Just as bitcoin and cryptocurrencies like Ethereum started to gain more attention on the mainstream arena, hype regarding lesser known crypto tokens began building up, which led people to buy them in hopes of getting profits in the future.
Just like the initial public offering (IPO) of a company, crypto companies started doing Initial Coin Offerings (ICO), an IPO equivalent in the crypto space. Since people started buying newer assets being offered in the ICOs as a result of FOMO (fear of missing out) relating to cryptos, fraudulent elements in the society started to take advantage of this situation in the form of fake ICOs.
As a result of fraudulent ICOs, a huge chunk of the investor community got duped into spending enormous capital, buying useless crypto tokens. The “ICO Boom” thus resulted in a plethora of scams, scarring the reputation of the crypto space to a significant extent, with many investors possessing fake cryptos in their hands.
The major reason behind the prevalence of “scam coins” in the crypto space, was the lack of regulation. There was no regulatory body overseeing the tokens being issued, nor was there any proper ownership proof of an asset. As crypto scams got into the notice of regulatory bodies in the form of Securities and Exchange Commission (SEC), the ICO boom thwarted, leaving accredited investor community extremely dejected at the uncertain nature of the crypto investments. And this was the point where security tokens stepped in.
Security token Offerings, or STOs, provide the same mechanism of selling crypto tokens to the masses but this time around, the entire process is backed by a regulatory body and the investors are ensured of their ownership. STOs essentially provide securities, a tradeable financial asset, to the investor but in digital form. Since the entire crypto ecosystem is based on the nascent technology of blockchain, all the inherent features of this technology such as transparency and trustlessness also get trickled down to the hands of the investor as security tokens are built using blockchain. A trusted decentralized crypto investment system is thus established crumbling the uncertain and fickle framework of ICOs. A new fundraising protocol for cryptos that far outweighs ICOs in terms of being credible and trustworthy.
In order to get expert perspectives on how security tokens are different from other crypto tokens and what benefits do they bring to the investor community, BlockPublisher recently got in touch with different personalities working in this space. The following expert opinions give one a clear insight into how security tokens change the crypto investment paradigm set by ICOs.
“In the world of crypto, security tokens, compared to regular (or utility) tokens, are valued based on actual, tradable assets. Like securities in the conventional world of finance, such tokens are typically subject to government securities and exchange regulations.
For the (crypto) investor community, we see the securitization of assets as a push towards accuracy, transparency and truth through a trustless system would benefit borrowers, lenders, and investors worldwide. Having countless currency tokens on the market is of course not sensible, so we believe that security (and utility) tokens can empower the next generation of global e-commerce, notably peer-to-peer marketplaces.” – Dr. Michael Yuan, Co-Founder and Chief Scientist Cybermiles
“First of all, security-tokens are digital analogues of securities that certify ownership and give owners the right to realize their investment interests such as shares rights, dividends, profit share, etc. The security tokens turnover is performed in accordance with the legal provisions of the financial regulators of different countries, for example, the Commission on securities and exchange Commission (SEC) or the Swiss Agency for supervising financial markets (FINMA).
Security tokens do solve one of the major ICO issues – the lack of guarantees of compensation in case of project failure or fraud. In addition, they serve as a tool for hedging risks in such an investment strategy as Simple Agreement for Future Tokens — SAFT. This model is considered to be more secure, as it gives accredited investors the opportunity to purchase tokens after the project launch, but it is still associated with certain risks: investments are not directed to tokens, but actually in the promise to receive them in the future.” – Alex Montana, Cellframe.
“Security tokens are able to provide a number of features reassuring to investors that ICOs have not. Backed up by tangible assets and legal regulation, the investor community now has the opportunity to invest in digital assets without the risks associated with the ICO boom. Whereas regular tokens derive their value simply from platform utility and hype, a security token may represent an equity share, bond or other external asset.
The benefits for investors are greatly improved with this kind of token. The backing of a financial authority and associated legal rights provide a layer of accountability when dealing with the issuer. Transparency, compliance and in some cases improved underlying asset liquidity are granted to all investors in an STO. The unease and mistrust that came with the repeated and all too common scams of the ICO period can now be swept aside.” – Dr. Mervyn G. Maistr, CEO & Founder of Konfidio
Security tokens solve the innate uncertainty issues regarding crypto regulation to some extent, but there is still a quagmire of other areas which need to be addressed by the crypto community so that a better trust relationship between the public, institutions and blockchain is established. The crypto and blockchain revolution is just a decade old at the moment. It is poised to replace the centuries-old system of banking. Just like every other technological innovation, it is going through its evolutionary phase. As more evolutionary phases like the replacement of ICOs with STOs take effect, things are expected to get better for blockchain and crypto overall.
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