Initial Coin Offerings (ICOs), which took the world by storm in 2017 and 2018, are today a shadow of their former selves.
Once a revolutionary way of raising capital for innovative new products, successful ICOs kick started numerous prominent projects, such as Ethereum, unlocking previously unexplored avenues of innovation and invention in the process. Creating a new paradigm of decentralized business, and allowing contributors to directly throw their weight behind projects which they believed in, ICOs witnessed many ordinary tech enthusiasts enter the market in droves, eager to shape our shared digital future.
Fast forward to today, ICOs have lost their momentum as a series of scandals, including bankruptcies, hacks, and unveiled Ponzi schemes have shaken consumer confidence in the cryptocurrency market. In the second quarter of 2018, although a total of $8.3 billion was raised in ICO, over 50% of the projects failed. However, not all is lost — we are now seeing a new class of digital assets emerge in the form of security tokens and Security Token Offerings (STOs), which offer tangible solutions to some of the most prominent failings of ICOs.
The promise of STOs has long been discussed within blockchain and financial circles, as industry veterans look to the future maturation of the cryptocurrency market. Proponents of STOs have argued that they will likely serve as the the next generation of ICOs, making up for a number of notable shortcomings in the ICO market, most notably in terms of regulatory compliance. As the lack of regulatory oversight in the ICO market birthed a series of scams, the cryptocurrency space has gained the reputation of being a “Wild West”, particularly among public and media spectators. STOs, meanwhile, are structured more similarly to traditional Initial Public Offerings (IPOs), meaning that investors maintain a legitimate claim on their share of returns if a project turns a profit. In contrast to ICOs, STOs provide a much clearer and safer framework for both investors and issuers, as they exist in the already heavily regulated securities sector.
For the most part, national authorities have struggled to appropriately draft regulation around the nascent ICO market, dramatically lagging behind the market’s growth and scale of rapid development. Although a number of jurisdictions, including Singapore and Switzerland, have now formulated formal guidelines around token issuances and cryptocurrency sales, many larger bodies such as the American Securities Exchange Commission (SEC) have failed to offer concrete guidelines to consumers. The government agency has, however, begun to clamp down on noncompliant token issuers, and continues to scrutinize the market closely. This lack of regulatory clarity, combined with the crackdowns on fraudulent and non-compliant ICOs, have attributed to shifts in the crypto market towards STOs.
STOs are designed to be regulatory compliant from the outset, seeking to align themselves with the common standards and laws of the securities market. Security tokens may be traded on fully regulated exchanges, while investors and issuers can enjoy greater confidence in their investment as the tokens are treated under the standard legislation which applies to traditional securities. Leaders of the security token movement insist that these key advantages will attract increased institutional interest to the cryptocurrency space, leading to the more rapid maturation of the industry as a whole.
As we witness a noticeable shift from ICOs to STOs, the cryptocurrency market may be provided with a much-needed boost in confidence. Institutional investors, who were unlikely to invest in the token economy similar to the one that existed in 2017, will continue to enter the space due to the added layers of protection security tokens offer. The influx of institutional investors could have wide economic benefits on the crypto industry, pushing it towards maturation and mainstream adoption. In addition, we are seeing Over-The-Counter (OTC) transactions ballooning, with more and more OTC trading desks being rolled-out over time. STOs may prove the safest, most certain way of bringing institutional money to the crypto industry, providing an array of far-reaching benefits including added diversity in the crypto market. We will witness new creativity when new types of securities are introduced for the wide variety of assets in the market. However, retail investors may have more limitations to participate in STOs, therefore security brokers have to be in place to prevent the market from becoming pure institutional play.
STOs will outpace ICOs as a way of crowdfunding for valid reasons — they offer wider asset coverage and adequate regulation to investors, providing the much-needed confidence boost that was so lacking in ICOs. Worth mentioning, the market will not be as wild as the ICO market back in 2017 as we now have more mature investors, better regulations and more efficient market. Undoubtedly, STOs are here to stay as issuers familiarize themselves with regulatory procedures and seek to align themselves with the relevant authorities. The STO space will be an interesting one to watch out for in 2019, as we witness the development of more secure and compliant trading platforms for security tokens. With the STO market showing promising signs and gaining momentum, STOs are poised to take the center stage. The age of the ICO 2.0 is here.