What is a security token offering (STO)?

Blockchain-based technology that powers Bitcoin and other cryptocurrencies, has been one of the biggest financial revolutions in history to date. When Bitcoin entered quietly into the world in 2009, that discussion has traveled beyond cryptocurrencies  to include the broader potential of blockchain-powered financial services. The days of ICOs (Initial Coin Offerings) burning brightly and quickly dying have welcomed an alternative, presumably more accountable and altogether more serious model for next-generation tokenized startups wanting to raise seed money: the Security Token Offering, or STO.

What Is a STO?

So what exactly is this abbreviation stands for and why are serious players in the blockchain-powered space pivoting towards this game-changer? Let’s break it down.

From ICO to STO: Needed Transformation

The future of the ICO is the STO!

In 2017, ICOs were badly supervised in tokenized seed money acquisition. They offered a ready source of capital for start-ups and quick returns for investors. But in the absence of strong regulation, the space became a homing ground for scams and projects with little, if any, accountability. Billions were raised — often on shaky promises — and when the bubble burst in late 2018, investor confidence crumbled. Regulators around the world, including the US SEC, took note and intervened.

Enter STOs. Unlike ICOs, STO are in accordance with current securities legislation. They’re not about skirting regulation; they’re about bridging tokenized innovation with legal financial systems. At their core, STOs are the grown-up, legal version of ICOs—injecting organization, responsibility, and more legitimacy into decentralised finance.

What the Heck Is STO, Anyway?

It is a smart contract-enabled ownership proof in a backing equity, such as a stock, bond, estate, artwork, and so on and so forth, that’s authenticated, issued, and maintained on a blockchain. Think of it as a share certificate that’s faster, smarter, and stored on an immutable digital ledger.

These ledger-based units are coded with smart contracts supervised by securities legislation. Unlike ICOs, which are backed by digital service credits, some of which may not be grounded in real-world use cases, digitally issued investment instruments are backed by real value and rights—dividends, earn equity position, or governance rights similar to the conventional venture trade.

Why Are Blockchain-based securities Important?

STOs are a step toward more than just obedience with securities legislation— they represent major tech milestones in the way that capital is raised and allocated. Here’s why:

1. Transparency: All transactions and token holders are published on a public or permissioned blockchain, allowing for a real-time, unalterable audit history.
2. Real-Time: Blockchain excludes intermediaries, and title transfer can be done immediately, lowering costs and friction.
3. 24/7 Market: Blockchain markets never close, so there’s no need to race against a closing bell.
4. Divisibility: You can own a piece of a really expensive asset. For instance, if you have your eye on a piece of a Picasso artwork, tokenization enables split investment in an asset.

The STO in Practice: Applications and Posters

STOs are already beginning to take hold with serious institutions. The Praetorian Group was the first-ever company to file an ICO offering with the SEC. On March 20, 2018, the SEC declared the offering of the Praetorian cryptocurrency tokens to be qualified under Regulation A+. Since then, we’ve seen:

• The World Bank sells a $33.8 million tokenized bond.
• Santander executes a $20 million blockchain bond on the public Ethereum blockchain.
• 1X, a regulated STO exchange, is open for business.
• Link REIT, Asia’s largest REIT, forms a partnership with Allinfra to study tokenization.

Covering assets from property and art collections to commodities and debt-based investments, STOs are changing what’s possible.

Various Categories of Security Tokens – An Overview

STOs provide a way to shift classic securities onto digital platforms using the new innovative tech, the blockchain pegging it on a whole new level of transparency, efficiency and flexibility. More than just digital holdings, these tokens perform lawful ownership or interest in something in real-world environments or assets. Insight into different categories of security tokens is key to understanding the scope of potential that they open up in the contemporary financial world.

1. Equity Tokens. The digital equivalent of company shares are equity tokens. Equity tokens are like a stock certificate or a line in a spreadsheet, except they live on a blockchain and provide an immutable record of how much of a company is owned by whom. Equity tokens holders also get voting rights and may also receive dividends as any regular shareholder would. The blockchain will improve transparency and democratize corporate governance, so that startups and multinationals can reach a global investor base.
2. Debt Tokens. Debt tokens represent loans or bonds made by entities seeking capital. These tokens encode details of repayments of debt, interest rates, and the dates of maturities in the smart contracts, so that it will automatically execute the agreements. Whether it is real estate mortgages, corporate bonds or other structured debt instruments debt tokens facilitate lending and borrowing more effectively. Investors can buy and sell these tokens in secondary markets, providing enhanced liquidity relative to traditional debt securities.
3. Asset-Backed Tokens. Asset-backed tokens are ownership interests in either physical assets (real estate, works of art, commodities) or intangible assets (carbon credits for example). When you tokenize an asset, it’s possible to make fractional ownership available, because you can break something down into shares. For instance, you can break a valuable art piece or piece of land into thousands of tokens, each representing a fraction of ownership. Maintaining a transparent, auditable record of ownership with blockchain – which can’t be altered (unless both sides agree to it) – could help reduce fraud and streamline transactions.

STOs Are the Future of Fundraising: Here’s Why

The STO is not simply a compliance fix — it is an innovative financial product. It’s the rare thing in blockchain that offers the old-ways legitimacy of traditional finance with the radical newness of blockchain’s potential. It opens up new global fundraising opportunities for companies. For investors, it opens the door to previously inaccessible assets. And for regulators, it provides transparency and enforceability.

Here’s what industry insiders reported:

• Security token market cap soared 500% in 2020.
• Others that are building STO infrastructure raised $30M just in January 2021.
• The EU’s Decentralized Arena: The MEKT tokenized market is projected to reach 85% CAGR by 2024.

The Path Forward: Challenges and Opportunities

Promising though they are, STOs aren’t without challenges. In some markets, regulatory uncertainty continues to hang over the industry. Infrastructure is still being constructed — particularly for secondary markets and global standardization. Moreover, tutoring is vitally important, both from control agencies to investors and from investors to issuers, about the difference between an ICO and an STO to avoid falling back into the unregulated past.

The path is clear. STOs are staking their claim at the intersection of legality, efficiency, and access. They may end up being the lifeblood of the next generation of capital markets as governments test central bank digital currencies and corporations tokenize anything from building blocks to artworks.

Final Comments: Not Just a Fad

Such services represent a key event in the evolution of finance, embarking on much more than a cyclical crypto trend. They are the bridge between old-world finance and the decentralized future. Combining the best of ‘old finance’ with the efficiencies of a native digital asset, STOs are ushering in a new era of capital formation and access to investment.

It would not be an exaggeration to say we’ve entered the age of the STO. Whether you’re an investor, a startup, or an institution, now is the time to pay heed. The next frontier in finance is here, and it’s not in the banks.