Test your Crypto Knowledge - What is the difference between ICO and STO?

As the cryptocurrency market develops, a lot of new words and lingo arise, which can be sometimes difficult to search for on the web as results may be confusing. In this article, we explain the differences between Initial Coin Offering (ICO) and Security Token Offerings (STO).

What does ICO mean?

ICO (Initial Coin Offering) is the first issue of a coin. It is the most reliable way to raise money for new cryptocurrencies. An ICO is an event that often lasts a few weeks at the start of a cryptocurrency. During the ICO everyone has the opportunity to buy the coin in exchange for Bitcoin, ETH, and other large coins.

In other words, an ICO is a type of funding through the use of cryptocurrencies. Often an ICO is carried out as crowdfunding. A defined amount of a cryptocurrency in the form of “tokens” or “coins” is traded to “shareholders” or investors in exchange for legal tender or other cryptocurrencies such as Bitcoin or Ethereum. The exchanged tokens will be used as a reserve when the ICO’s funding goal is met and the project begins.

What is an STO?

An STO (Security Token Offering) is fundamentally very similar to an ICO, but very different in some important points. With an STO, as with the ICO, an investment (in cryptocurrency or fiat) is exchanged for tokens of a new cryptocurrency that are held on a blockchain. Otherwise, ICOs and STOs have little in common. While ICOs are used to exchange coins, profits, or even currencies, STOs are more like securities.

Security tokens are cryptographic tokens that give the buyer a percentage of the profits, give them loans, or distribute other income that can be reinvested. In contrast to ICOs, with STOs buyers actually receive shares in the company in which they invest.

ICO vs. STO

Unlike ICOs, STOs are actual securities based on token assets. These tokens describe the property, plant, and equipment and secure a share in the company for investors if the system works well. In other words, STOs can give the token holder a certain percentage of the company, just like on the exchange. On the one hand, STOs offer intermittent returns, property control, and more interest. On the other hand, STOs are defined by a smart contract that describes the token, similar to an ICO.

STOs allow companies to create whitelists and blacklists, making it easy to comply with KYC standards and anti-money laundering specifications. The main advantage of an STO is its clarity. Therefore, STOs can radically change crowdfunding.

An ICO is usually a one to a two-week event where everyone is given the opportunity to purchase crypto tokens in exchange for e.g. Bitcoin, ETH, XRP, and much more. For this, the investors have to pay their investment into a smart contract, there the funds are collected and the investors receive coins or tokens from the ICO. An ICO is a great way for startup companies to raise capital. Startups can build millions through crowdfunding based on cryptocurrencies.

Most ICOs offer their first investors a huge discount. While that sounds like a great idea to quickly develop a community through the discount, the practical result often contradicts the company’s goals. Very often, due to the high discount, the first investors have an interest in trading the token as soon as it is tradable in order to achieve an immediate (high) profit.

STOs are filed with the Securities and Exchange Commission (SEC) and receive approval from securities privileges such as Reg A +. The tokens, which have their origins in STOs, give investors some security to influence the company that issues the tokens.

Filing with the SEC is one of the methods STOs use to guarantee to provide the investor with additional collateral. Because the regulatory authority checks the background of the founders and the team in the course of approval and only recognizes those companies that are verifiable and seriously working on their project. The method of submitting an STO is therefore similar to the approval for initial public offers (IPOs) and is certainly not an absolutely decisive step for investors, but it will help to offer investors additional security and to give sufficient information to the state authorities.

ICO projects are classified based on the blockchain technology on which the tokens of the project are held. The focus is on the token blockchain and not on the blockchain technology on which the project itself works.

Disclaimer : This information is not a confirmation of a cryptocurrency. It is not a recommendation to trade. The crypto market is full of surprises and overvalued assets. Please do your research before buying anything. Never invest more than you can afford to lose.

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