What Is the Difference Between STO and ICO?
Initial Coin Offerings (ICOs), a well-recognized form of token sale, dominated the cryptocurrency market until their popularity waned in 2018, following market collapses and regulatory challenges encountered by both investors and companies.
In response to these hurdles, a new breed of initial offerings emerged. Today, the cryptocurrency landscape features up to ten diverse ways to attract capital, with the STO standing out among them.
What is an STO?
An STO, or Security Token Offering, involves the initial sale of tokens that offer ownership rights over a particular investment asset, all documented on the blockchain. These STOs provide digital certificates, governed by the legal requirements of securities regulation. The foundational assets for security token offerings can range from shares and bonds to other traditional financial tools.
Companies that have securities already listed on the stock market find STOs appealing. Through the implementation of blockchain technology and smart contracts, they are able to tokenize their ownership shares. This action enhances liquidity, fosters beneficial financial circumstances, automates and streamlines processes, and elevates transparency in information.
The concept of STOs as a service was first put forward in 2018 by the American firm, Praetorian Group. Fast forward to 2020, the market value of security tokens saw an incredible rise of 500%, amounting to $449 million. By 2021, their market value had further climbed to reach $1 billion. As of May 2022, the overall market capitalization of tradeable security tokens had surpassed $19 billion.
What is an ICO?
An ICO, or Initial Coin Offering, is a fundraising event where cryptocurrency startups accumulate capital to kickstart their products.
Ahead of an ICO, projects generally generate a Whitepaper and other formal documents. These provide an insight into their vision, objectives, tokenomics, technological features, advantages, and other unique aspects. Following this, they proceed with a presale and eventually the ICO, leveraging specialized platforms to trade their tokens for other cryptocurrencies or fiat money.
Investors and traders engage in ICOs, hoping for an increase in the value of the tokens they purchase, while others buy tokens for practical use within the scope of a specific project.
The boom in coin offerings was between 2016 to 2018. In the first quarter of 2018 alone, companies raised more than $6 billion this way. However, by the end of 2018, the cryptocurrency market capitalization had dropped by $750 billion. This drastic fall drew the attention of regulatory bodies, leading to their claim that all tokens and cryptocurrencies should be considered as securities, hence, regulated under securities laws.
This inference was not well received by the cryptocurrency community and blockchain project founders. This stance is understandable as many were offering utility tokens, essential for maintaining distributed ledger ecosystems, incentivizing users, and providing access to platform functionalities.
How does STO differ from ICO?
The first difference that jumps out is the presence of a regulatory framework with STOs and possible regulatory assaults on ICO-utilizing projects.
Therefore, as opposed to STOs, ICOs carry the inherent risk of fraud. Hence, it's crucial to thoroughly scrutinize a project before buying its tokens.
Another notable difference pertains to the ultimate intention of the tokens issued via these kinds of token sales. For STOs, the ultimate aim is investment. On the other hand, ICO tokens primarily provide expanded access to a blockchain project and its perks.
As a result, projects opting for ICOs aren't required to adhere to securities laws, as their tokens don't qualify as securities. Nevertheless, regulators have a different perspective, leading to lengthy legal disputes for cryptocurrency projects.
ILaunching an ICO is significantly easier than an STO, as the latter requires numerous preparatory steps to meet the regulatory demands. In addition to this, investors frequently need to go through accreditation to participate in an STO.
Finally, ICOs are exclusive to the cryptocurrency and blockchain market, whereas STOs represent a modern approach for public companies to raise funds, implying the tokenization of conventional investments.
Just a quick reminder: we previously highlighted the contrasts between ICO and Initial Exchange Offering (IEO). And here, you can discover more about alternative options to ICO.
