With the Ethereum Classic shutdown and collapsing prices of popular cryptocurrencies, 2018 ended in a very bad note for the whole crypto industry. Many are seeing 2019 as the year crypto is going to make its comeback. The new buzz word in town is the STO(Security Token Offering) which could finally bring some life into the market. Many analysts believe that this could be the next big thing like ICO’s back in 2017. Likewise, it could also usher in a new period of innovation into the blockchain technology. The peak of crypto valuation was during the height of ICOs and STOs might bring some lost glory to this new industry. Practical use cases of mainstream adoption cryptocurrencies until now have been for speculation and as a store of value, security tokens will surely change this status quo making crypto a viable financial instrument. It is possible that in the foreseeable future STOs could completely replace ICOs.
Why aren’t ICOs considered securities and are ICOs any different from STOs? To answer this, we first need to look at the definition of a security token or a security. Any financial asset is considered a security only if it passes the Howey test, and since ICOs vary according to their role, feature and purpose not all ICOs are securities but some are. A transaction is deemed as a security if it meets three conditions. First, it has to be an investment of money. Second, the investment is in a common enterprise, and third, there is an expectation of profit from the work of the promoters or the third party. If an ICO meets all the three then it is a security token. STOs are ICOs which are securities and as of now, most STOs are ERC20 which are a representation of holding of real-life stocks. In the future, STOs could be issued as shares of companies and IPOs could be held to sell STOs.
How the current stock exchanges will react to STOs remain to be seen. It will depend on how regulators deal with STOs. One of the reasons ICOs escaped regulatory oversight was the fact that it was not a security. STOs are securities by definition hence they will have have to face regulators head on. Security comes bundled with investor protection which means transparency, how to achieve that in a pseudo-anonymous platform like crypto is a challenge. Will the existing coins like Bitcoin and Ethereum be used or will they develop native coins? How current exchanges, developers and community will contribute and take part remains to be seen. Also, how will the current ICOs and their companies cope?
STOs are a monumental change to the crypto industry from how it operates now and how big of an impact it will create in the crypto industry only time will tell. But it will surely draw more talent and money to the growing technology, helping it achieve stability and maturity. Overall, it is a positive development in the crypto space bringing in big investors and institutions as well as bridging the gap between traditional finance and the crypto world. How investors react to these new tokens is something everyone will have to wait and watch.
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Disclaimer: The authors of this website may have invested in crypto currencies themselves. They are not financial advisors and only express their opinions. Anyone considering investing in crypto currencies should be well informed about these high-risk assets.
Trading with financial products, especially with CFDs involves a high level of risk and is therefore not suitable for security-conscious investors. CFDs are complex instruments and carry a high risk of losing money quickly through leverage. Be aware that most private Investors lose money, if they decide to trade CFDs. Any type of trading and speculation in financial products that can produce an unusually high return is also associated with increased risk to lose money. Note that past gains are no guarantee of positive results in the future.
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