What is a Security Token and STO
‘Security’ is any financial instrument that acts as a guarantee of something.
It can either represent equity or debt. For, e.g., a stake in a company or a loan offer. Security is a fungible, i.e., security offering from one entity is identical. It can be easily exchanged in the market. The value of the security resides with the bearer of the ‘security.’
Furthermore, ‘security’ serves two purposes.
- It provides the necessary financial support to projects and firms. (debt)
- It provides an avenue for investment. (equity)
However, equity is purchased on the guarantee of the firm and its people or an asset.
Moreover, to protect the investor’s interests, regulator all over the world have placed strict financial laws for crowdfunding and IPO (Initial Publis Offering).
The firm must meet the required pre-requisites to make a ‘Public Offering’ of their shares. Only after obtaining a license from the regulatory body, a security offering can be made to the public.
A Security Token Offering
When a ‘security’ is offered as a cryptocurrency token, it is defined as an STO.
Nevertheless, an STO should not be confused with an ICO. There is a lot of difference between an STO and an ICO. According to the SEC, decentralization and autonomy are the two conditions for crypto not to be classified as a ‘Security.’ SEC Chairman Jay Clayton said,
”Lets say you’re a producer of a play, and you invite 10-15 investors to invest in that play for a certain amount of tickets for the play… that is a Security…”
Advantages of an STO
An STO is similar to a Public Offering except it has a lot of added benefit to it:
- Since an STO is designed on Blockchain, it provides global engagement.
Hence, while an IPO is limited due to geographic boundaries, STOs can attract investors from all over the world.
- The transparency and immutability of the blockchain provide an added layer of trust for the investors. Blockchain implementation also reduces the operating costs for issuing them.