What the bleep is an STO?
As Creditum Lite prepares to launch an STO, we thought it would be a good time to explain exactly what that is.
The answer is, it’s a Security Token Offering (STO). In some ways it’s similar to an Initial Coin Offering (ICO), but in the case of the STO, the security token represents an investment into an underlying asset, such as stocks, bonds or even real estate.
A ‘security’ is defined as a “fungible, negotiable financial instrument that holds some type of monetary value.” In other words, the investment product is backed by a real-world asset. The security token contains ownership information that is recorded on a blockchain. This is quite different to traditional investments, where ownership is written in a document or digital certificate. With an STO, ownership details are recorded on a blockchain and issued as a token.
What’s the difference between an STO and an ICO?
STOs are asset-backed and comply with investment regulations. ICOs tend to try and bypass legal frameworks and do not have to register or comply with the governance of regulatory bodies.
So, there is more difficulty involved in launching an STO, because it offers an investment contract governed by regulatory laws. A platform has to ensure compliance with the relevant regulations before the launch, and typically they can only offer the product to accredited investors, who must pass certain requirements.
Is an STO different to an IPO?
They are both regulated offerings, but that is the only similarity. An IPO is only used by private companies to raise funds by going public. An STO raises funds via the tokenised shares in an underlying asset, and only to accredited investors.
Jurisdictions and STOs
The rules on STOs vary from country to country.
In the UK, security tokens come under the scope of FCA regulations, and in Switzerland the Financial Market Supervisory Authority (FINMA). FINMA regards asset tokens as securities, which means that there are securities law requirements for trading in such tokens. Singapore, Estonia and Malta also allow STOs.
What are the advantages of an STO?
They are seen as lower risk compared with ICOs. Because a security token is backed by an asset, the investor can more easily assess whether or not the token is priced fairly in relation to the underlying asset. That is difficult to do with a utility token, such as ICOs tend to issue.
STOs are also good for blockchain adoption, precisely because they comply with regulations. This means they are perceived to be less of a risk and will encourage institutional investors to come on board. More institutional investors in blockchain products should lead to less volatility in the blockchain-related crypto market.
What are challenges of an STO?
Any further increases in regulations presents a challenge, as they would raise the cost of launching an STO. More processes would have to be set up for custodianship, tracking ownership, exchange approvals, Know Your Customer (KYC) and Anti-Money Laundering (AML). Also, without using middlemen, such as brokerages and banks, it places all responsibility on the company launching the STO.
As you can see, an STO is more robust form of investment than an ICO, which is why Creditum plans to take this route, offering you an opportunity to be part of this innovative project.