Today it’s all about security token offering or in short STO. We will be discussing different aspects of STO and will try to give you a clear idea about it. So, if you are interested in STO, let’s start.
First thing first, the definition. It is a process like Initial Coin Offering where one can exchange money for coins or tokens that is an equal amount as of their investments. The only difference being that STO provides tokens that are linked with a crucial investment asset in a way like bonds, stocks, real estate, or other similar funds.
Let us have some knowledge about the security of traditional finance. Securities represent ownership of a company like stocks. Here the owner can have perks from capital gains on the assets or can get returns in exceptional cases. The owners can be from private, public companies, but the common part is that they are empowered to some form of proprietorship of the company.
Securities play an essential role in finance, and it is strongly connected with STO
in their potential to be leveraged for raising funds. Companies can enhance a tremendous amount of sum via Public offerings, and the government can even issue municipal bonds to boost funds.
It is possible to trade Public securities on major stock exchanges and can be shifted between investors on secondary markets as assets.
So, why should one use STO over others? Here is the list of the advantages:
The space of ICO is chaos. There are many cases where people were scammed, and many more are stuck with useless tokens. In STO, they follow the proper regulations and allow cryptocurrencies to recover some credits.
• Improving finance:
Security tokens makes it easier to provide services at a lower cost, whereas the traditional finance systems are very slow and also pretty expensive.
Security tokens come with the advantage of programming, which makes it able to be enforced by smart contacts.
• Free Market:
Security tokens are like birds and rivers. They are not bounded by the boundaries set by countries or any such local regulations, making it a free-flowing market.
The traditional security deals are limited to only the local individuals. But as the market in security token is free-flowing, so it is open to anyone and everyone who are and can use the internet. So, in general, the number of investors in security tokens are much higher.
• Reduced rate of Manipulations:
As the market is free and is easily accessible to anyone with the knowledge about security tokens. So, the number of intermediaries is cut down to a considerable amount, which reduces the chances of institutional manipulations, making it cheaper and better place to invest. As the theory and history suggest, the more people involved, the more chaotic a situation gets. As security tokens are almost in direct relation with investors, so these chances are also reduced.
Security tokens are traded on specialized security exchanges. This is the reason the investors have a more convenient way to liquidate their investments.
How to make sure if a token is a security?
The answer lies in the Howey Test. The token has to pass the Howey test to get recognized as a security. The Howey test have the following criteria
1. It has to be an investment of money.
2. The investment is in a joint enterprise.
3. There must be a prospect of profit from the work of the promoter.
How can one participate in STO?
If a company wishes to issue security tokens, they can do so by taking help from multiple market participants that includes
• Issuance Platforms:
The company can formally issue their tokens to the investors through an issuance platform. Developers for issuance platforms also function on standardized token interfaces that hard-code regulatory parameters into token contracts.
They are famous for storing digital tokens> Custodians often have a partnership with exchanges or issuance platforms.
Exchanges helps the investors to trade security tokens, empowering them with better access to their capitals, boosts secondary liquidity and equalized investors access to securities.
Generally, investors do not opt for them, but if someone is hiring a broker, they help them with areas and ways to invest in security tokens.
For conclusion, I will say that since early 2018, security tokens have emerged as a sensible use case of blockchain technology. And security tokens are the right combination of conventional financial instruments and digital assets.