Security Token Offering — Future of Cryptocurrency and Crowdfunding

Raising funds the traditional way of doing business does not provide the tangibility for business growth and exploring the prospects in the right instance. Looking out for investors for a development concept at an early stage through ICO (Initial Coin Offering) model holds business benefits across all channels. It can be defined as a fundraiser through cryptocurrency tokens in an unregulated environment. However, there are some limitations to this system. Security Token Offering (STO) is a step forward into this scenario.

ICO Vs STO

ICO, in a nutshell, refers to the token offering by a company for the purpose of raising capital for a project or concept. However, it is unregulated in nature. This proves to be risky for investors. Security token offerings (STOs) on the other hand operate in a regulated environment with a similar concept to that of ICO. The security token offering is the definition of reduced scam risk and protection of investor rights in an effective manner.

· The businesses tend to raise capital by defining a use case. But in reality, a small bit of it is required for network maintenance. But in case of security token offering the process is a bit different. The token is backed by specific assets. There is no investment required for the use case.

· Security is a prime concern in the ICO system. There is no provision for profit gain or distribution. In case of a security threat, the investors are at prime risk. But security token offering is a platform that has provision for legal rights and revenue distribution. There is protection for the assets stolen.

· Since its introduction, a lot of scams happened around ICOs. Investors lost their money without any legal backup. Security token offering has a safer approach towards fundraising. It is more transparent for both investors and companies.

Combining the Concept of DAO to ICO

ICO brought a new wave in the financial industry. As per published sources, companies raised USD 5 billion through ICO channel in 2017. However, due to its limitations, the investment became risky. It received setbacks. The DAO came into play. The Decentralized Autonomous Organization (DAO) is a form of venture capital fund that is directed through investors. DAO has open source coding and was initiated on Ethereum Blockchain. DAO aimed at presenting a decentralized business model for commercial businesses and non-profit organizations.

In order to manage the issues related to ICO, Vitalik Buterin, founder of Ethereum, combined the concept of DAO with ICO to create DIACO model. In this model, the funding process is more spread out and provides safety measures to investors.

The DAICO approach is subdivided into phases. The initiation starts with token purchases in exchange for Ethereum. The team decides the sale type and the sale takes place for a limited time period. After that, no token purchases can be done. After completion of this phase, token balance is set and the token trading becomes permissible. The development team, on the other hand, cannot access the whole amount as it is locked. It can be gradually withdrawn. The withdrawal per second can be decided by investors and is defined as “tap”. It is set to zero in the beginning. The investors can vote on increasing or decreasing the tap.

There is an option to vote for “Self-Destruct” also in case of a security threat or other issues. Investors can put the contract in “Withdraw” form. It allows pulling out Ethereum tokens from the project. This system ensures better safety for investors and opens new doors for security token offering and companies.

Benefits Security Token Offering

Security Token Offering comes in with its own set of benefits for the investors and the funding system as a whole.

· Transparency is the key element of STO. Registration in SEC makes security token offering a more viable option for dependable crowdfunding. There is detailed information available related to the company in terms of assets, management, financial performance and such like. Investors can perform legitimate research before putting in the money.

· STO can be used for tokenizing any asset or financial device. This unlocks the opportunity for online trading. Small businesses and startups can raise funds without putting in large amounts of fees. With time, the standard legal documentation will evolve and token protocols will become open source. It is expected to bring down the operational cost of STO.

· It will aid in channeling investments beyond geographic boundaries. Since token standards remain uniform worldwide, the purchases and trading can be done more conveniently. This will speed up the process of funding.

· The investors also benefit from the easy liquidation process with the usage of licensed STO trading platforms.

· Last but not least is the security factor. Investors have better control over the system as the funds cannot be accessed at once. Moreover, there is a limit on the withdrawal rate which is set by investors themselves. There is a recovery feature also available in this system.

Conclusion

The STO structure is a positive reformation to the ICO system. Due to the presence of regulations and certain control factors on the investor side, it can be considered as a safer approach towards crowdfunding through cryptocurrency. Businesses need to figure out how to do a security token offering in a controlled yet favorable environment for mutual benefits. It can be predicted that security token offering will transform the demographics of equity in the long run.

A version of this post was previously published on medium.com and is republished here with permission from the author.

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