is that the ownership of STOs are confirmed through the blockchain.

Well, this is not the only difference that exists between STOs and regular financial securities. There are many advantages that STOs may provide compared to financial securities, such as the elimination of a middleman when doing transactions, however, this part will be discussed a little later, since it is very debatable.

Types of Tokens (utility security)

Before going to the debatable part about the advantages of STOs and why they have become so much popular and trendy lately, let us understand what types of tokens actually exist and what their differences are. In general, there are 2 types of tokens that are recognized: utility and security.

Utility Tokens Security Tokens
Utility Tokens are used or
funding the development of
cryptocurrencies, which in the
future can be used for the purchase of certain goods or services.
Simply put, utility tokens provide
their users with a
particular product or service. 
As we have already mentioned
previously, Security Tokens obtain
their value with the help of certain assets that are present as a backup. These assets are external,
and tradable.
Unlike Utility Tokens, there are
certain regulations that
Security Tokens are under, which
will be discussed later with more
detail.
The rights provided by
Utility Tokens are the right to vote and the right to use the network.
The rights provided by
Security Tokens crypto are the right to vote within an organization,
stake, and value.

What Regulations are STOs under?

We have discussed that Security Token Offerings are known to be under certain regulations, but what the regulations exactly are have not been mentioned. Security Tokens have the feature of being safe, in contrast to Initial Coin Offerings, which will be explained in detail in the further part of this article. The reason why we mentioned safety is because this is the reason why regulations exist in the first place.

After the 1929 stock market crash the SEC was formed with the aim of protecting the investors. The SEC is present in regulating the cryptocurrencies as well. In order to start an STO, the registration process of IPOs are needed to be completed. Thus, there is an entry barrier which did not exist at some point when STOs where not introduced in the market yet. Thus, the government security regulations need to be followed in the blockchain industry as well starting from the introduction of STOs. Is this good news or not? Well, it depends on who is asking the question. Surely, this would be harder for businesses as they would need to be qualified enough. On the other side, it is a lot more beneficial for investors as they can be sure that everything is being regulated for safety reasons.


Securities and Exchange Commission (SEC)

Regulation D

Regulation D is what we understand under an offering which is available for accredited investors. Under this specific regulation, the issued securities must be locked up for a year. Also, with regulation D, you can be sure that all the information that has been provided in the solicitation is true.

Regulation A+

With the help of this specific exemption, the creator will be able to provide an SEC-approved  security to those investors who are non-accredited. This is a huge priority but qualifying for it is, in fact, very hard. Due to this difficulty, the Regulaotion A+ would be costly and of great difficulty for issuance.

Regulation S

This regulation is present in case if an offering is outside the borders of the United States. Thus, this token security is supposed to follow the regulations of the specific country that the particular country that they are going to be executed.

What are Initial Coin Offerings?

By now you should have already learned that the ICOs have an advantage over STOs in the sense that they have no entry barriers and basically everyone can enter the market. This is true, but this may be the reason why Initial Coin Offerings have experienced a downfall in a very short period of time. Yes, they have been very popular, but they were the only option present. Unlike Security token Offerings, Initial Coin Offerings have no regulations. Thus, they are very similar to STOs but the security is absent here which is a problem for investors because they do not know whether a certain offering is trustworthy or not.

A

What are the Advantages of STOs?

Now that you have all the understanding about a security cryptocurrency token, STOs, we should make their advantages clear for better understanding. You might have already guessed some advantages that Security Token Offerings may have but the most important and major ones will be discussed below:

1.   Tokenization of assets.

We have already discussed that Security Token Offerings are used for fundraising with the backup of an asset. Simply put, this is a tokenization of an asset. You may think that this is a very similar function to IPOs and there is not much of a difference. Well, besides the obvious advantage of fundraising using token cryptocurrency, another advantage is that many fees are avoided as well as the usage in general is much easier than when it comes to traditional securities.

2.   Freedom of trade.

This is one big advantage which enables trade 24/7. This is something that hasn’t existed before and you must agree it will make people’s lives so much easier. Trade globally will be enabled and no barriers such as time will exist anymore.

3.   Fractional ownership.

Let this term not confuse you. Fractional ownership is like diversifying a portfolio in the traditional financial security market. This is one other thing that makes people’s lives easier. Think about it. So many high amount of payments will be avoided just by being able to split an ownership into some amount of fractions.

4.   Absence of a middleman. 

This one is a little debatable. The truth is, yes, there is no middleman that we have been so much used to a few years ago. The absence of a middleman means that everything between a buyer and a seller is done without the interference of anyone else. This means freedom. However, people may argue saying that this is too much responsibility put on buyers and sellers. This is true, but we believe that everything can be handled by buyers and sellers if enough information is provided to them.

Final Thoughts

Security Token Offerings have become very popular especially after the downfall of the Initial Coin Offerings. People have experienced a lack of trust when the Initial Coin Offerings were present which is why a token security was under high demand. We have already explored what are tokens and their differences. This should have helped you understand the importance of a security and a regulation in general.

Tokenized securities have helped investors very much, they have built trust for them which makes everything much easier. In other words, a security token of a cryptocurrency is a guarantee of safety of people’s assets, according to its regulations. The specific regulations that guarantee a token’s security have been discussed in the previous section as well. Crypto securities although make the lives of issuers harder, they are very beneficial for investors. Thus, by now you should have a clear understanding of what tokens of cryptocurrency are in general and what their functionalities are as well.

Thank you for reading this article!

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