What is Security Token Offering?

Back to Glossary

ICOs (Initial Coin Offerings) ruled the financial world in 2017. The global startup capital generated from cryptocurrency offerings in 2017 amounted to US$6 billion. However, about 80 percent of them were scams. A security token offering (STO) is a fundraising event where security tokens are sold from a security token exchange. STOs are viewed as a more regulated version of an ICO. With the advent of the STO era in 2018, blockchain investors had much better protection, paving the way for mass adoption of the digital economy.

A security token is a one-of-a-kind token representing a stake in an external asset or organization and is issued on a permissioned or permissionless blockchain. Security tokens, which serve the same purpose as stocks, bonds, and other assets, can be issued by entities such as the government and enterprises.

How is an STO different from an ICO?

Both STO and ICO are created using the same process. However, the token characteristics are not the same.

STOs are asset-backed and subject to regulatory oversight. The majority of ICOs, on the other hand, pitch their coins as a utility token that grants users access to the native platform or decentralized apps (dApps).

As a result, the barrier to entry for organizations looking to start an ICO is substantially lower, as they do not have to complete all of the upfront compliance work. Launching an STO is significantly more complicated because the objective is to issue an investment contract under securities legislation. As a result, these platforms will have to conduct the preliminary work of ensuring that they comply with the appropriate rules.

How to Create an STO

Many smart contracts are used to create security tokens. A smart contract is a simple software meant to execute when a given condition is met automatically. 

Smart contracts also govern how the token may be acquired, exchanged, and sold legally. Since they are blockchain-based, the transactions are immutable, traceable, and completely visible. The entire procedure is known as whitelisting, and it makes Security Token ownership more secure than other types of tokens.

Types of Security Tokens

There are three types of security tokens available on the market:

Equity Tokens: Except for how ownership is documented and transferred, an equity token is comparable to regular stock. It is stored in an immutable ledger kept up to date by tens, hundreds, or even thousands of computers networked throughout the world.

Debt Tokens: A debt token is a short-term loan with an interest rate granted to a corporation by investors — it might be real estate mortgages, corporate bonds, or another sort of structured debt.

Asset-backed Tokens: Tokens of this type indicate ownership of things like real estate, art, carbon credits, or commodities. Because blockchain is safe, irreversible, and transparent, it allows for a reliable record of transactions; it lowers fraud and improves settlement time, making it a perfect match for commodities trading.