The development of the digital asset ecosystem has been a windy road, and many questions still remain unanswered, but some general trends are coming into focus. Official Cardano commercial arm EMURGO recognizes the potential value of STOs to be the next impetus in the blockchain and financial industries. Before comparing the options, below are some basic descriptions of the offering methods in context of the financial market.
・ Utility Tokens and ICOs (Initial Coin Offerings)
Most people familiar with crypto have heard the term ICO hundreds of times, so let’s keep this section short. Utility tokens are tokens that can be traded in return for some good or service. They do not represent financial products that would be classified as securities under securities laws, and are in most countries regulated to a lesser extent than tokens backed by securities.
The hype of the 2017 ICO market was felt around the globe, with more than $6 Billion raised in 2017 and even more in 2018. Individuals that had never invested in their lives became crypto retail investors and VCs changed their investment theses to accommodate for presale investment opportunities. With the end of 2017 came a dramatic exit from the parabolic crypto market and the rate of successful ICOs has declined ever since. More recently exchanges have begun conducting ICOs, offering primary issuance of utility tokens to the exchange users. Known as IEOs (Initial Exchange Offerings), this type of initial coin offering is an effective method to reach an audience of millions of retail investors while streamlining the traditional ICO model (previously with many more moving parts).
・ Security Tokens and STOs (Security Token Offerings)
With the 2017 boom and 2018 bust of the ICO market, it became clear that changes were needed in order to establish a sustainable (and more stable) digital asset fundraising ecosystem. The number of low quality projects vastly outnumbered projects with sound business plans, viable or tested models, and experienced (and verified) teams. Investors began to question the value of utility tokens, backed only by the adoption and future use of each blockchain ecosystem. Though funding was infused into the markets in 2018 on a similar magnitude to 2017, investments were focused among a smaller set of projects demonstrating heightened transparency, accountability, and sound use cases.
As 2019 approached, STOs (Security Token Offerings) were hailed as the solution to the inefficiencies and high risk of the ICO market. They promised to offer transparency through comprehensive disclosure, accountability (legal liability), and perhaps most importantly were backed by tangible assets, suggesting less volatility and downside risk.
Security Tokens, tokens classified as securities by regulatory agencies, span a wide variety of assets. Security Tokens may be backed by traditional securities (equity, debt, dividends, derivatives, options, etc), or by commodities, real estate, unique assets (i.e. art or collectibles), and also new combinations of assets that do not exist in traditional markets. For more info, check out What are Security Tokens: An Intro to Security Tokens and STOs.
Many forecasters in late 2018 declared that 2019 would be the year of STOs, with an STO wave greater than the ICO wave of 2017. However, STOs are off to a mixed start, with a select few raising hundreds of millions while the overall number of STOs remains relatively low.