In today's decentralized financial ecosystem, security token offering and initial coin offering are the two most common methods of raising funds. They are similar to initial public offering (IPO) except that the underlying asset is different. STO tokens are traded on regulated exchanges, while ICO tokens are traded on specialized digital currency trading platforms.
ICOs and STOs offer business owners and operators another way to raise capital. But what exactly are these new financing institutions and how are they different? Let's take a look.
What is ICO?
Initial coin offering(ICO) is a popular fundraising method in the blockchain and crypto space. ICOs allow projects or startups to obtain capital by offering digital tokens to investors. These tokens typically represent future access to products or services within the project ecosystem.
ICOs have the following characteristics:
Initial Coin Offerings (ICOs) have emerged as a novel approach to fundraising in the digital age. However, these offerings come with unique characteristics that require careful consideration before participating. This overview delves into the key aspects of ICOs, including the type of tokens offered, regulatory landscape, accessibility, risk-reward profile, and potential for anonymity.
- Utility tokens: ICOs typically offer utility tokens that grant holders access to a project platform, service, or product.
- Lack of regulation: ICOs are popular in part because of their initial lack of regulation. This attracts both innovative projects and speculators, leading to success stories and scams.
- Global openness: ICOs are usually open to global investors, and anyone can participate in the investment, so ICOs have a large financing scale and can raise more funds for the project.
- High risk, high return: Investing in an ICO typically carries higher risks than traditional investments, but it also offers the potential for generous returns.
- Privacy protection: ICO investors can usually participate in the investment anonymously, making the ICO highly private. This is attractive to some investors who wish to protect their privacy.
What is STO?
Security token offering (STO) is a method of raising funds for blockchain projects or startups by offering digital tokens. Unlike ICOs, STO published tokens are classified as securities, meaning they are subject to securities laws and regulations.
The main characteristics of STO include:
- Security tokens: STO published tokens represent company ownership, equity stake, debt or other tangible assets that provide investors with legal rights and comply with securities regulations. These tokens represent stock or income rights in a company or project and therefore have a more defined investment value.
- Regulation and compliance: STOs must comply with the existing securities laws of the jurisdictions in which they operate, including registration with regulatory authorities and compliance with investor protection measures. For example, in the US, STOs need to register or be exempt from the US Securities and Exchange Commission (SEC).
-Transparency: STOs have stricter disclosure requirements and need to disclose detailed information about publishers, companies and financial statements, so they have higher transparency and can increase investor trust in the project.
- Investor protection: Thanks to regulatory oversight, STOs offer a higher level of investor protection, reducing the risk of fraudulent or deceptive schemes.
ICO vs. STO Key Differences
| Characteristics | ICO | STO |
| Token | Utility Token | Security Token |
| Regulation | Not regulated or partially regulated | Strictly regulated by securities law |
| Investors’ right | Utility token with no guarantee of legal ownership | Security token with proof of legal ownership, may include dividend and/or voting right |
| Locality | Open to global market without any boundaries | Usually restricted to accredited investors and specific jurisdictions |
| Risk | Tends to carry higher risks due to lack of regulation and transparency | Safer investment option as security tokens are regulated by local authorities |
| Use case | Often used to fund blockchain projects | Primary choice for TradFi industries seeking to tokenize their assets |
| Market maturity | Exists in the market for more than 10 years | Still at early development stage |
| Advantages | Faster fundraising, large scale, low cost, great global influence | Better investor protection, regulated, high liquidity |
| Disadvantages | Inadequate supervision, high risk of scams | High issuance costs and complex issuance process |
Case study
Developing a blockchain platform for ICOs
Ethereum , one of the most popular blockchain platforms for ICO development, conducted its ICO in 2014. It has a flexible and powerful programming language called Solidity that can be used to create smart contracts, which is the backbone of ICOs. Ethereum's ICO raised about $18 million by selling Ethereum (ETH) tokens. These tokens act as fuel for the Ethereum network, allowing developers to build decentralized applications (DApps) on the platform. Ethereum is a utility token that provides access to computing resources on the Ethereum network.
Stellar is a blockchain platform specifically designed for creating and managing digital assets, making it a popular choice for ICOs. It features fast transaction speeds and low transaction fees.
Cardano is a blockchain platform designed to provide security and scalability. Cardano is still in the early stages of development, but it has been used to launch some ICOs, such as Cardano's ADA token sale.
Well-known ICO projects
Filecoin is a project that aims to provide services for decentralized file storage. In August 2017, IPFS officials started global crowd funding under the name Filecoin in the context of the popularity of cryptocurrency ICOs, becoming the largest cryptocurrency ICO project. It raised $257 million, the most funds in the history of ICOs.
Tezos is a decentralized open-source blockchain created in 2018 that performs peer-to-peer transfers of cryptocurrency and deploys smart contracts. Tezos raised $232 million in an ICO, setting a record for the largest ICO at the time, second only to Filecoin.
Check out the full ICO day
Developing a blockchain platform for STO
Ethereum is the first blockchain platform to support smart contracts and is currently the most popular STO platform. STO projects on Ethereum can use the ERC-20 standard to create security tokens. Its STO projects include Polymath, Securitize, and Harbor.
Tezos is a blockchain platform known for its self-correcting mechanism and formal verification capabilities, which are useful for creating STOs, and it was one of the first regulated STOs in the US.
Polymath is a blockchain platform dedicated to building and managing security tokens. It takes a compliance-centric approach and offers a range of features for compliance.
Hyperledger Fabric is an open-source blockchain platform for building enterprise-grade blockchain applications. It provides a Modularization architecture and supports the creation of smart contracts for STOs.
Well-known STO projects
Aspen REIT , a pioneer in real estate STOs, raised $18 million to demonstrate how STOs can be applied in the traditional real estate industry.
RealBlocks is a real estate securitization platform. RealBlocks has successfully published an STO, raising $3.10 million for a tokenized real estate platform to tokenize a work building in Manhattan, New York.
The Swarm Fund is a venture capital fund that uses STOs to raise funds. The Swarm Fund invests in blockchain startups.
Evolution of financing methods and commercial implications
ICOs, STOs, and IEOs are all different financing methods. They represent the evolution of cryptocurrency financing methods, and also reflect the deepening integration of traditional finance and cryptocurrency.
ICO provides financing channels for early blockchain projects. Its appearance marks the rise of cryptocurrency financing methods and provides financial support for the application and development of blockchain technology.
Although there is a lack of regulation, ICO has promoted the development of blockchain technology to a certain extent. IEO is a way for traditional Financial Institutions to begin to intervene in the cryptocurrency market. Exchanges use their own resources and credit to endorse the project party, which solves the regulatory problem of ICO to a certain extent, raises the threshold for project offering, reduces investment risks, and brings new revenue streams to exchanges. STO provides a bridge for the integration of traditional finance and cryptocurrency.
It is a more mature manifestation of the integration of traditional finance and cryptocurrency. It combines securities regulations with blockchain technology to improve compliance, but also improves efficiency and transparency.
STO represents the future trend of securities offering, which will have a significant impact on the traditional financial system and bring more opportunities to enterprises and investors. With the continuous development and improvement of STO technology, its business application scenarios will continue to expand, and will bring new opportunities and challenges to all walks of life.
As a leading blockchain technology company, ChainUp has actively deployed in the STO field and launched a full set of STO solutions to provide safe, efficient and compliance STO services for enterprises and investors. At present, it has provided STO services for many well-known enterprises to assist enterprises in successfully raising proceeds and provide investors with safe and reliable investment channels.
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