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STO vs. ICO: What are the differences?

STO vs. ICO: What are the differences?

Following the 2017 crypto boom due to the rise in popularity of Ethereum, all ICOs fell sharp throughout 2018 amid government concern over fraudulent activities. To help bridge the gap between regulation and crowdfunding, security token offerings emerged as an upgraded version to the notorious initial coin offering.

According to Coinone Research Center, STOs are projected to reach $2 trillion by 2030. Following the launch of tZERO, a security token trading platform that began trading earlier in January, the future of STOs looks rather promising. In the following lines we’ll discuss about STO vs ICO and the main differences that sets them apart.

STO vs ICO -  rights vs. no rights for investors

In the absence of genuine screening to ensure investor protection, as well as numerous pay-to-play schemes and fraud reports revealed in the ICO world, the need for things to change led to the rise of STOs: a more transparent, clearly-defined and regulated investment vehicle. Security token offerings issue “security tokens” that are approved by regulators, thus providing investors with leverage and assurance that their money goes into a company with real potential to yield returns.

Unlike ICOs, STOs provide token holders with some form of ownership or equity over a tangible asset that belongs to the company; either in full or fractionalized. This way, investors can expect a profit via the STO’s revenue or through dividends. Simply put, the security tokens provided by STOs are an investment contract in electronic form, powered by blockchain and the smart contract system. ICOs cannot offer the same guarantees to investors because utility tokens are not backed up by any form of tangible asset.

An original feature of STOs is that they’re not aimed exclusively at early-stage startups. Successful companies can also leverage an STO to issue their own digital tokens and back them up with existing equity instruments to raise money and maybe develop a new product, or expand their business line. Does this mean established companies seeking to file for an IPO might have better chances to raise money via an STO? Definitely, and with a lot less hassle.

Investing differences - characteristics that set STOs and ICOs apart

How can investors know for sure that when investing in an ICO they’ll actually get a return on investment? The simple answer is: they can’t. ICOs were meant to be this extraordinary strategy for startups to provide investors with their “amazing” protocol-based tokens. But most of them ended up offering a structure/idea/vision/roadmap in its early stages. Specialists are still dissecting the promise of tokenomics, which it yet to be demonstrated.

The problem with ICOs is that the tokens issued are not functional, with the majority being locked for up to 1-2 years. In the absence of an actual use for ICO tokens, investors end up pouring money into a startup’s dream; money that might go down the drain if the ICO decides to keep the money but not proceed to further work that dream.

Investing in an STO is a whole different story. From the very beginning, an STO is backed by tangible assets because it issues securities tokens. Whether art, gold, cars, or even real estate, the purpose of an STO is to protect investors. Enters KYC/AML verification, which unsurprisingly is not a requirement in an ICO. One of the most practical uses of blockchain technology is crowdfunding democratization because it facilitates equity tokenization while bringing liquidity to investors.

How STOs bridge the gap between regulation and crowdfunding in crypto

Investing in an ICO is susceptible to tremendous pumps and dumps of the token because the value is mostly driven by hype and speculation. With STOs, investors buy security tokens that serve a real purpose. Before buying into an STO investors must go through a detailed verification process to prove their eligibility. Featuring a bulletproof value proposition that centers around fractional ownership and asset tokenization, STOs have viable chances of becoming the next generation type of investment model based on blockchain technology; a win-win solution that benefits both entrepreneurs and investors.

author
Ioana Paicu
Senior Cryptocurrency Technical Writer

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