Estimates of $22 billion were raised in ICO funds in 2018. The exact amount is unclear but it is nearly double the raise of 2017. In fact, ICO funding surpassed angel and seed funding for early-stage technology companies in the summer of 2017.
It truly was the Wild, Wild West. And yes, was is a keyword here.
Research finds that 7 out of 10 ICO’s are completely undervalued in what they raised, with an estimated $6 billion loss in market capitalization. A quick primer for those new to cryptocurrency market capitalization is the value of a company that is traded on the market, calculated by multiplying the total number of shares by the present share price.
In fact, over a third of all ICO tokens have never been listed on an exchange according to the same research. This all adds up to broken promises and investors getting pennies on the dollar, if in fact, they get anything back at all.
The US Securities and Exchange Commission is putting a stop to these kinds of offerings for good reason. Which is why the ICO is coming to a dead halt and the STO (Security Token Offering) is on the rise.
What Is A Token?
First, there are many forms of tokens. They represent various different forms and functions and are therefore hard to define, which is one of the reasons the Wild, Wild West has been at the helm of some investor nightmares. It’s all new. Lack of understanding for the general user with some who are launching these tokens taking advantage of the purchaser due to no regulation.
Tokens can represent a user’s reputation within a system (example: Augur), a deposit in US dollars (example: tether), the number of files that are saved in it (example: filecoin) or the balance in some internal currency system (example: bitcoin).
Thus, a token can fulfill either one or several of the following functions:
- A currency, used as a payment system between participants
- A digital asset (a digital right like land ownership)
- A means for accounting (number of API-calls, volume of torrent uploads)
- A share (stake) in a company
- A reward for contributors (i.e. Steemit)
- Payment for using a system/product/service
What is a Security Token and Why Is It The New ICO?
To understand what security tokens are, it is crucial to understand securities.
Securities are tradable financial assets such as bonds, debentures, notes, options, shares (stocks), and warrants. And if we take the example of stocks, you might understand that it is a way to own a part in a company without taking actual possession of it.
Companies and governments use this method to raise money from capital markets from various investors. And then these investors are promised a return back programme in the form of dividends or interest rates or share of company’s profit in some form or other.
When these things are done through a cryptographic token, it is called a ‘Security Token’.
In simpler terms, security tokens are cryptographic tokens that pay dividends, share profits, pay interest or invest in other tokens or assets to generate profits for the token holders. This takes care of the liquidity issues.
Previously, with traditional paper backed assets like company’s shares or bonds or real estate, liquidity was a problem, but the cryptographic representation of all these things in a token form can take care of that issue.
Imagine, your dividends being paid to you on a specific date upon meeting a certain condition via a smart contract! (We’ll cover that in another article)
All these programmabilities can bring in a lot of automation and swiftness to the whole process because after all, you are creating programmable security. And this type of security can do all things that a traditional form can and more.
Moreover, there is sufficient demand for such type of security tokens because security’s regulations in the respective jurisdictions govern them.
Thus, Security Tokens Offerings are a two-fold challenge:
- Issuers will look for jurisdictions that recognize tokenized securities, but…
- Trading platforms and service providers can only build up the necessary infrastructure where the proper legal framework exists.
In all likelihood, due to the wide spectrum of use cases; zero tolerance for shaky legal grounds; andlimited pool of addressable investors; we won’t see mega STO rounds in the coming months. Instead, in our minds, smaller private placements backed by thorough disclosures will become the norm.