If you are to go online, you are most likely to be swept by the new wave that is doing rounds. Security Token Offering is deemed to be the next big thing and a lot of hype is associated with this.
This blog will be a guide to all you need to know about Security Token Offering. Let us begin with the customary definitions of the basics.
What is a Token?
Well, a token can be defined as a thing serving as a visible or tangible representation of a fact, quality, value or stake. The token can fulfill a set of roles in a particular context. Now, you mind would be setting off to a cryptocurrency token which is quite a different entity from the token. Bitcoins, Ethereum etc are the example of cryptocurrency coins and can be independent of its platform. These coins can be used as a form of currency outside their native ecosystem.
Tokens, on the other hand, exist on a particular platform. There are a lot of token developing platforms out of which Ethereum is the most favored one by the developers. OmiseGO and Golem are some of the popular tokens developed on the Ethereum platform. They are the assets of the company who develops the token and is given away to investors during the fund sourcing for a particular project of the company.
Value of the token
Now, we shall address the next obvious question. How does a token gain value?. There are three creeds that determine the value of the tokens and subsequently, its usage.Image source : https://www.coinspeaker.com
There are many different types of tokens like the Utility Tokens like the Initial Coin Offerings, security tokens etc based on the roles they perform.
What is Security Token Offering(STO)?
Before we get on to what exactly is a Security Token Offering, let us discuss how a coin can be deemed as a security.
A coin can be deemed as a security for investment if it passes the Howey test. There are three demands that are to be met by the token if it is to be deemed as a security.
- The token is an investment of money.
- The investment is in a common enterprise.
- The buyer of the token expects a profit from the party selling the tokens.
When a token qualifies for all the three criteria, or in short, passes the Howey Test, it is deemed to be a security token. Such tokens usually get their value from a tradable asset and have immensely strong uses.
Importance of Security Tokens
The Security Token Offering acts as a bridge between the legal finance and the blockchain world.
The ICO scenario has been a little shady due to the lack of regulation for the tokens. Security tokens have managed to bring the credibility back by bringing crypto space and legacy space together.
Improvement of traditional finance
The need of middlemen ( read banks!) for traditional financial transactions have rendered them expensive. Security tokens have begun to improve the traditional finance by eliminating the need of middlemen.
Adding on to the aforementioned, the security tokens are issued in a fast manner by eliminating the middlemen. Due to this very reason, security tokens are seen as a hotshot investment option.
Since the role of middlemen is nil, there are little chances that the investment process will be rigged and manipulated.
Exposure to free market
Currently, there are a lot of restrictions in the investment transactions with most of them being localized. Security tokens can be bought by anyone on the internet, opening up markets for the investors.
The greater number of investors
Since the creators can deal with anyone on the internet over the tokens, the investor base increases explicitly.
Having said that, not everything is sunshine and rainbows, there are some disadvantages of security tokens.
Any flaws in the perfect picture?
Though the scene is now picture perfect, it is not sunshine and rainbows all around. The elimination of middlemen from the system has its fair share of advantages, but the reality is that they serve a lot of purpose in the ecosystem like deal underwriting, preparation of marketing materials, solicitation of investor interest, insurance of high levels of security, and compliance regulation etc. Some critics are of the opinion that this cannot be successfully taken care of by the token creators. Only time can prove whether their fears are true or not.
Let us put the truth out there, shall we? The security token offering has a far less market share compared to utility tokens like ICOs. However, 2018 is witnessing a change in the weather. A huge amount of money is flowing from utility tokens to security tokens. There is no doubt that Security Token Offering will be embraced by one and all in the near future.
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Very Interesting blog.