At first glance, initial coin offerings and security tokens perform a similar process by which an investor receives a cryptocurrency or…
At first glance, initial coin offerings and security tokens perform a similar process by which an investor receives a cryptocurrency or token representing their investment. But unlike an ICO coin or token, a security-token comes paired with an investment asset such as stocks, bonds, and funds.
However, there are many more differences between an ICO and an STO. Let’s take a look at them.
What is the difference between an STO and an ICO?
First of all, most ICOs are designed to handle funds in an unregulated environment. Many ICOs actually position their offerings as utility tokens to circumvent regulations. Most founders and various projects claim that they distribute tokens to access their decentralized applications (DApps) or proprietary platforms. The basic logic here is that the purpose of their coin is for use, not speculation. This reasoning allows ICO projects to avoid regulation and the necessary registration with the SEC or other strict regulators.
ICO and STO processes
STOs, on the other hand, are launched with regulatory governance in mind. They are registered with the necessary government agencies, meet all legal requirements and are 100% legal.
Hence, it is much easier to launch an ICO than an STO. An STO requires that all regulatory requirements are met. While anyone can start participating in an ICO (unless local law says otherwise), only fully compliant companies and accredited investors can sell and buy security tokens.
ICO and STO: pros
The advantages of an ICO include:
- No barrier to entry for both buyers and sellers;
- Tokens are distributed in a simple, automated way;
- Teams can manage their funds the way they want;
- If the price of the coin goes up and the team delivers, investors receive high profits and benefits to other users;
- Some ICOs allow anonymous participation.
Benefits of STO:
- Investors actually purchase underlying assets that derive their value from something else;
- 100% regulated offerings that ensure investor safety;
- STO projects tend to be more mature and trustworthy than ICO projects;
- STOs are experiencing significant growth while the number of ICOs is declining;
- Security tokens are expected to be sold through brokers who are also monitored by regulators;
- Security tokens are the next big step in the evolution of traditional finance;
- Less speculation and market manipulation.
ICOs and STO: cons
The most obvious disadvantages of ICOs are:
- High volatility and manipulation of cryptocurrency;
- Low liquidity;
- Uncertainty whether the product will be finalized and delivered as stated in the white paper;
- Fraud, pump and dump schemes;
- Unregulated space with lots of risks.
Minuses of STO:
- Takes a lot of time, effort and money to get the green light from regulators;
- Only for accredited investors;
- May require a significant amount of money;
- So far, the SEC has not approved a single Reg A + STO, and only allows institutional investors to participate.
ICO and STO: Comparison
Despite their differences, both ICOs and STOs are proven fundraising methods for blockchain and similar projects, and both have their pros and cons. You have to decide for yourself what you want to participate in.