One of the side effects of the great popularity that cryptocurrencies experienced back in 2017 was the growth in the number and popularity of initial coin offerings (ICOs). The ICO trend sparked the creation of numerous new coins, many of which have failed relatively quickly. However, many of them are still alive and functional today.
However, the trend was brought to an end for several reasons. Not only did it inspire scammers to come up with fake projects and steal investors' money, but it also brought the US regulators' attention. Before long, the US SEC started studying the coins and announcing that most of them are, in fact, securities, and not utilities as developers were presenting them as. The market crash also helped with stopping the ICO trend, as investors started experiencing losses. Soon enough, everyone was much pickier when it comes to investing, and a lot of projects never gained the support necessary to take off.
After the ICO trend died out, investors and developers alike started searching for their spiritual successor, and it was not long before they found it in form of security token offerings or STOs. STOs are seen as a much safer alternative for investors, as well as a type of coin that respects the regulators' rules, which automatically gives security tokens an advantage in the troubled crypto space.
What are Security Tokens, Actually?
Security tokens are still full cryptocurrencies, similar to Bitcoin in many ways. However, Bitcoin itself is not tied to anything, which makes it difficult to determine its value. It is only as valuable as investors believe it to be valuable, which is why it remains the most volatile coin out there.
Security tokens, on the other hand, are tied to other valuable assets. These assets may include anything, from art or diamonds to real estate and even entire companies. Due to the fact that they are recognized as securities means that they are subjected to securities laws. While this may be a problem for alleged utilities which are recognized as securities, the new security tokens are designed to fit in this category and prosper while doing so.
Thanks to the Securities Act of 1933, securities can be issued to accredited investors, which allows them to take partial ownership in the underlying asset. The trend has been catching on very quickly, and while there were only two official STOs in 2017, there were 25 of them in 2018. In 2019, it is expected that the number of projects hit around 87 STOs.
This is a good thing for startups as well, as limiting offerings to only accredited investors allows STOs to remain within the SEC guidelines, as mentioned. It protects the investors and companies alike, and startups can even benefit by avoiding some expensive registration requirements that are necessary for ICOs.
Are STOs Risky?
The short answer is: probably. Investing in a new company is always a risk, whether it is a crypto startup or a traditional firm. The crypto aspect makes the entire process even riskier. Still, STO supporters have pointed out that there are some advantages, such as an easier method of reselling the coins. However, even when it comes to STOs, there are concerns about scams and schemes which might start appearing in an attempt to trick investors out of their money.
While the trend is picking up, it is growing slowly due to additional concerns regarding regulatory scrutiny. Most of the crypto exchanges are still unwilling to list them, although there are some of them, like Polymath, tZero, or Templum which are offering security tokens. It is likely that there will be more of these exchanges in the future, as the trend receives more attention. Many believe that it will happen at some point in 2019, and while nobody can claim this for certain, STOs are still appear to be a safer and better option than ICOs.