A new study by Node Blockchain Inc., a Toronto-based blockchain company with a focus on asset management, independent research, analytics, and proof-of-stake mining, has revealed that Security Token Offerings (STOs) may be the future of fundraising in the blockchain industry.
So far in the blockchain industry, cryptocurrency projects have been funded by Initial Coin Offerings (ICOs). This revolutionary method of fundraising or crowdfunding allowed people from around the world to invest at the ground floor of a new company or project.
According to www.icodata.io, in 2017 alone there were a total of 875 ICOs that raised over $6 billion. In 2018, there have been 1,183 ICOs that have thus far raised over $7 billion. Therefore, ICOs have clearly been a viable method of crowdfunding to bring new technological ideas to life.
However, while ICOs have raised a great deal of money, the fundraising method also gave birth to a variety of scams and subpar cryptocurrency projects. Many investors lost a great deal of money this year due to abandoned crypto projects and false promises.
Recently, the US Securities and Exchange Commission (SEC) has been cracking down on fraudulent and non-compliant ICOs to set and enforce a better standard in the industry.
In light of the many problems and issues ICOs have presented, Security Token Offerings (STOs) are arising as the new method of crowdfunding and could be the next big thing to spur growth in the industry.
What Are Security Token Offerings (STOs)?
According to the Node Blockchains Inc. study, STOs hold a better potential for fundraising, as the tokens investors receive actually represent stakes in the company and its assets. This differs from ICOs, where investors receive tokens that are essentially useless until the project makes good on what it has promised.
As explained in the study, an STO is a:
Financial security issued in the form of a digital asset; which typically represent ownership rights in an underlying company and/or its assets. This is distinctly different than the aforementioned ICOs, which were ‘Utility Tokens’ or digital tokens that provided access to a project’s future product/service with no tangible claim to an asset or equity ownership.”
In the same way that STOs present a different take on the fundraising method of cryptocurrency projects, the study points out an interesting ideology that differs from what we’re used to in the decentralized blockchain industry.
According to the study, the driving idea of a decentralized blockchain which cuts out the middlemen and key intermediaries such as bankers, lawyers and accountants, custodians and exchanges, is misguided. The study holds that these entities are necessary to improve and create efficiencies going forward, and should be immersed in the blockchain ecosystem rather than cut out by it.
Therefore, the researchers believe the “STO model” will help drive the blockchain industry further by coupling STOs with smart contracts, middlemen, and intermediaries. They believe this will be the most beneficial to both issuers and investors.
Benefits of STOs
As mentioned before, the study believes the STO model is far better than the ICO model, as issuers benefit from lower transaction costs and higher speeds of execution, as well as a wider investor base and better deal terms. STOs also pose benefits for investors, as they benefit from a superior asset universe, enhanced liquidity potential, and fractional ownership.
Although STOs are still up and coming, the researchers believe they will have a significant impact on the growth of the capital markets industry within the next 2 years. They strongly encourage their adoption rather than ICOs, and believe STOs will ultimately strengthen the blockchain industry.
What do you think of STOs? Will they become the new standard for investing in blockchain? Let us know in the comment section below.