Blockchain Platform Selection for Security Token Offering STO Using Multi-criteria Decision Model SpringerLink
Though the security token market has a long way to go, it is becoming more and more evident that it will reach significant levels of liquidity. If we look at the traditional stock exchange market that has been around for almost 300 years, we’ll see that its volume hasn’t always been that high, and most investors were expecting low liquidity at the beginning. It is important to note that although STOs fall under securities laws in the U.S., there are legal nuances to the launching of security tokens as they are based on a novel technology.
In this case, each Aspen Coin represents a share in a single-asset real estate investment trust (REIT) that holds the $18 million in St. Regis Aspen equity made available through the STO/ICO. Since securities offerings are regulated by the SEC, the sale was restricted to accredited buyers. STOs (secure token offerings) were created in response to the token issuers who sold tokens without considering relevant laws or regulations. STOs were created to be a secure version of ICOs (initial coin offerings) that are compliant with all laws and regulations. STOs give token holders rights similar to stockholders, like a voice in the company or dividends, while ICOs did not provide as many rights to token holders.
STO Regulation in the World
The role of custodian participants should also be abstracted by the smart contracts. An STO, also known as a Security Token Offering, is a digital token supported by blockchain technology that represents a stake in an asset. STOs enable digital funding, while still complying with government regulations. Security tokens require extensive regulations, so they are not traded on regular token exchanges. However, they are similar to ICOs (initial coin offerings) in that they are fungible tokens, meaning that they hold monetary value.
This led to numerous fraudulent ICOs being deployed to fleece unknowing investors. A 2018 report by ICO advisory firm Satis Group said almost 80% of ICOs were “identified scams.” This raised the need for a token-offering solution to protect the blockchain investor, which ushered in the STO era. This differs from a traditional IPO (initial public offering), where companies are listed on the stock market. Instead, issuers can build a new business or deploy an already existing one with the help of smart contracts. These smart contracts are self-executing legal agreements between two parties, usually stored on public blockchains.
Security Token Offering – All you need to know
Choosing the wrong standard means that investors may not have various options to store the tokens securely and secondary markets cannot host your token. Performing a legal activity in France is usually prohibited until the specific person is exempt or licensed. AMF (Financial Markets Authority) had earlier identified the absence of ICO regulations as a risk inherent to ICOs. As a result, the French Treasury has come up with a new legislative framework. Though all of the regulations discussed above are valid to launch a security token, it is crucial to consult a legal person before proceeding further. Security tokens comply with both Know Your Customer (KYC) and Anti Money Laundering (AML) laws.
Therefore, parties engaged in a regulated activity need to be licensed or registered with the SFC (Securities and Futures Commission) no matter whether the parties are based in Hong Kong or not. The role of AMF within the framework
The AMF requires to offer additional advice related to the law’s provisions in General Regulation (RG AMF). Issuers have the right to submit a disclosure document to the AMF so that buyers can make the right decision while buying tokens.
The differences between ICOs and STOs
However, if the token doesn’t qualify according to the Howey test ( a test which will be used to determine whether a certain transaction is an investment contract or not), then it classifies as utility tokens. STOs as an alternative to utility token sto in blockchain offerings combine the reliability of traditional finance with the versatility of crypto. Aside from being a more secure way to prove equity ownership, blockchain and now STOs are already beginning to overhaul financial systems as we know them.
One of the most straightforward and beneficial applications of an STO is with an SME looking to raise funding when they cannot tap into commercial banking services. Parallel with the rise of other DeFi services, SMEs can access open financial services — issuing security tokens for investors to obtain on the blockchain. Following in the footsteps of the ICO, the ‘Security Token Offering’ (STO) has garnered widespread attention as an ecosystem of investors, service providers, exchanges, and more jostle for position in a blossoming market. Security tokens have some intriguing prospects, and the STO presents a valuable tool for companies to issue digital assets on the blockchain.
b. What all regulations should be followed while creating a security token
Before raising funds, the company needs to undergo legal processes with governing entities. But when you are investing in a security token or STO, it means you want to invest in a company that owns the factory and machinery. You will require to build a strong culture of professional discipline to execute the business plan effectively. Implementing result-driven methods to increase revenue can enhance the liquidity of your security token. No doubt that the product can be developed after the token is launched, there is a need to build a user-friendly, secure and robust application on the blockchain.
Equisafe has revolutionized real estate investment with the AnnA transaction. However, the STO will make this type of asset more liquid, in the sense that this transaction will offer a lower entry ticket than traditional stone funds or SCIs. To ensure that you don’t encounter all such issues, you should consider engaging a security token consultant.
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According
to Polymath, The main
purpose of the platform is to help the conventional financial securities
integrate with the blockchain tech. The platform also offers a well-detailed
guide on processes involved in tokenization. Static pools have a pre-set price and quantity, whereas for dynamic pools either the price or the quantity is set. A whitepaper is issued to provide investors with information on the ICO structure and project details.
- If a startup meets the required regulatory obligations, the security token offering can create a vast potential for the variety of applications.
- They are digitized versions of old-fashioned paper-based securities, fungible financial instruments that are linked to underlying investment assets.
- It’s important to note that security token offerings technically offer the same securities available on traditional investment platforms.
- While regulation gives greater legitimacy than ICOs, the procedure is more time-consuming and requires additional regulations owing to the application of standard securities legislation.
- In January 2021 alone, Security token infrastructure companies raised over $30 million in capital.
- STOs are backed by actual assets while ICOs were primarily predicated on ‘utility tokens,’ with no underlying collateral and were not protected by securities law.
Such restrictions will allow the projects to be confident that their STO tokens will be held by serious and authorized investors. Tokenised Security Offerings are backed by assets and are fully compliant with regulatory governance. ICOs, on the other hand, are utility tokens that offer access to a native platform and decentralised apps. The biggest disadvantage of STOs is compliance with regulatory requirements. These ensure that the administrative burden of custody, ownership tracking, stock exchange approvals, Know Your Customer (KYC), etc. is constantly increasing. Over time, these rules could become costly for an STO to comply with all securities laws.
Types of security tokens
Switzerland’s Financial Market Supervisory Authority (FINMA) has also released similar guidelines. The advantage of STOs over IPOs is that they are inexpensive to go public. STOs also have legal fees, but no bank fees due to direct market access because of the blockchain. In addition, the administration of the IPO is also much cheaper than IPOs. Nowadays, the London Stock Exchange market cap, for instance, is over $26 billion, which is pretty modest compared to the New York Stock Exchange with its staggering $30.1 trillion market cap.
Though the security token market has a long way to go, it is becoming more and more evident that it will reach significant levels of liquidity. If we look at the traditional stock exchange market that has been around for almost 300 years, we’ll see that its volume hasn’t always been that high, and most…