March 25, 2019 | AtoZ Markets - Blockchain technology opened the door for ICOs, a fundraising model where a project sells blockchain-based tokens to gain funds. When the crypto market was booming in late 2017, ICOs were thriving as well, raising astronomical amounts in record times. When the 2018 bear market hits, the craze for ICOs diminished as investors were less willing to buy utility tokens, which are supposed as even more speculative and risky assets than Bitcoin and other cryptocurrencies.
With interest for the Initial Coin Offerings (ICOs) melting down, a new type of blockchain-powered funding mechanism is gaining a lot of attention, which is referred to as Security Token Offerings (STOs).
What is an STO?
Security Token Offerings (STO) are becoming a common way for blockchain startups to raise money. This next generation of ICOs has stricter rules and regulations which in turn provides greater assurances for investors.
What is a Token?
A token is a unit value that exists on an existing blockchain technology. Tokens do not have their own blockchain but depend on an existing blockchain of a cryptocurrency. Some examples of tokens on a blockchain are:
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- Cryptocurrency: Bitcoin
- US Dollar based stable token: Tether
- User reputation based coin: Augur
- File sharing coin: Filecoin
- Rewards based coin: Steemit
- Crypto exchange native token: CGCX
What is a Security?
Securities are tradable financial assets such as bonds, options, stocks, and warrants. These financial assets, particularly stocks, enable an individual to own a share of a company without having to buy it outright. There are strict rules, regulations, and assurances to ensure that if the company does well, the individual shareholders are rewarded proportionately, which is known as a dividend.
Putting all together - Security Tokens
Security tokens are backed by an asset, such as a company’s shares. STOs need licensing and approval by the regulatory bodies. This means that security tokens will have the features of traditional assets, such as shares of the company, while also using the benefits of being a digital asset.
Security Tokens are an investment and obey country-specific laws. Blockchain projects launching an STO will need to register their intention to offer a security with the relevant authority. This will include the submission of their background check documentation, KYC and other procedures according to the region. The main reason for contributors to buy the token is an expectation of future profits in the form of dividends, revenue share or valuation increase.
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