STO - Why is everyone crazy about it?

Cryptocurrencies have been on a rise from a few years now, lots of people get used to them, and formed their own opinion about this kind of asset. No matter if these opinions are positive or not, it is impossible to ignore the fact that cryptos caused quite a commotion in both technological and financial world. Never before our globe has seen an investment opportunity so profitable but what more important, easily accessible to everyone in the world. Everything you needed was an Internet connection, that’s all.

But let’s not focus on what cryptocurrencies are, actually let’s talk about what they are not. And unlike many people claim, they are neither a representation of any companies shares nor an ownership symbol of anything besides the digital, artificially created piece of code. In fact, traditional cryptocurrencies don’t hold any of real, financial value. Ok, so is there anything that really got it?

Revolution in financial industry?

Around 300 years ago, first, the fully usable steam engine was invented. It revolutionized transport to the scale which was almost unimaginable in that times. Emergence of blockchain technology and cryptocurrencies is the same for global finances, what steam engine was for transport industry. When properly coupled together, it can boost performance as anything before, giving effectiveness, accessibility and multiplying use cases. We have the opportunity to be on the exact verge of this financial technology revolution, to direct witness the birth of “Decentralized Finances” (DeFi). One of the instruments in this trend are Security Tokens!

So what are these Security Tokens?

Traditionally “security” is the term used to describe an economic instrument that represents value in form of company shares, ownership, debt or another form of equity. Trading them gives the opportunity to take profit from value fluctuations and holding entitles to receive dividends from a portion of companies earnings. In that or similar form markets stayed from hundreds of years, but the time for revolution is now.

A security token is exactly the same, but boosted by the “steam engine” of decentralization, and closed in the form of tradeable, digital equivalent. Technically there is no difference between security tokens and usual utility tokens, but their purpose and usability are utterly different. While utility tokens have to fulfill their designed functions, security tokens have mainly investment purposes and can take over 100% of the function of assets on traditional markets. On the legal side, they are also two separate entities. Utility tokens are mostly unregulated by any laws, thanks to what they were so successful, and why they gave sometimes insane returns. Security tokens are subject to the same laws as conventional securities, so they are partly regulated, for example by the SEC (Unites States Securities and Exchanges Commission). At first, regulations were considered as something what would destroy the cryptocurrency market, and tokens recognized as “securities” were instantly all-up. Times changed, crypto market is maturing and now regulations is what paves the way for the blockchain technology too spread globally and get access to the zones, where the real capital is. Security tokens are emitted in the process called STO (Security Token Offering).

Two Extremes...

Main purpose of any types of offering, is raising funds for company for further development, and financing the next investments (staff, infrastructure, gear) in exchange for shares of company ownership. Conventionally on stock markets, this process goes by the name of Initial Public Offering. That’s the moment, when all investors have the first chance to publicly invest in a company. IPO is backed by the law and secure, but way to it is hard for both the issuer and the investor. First of them needs to pass many complicated bureaucratic and legal procedures to prove its credibility, which is a long, very time consuming, expensive and nerve-wracking process. There are also many geographical, financial, and procedural barriers for potential investors who are willing to support the company by investing in it.

On totally other side stands ICO – the Wild West of investments, and high cryptocurrency trend in 2017. In extreme cases, totally unregulated, chaotic, where non-existent issuer could emit hundreds of millions worth of useless tokens to unaware and inexperienced people all over the world. No procedures, no regulations, no barriers. The key was having an average but good sounding idea, nice and techno-looking website, fake merits of team, and extensive social media marketing. Hype did all the needed work.

... and the real Golden Mean

But what will arise when advantages of these two solutions are combined? Security Token Offering! (STO). It provides all the simplicity and accessibility given by blockchain, together with trust and possibilities of traditional securities.

What was previously said, STO offers real securities in the tokenized form, what that means, it applies to all the legal regulations as conventional assets. That reduces risk of fraud and other dishonest practices, insuring both issuer and the investor. To cut down on complicated procedures, it is possible to take advantage of special platforms with infrastructure created just to guide the issuer through whole process thereby simplifying the way to emitting own security token. Thanks to skipping the entire queue of middlemen and this limited procedure, cost and time to issue a token instead of stock shares is several times lower.

Of course, companies take indisputable advantage of STO, but investors are those who will feel the power of decentralization in its full potential. In a traditional system, it is extremely hard to invest in foreign markets, geographical borders are strong, and need long-lasting operations, many paperwork, middlemen to break. Additionally going through whole the process takes time and money, trading decisions are taken with a long delay causing undesirable results. Finally, only those who are wealthy, persistent and experienced can enjoy the benefits of global financial markets.

Blockchain opens the market on a scale never seen before, truly global scale available for everybody who is connected to the Internet, no matter where he lives. Number of potential investors grew unimaginably, giving immediate and constant liquidity, what together with mechanics specific for cryptocurrencies opens so many new possibilities.

All the system works instantly without the need for brokers, banks, middlemen, what reduces the risk of manipulation or influence from above, yet fully controlled by automatic and independent smart contracts. Trades are cheap and not delayed, procedures are simplified and understandable for everyone. Thanks to core based in cryptocurrencies all investments are heavily scalable and possible to divide into small fractions, what creates opportunity for everyone, no matter how financially capable one is. Additionally STO lets tokenize even material goods like real estate, pieces of art or even people like athletes as full, or just part of them, then take profits or loss depending on their value or performance fluctuations.

This revolution also has a downside - everyone becomes responsible for their own investment decisions. But how can regaining full control over own funds be considered as a disadvantage?

New horizons in financial industry

STO is something so fresh and so groundbreaking, that it has the potential to change financial world forever. Possibilities that it provides are so vast, that we can call it a true revolution. Think about the situation when you come across new, noteworthy investment in China, you do research and take quick decision. Even on the same day you can become the shareholder of a company based on the other side of the globe. Without blockchain, it wouldn’t be possible, or would but after time long enough to miss the highest opportunity moment. Blockchain is an extremally powerful weapon that is finally getting proper, regulated use case, if everything follows the way it follows now, soon will we see free for all and open global market, and this is what both the financial and cryptocurrency industries need to fully bloom.