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STO - Printable Version

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STO - Hugues - 2019-03-15

Security token offerings (STO) are similar to the Initial Coin Offerings (ICO). The name initial coin offerings has been chosen unluckily since it is in fact the issue of utility tokens. When a security token offering (STO) is mentioned, it is in fact a regulated open IPO on the blockchain where securities are issued in exchange for financing.

First, let's describe the difference between a utility token and a security token to explain how a Security Token Offering (STO) works.

Difference between utility tokens and security tokens?

Utility tokens are used to access services. Specific example the SGN token is used to gain access to the Signals Trading platform. The purchase of a utility token is comparable to the purchase of user rights for a software or product, such as in-game currencies or pay-per-use Software as a Service offerings. They are developed on the basis of smart contract and blockchain technology. Usually the ERC20 protocol on Ethereum is used for the issuance of utility tokens during token crowd token sales or initial coin offerings.

There is a clear reason why these tokens are also described as such in the white papers. The companies that issue these tokens do not want them to be in the investment contract category. So we try to avoid the word security. This will hopefully prevent the company from getting into trouble with the financial authorities. The American Securities Act in particular is feared and US investors are often denied. There is still a lot of uncertainty about legislation and regulation and serious companies often seek refuge in jurisdictions such as Switzerland and Singapore where the legislation is favorable.

Security tokens represent a share in an organization or a right to profit distribution. This is an investment contract. The issuing of security tokens in a Security Token Offering (STO) is an IPO on the blockchain in which securities are traded. This act is subject to strict securities trading legislation. Organizing a token security offering must therefore be done with policy in consultation with the financial authorities with people who have expertise. Lots of work has to be done on networks and platforms where companies can issue effects on block chains without any problems. There are two American states (Dellaware and Wyoming) that are already changing the legislation to allow these new financial innovations and where security token offerings (STO) can be organized without problems using specialized platforms. Two well-known names in this field are Polymath and tZero.

The importance of STOs and the liberation of securities trading!

Security Token Offerings (STO) actually pose a threat to the old financial system (investment banks). It is quite possible that within 5 years the IPOs will expire completely and that we will only talk about STOs. A P2P securities trade may arise. The securities trade is democratized and leveled, making it easier for capital to flow in. Global securities trading on block chains is not only much safer and more transparent, but above all also fairer and much, much cheaper. The STOs in consultation with the ICOs will be an important component in the realization of a fourth industrial revolution. What we have to realize is that it will be very easy for small businesses to organize an STO.

Finally, other terms that you may come across more often in articles for a Security Token Offering is a Tokenized Asset Offering (TAO) or an Equity Token Offering (ETO). In our opinion, a security token offering is a more accurate term to use. Terminology that is more in line with current stock markets is the Depository Receipt. CDRX will publish these existing instruments on the blokchain. For more information: Crypto Depositary Receipts (CDR).

The terminology used may therefore differ per publisher. It is very likely that over a decade this terminology will have completely disappeared and we are simply talking about securities and that smart banks will play a facilitating role here in terms of advice, supervision and compliance. The entire securities trade will move more and more to the blockchain. For example, a bank could purchase CDRX or Polymath and integrate it into its services.

RE: STO - Carsten - 2019-03-15

Thanks for the post!