Security Token Offering (STO) and Tokenization

Security Token Offering (STO) and Tokenization: How to Digitize the Real World with Blockchain

Nick Kurat
Nick Kurat
publish date April 11, 2019 Tags
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If you think about raising capital in an innovative but transparent way, you opened the right article. If you consider tokenizing physical assets to increase their liquidity levels effectively, it will offer a basic understanding of the process. In both cases, Security Token Offerings (STOs) provide such opportunity.

Logical step from ICO to STO

Initial Coin Offering (ICO) has become a synonym both for abundant crowdfunding and shady activities of founders. ICOs provided significant benefits to the companies raising capital while transferring the majority of risks to the coin buyers. However, the tool itself has validated its efficiency, and STOs became an evolutionary step due to the involvement of the central authority and transparency. In a new model, “tokens” result in legal liability to the businesses and have a connection to the financial performance and capital structure.

Furthermore, STOs fall in the regulatory jurisdiction of the U.S. Securities and Exchange Commission (SEC) and the other similar bodies in other countries, with the registration requirement and the eventual tax exemptions for their holders. Tokens minimize the risks for investors because of their connection to the assets of various entities whereas offering legal rights. They may combine the benefits offered by stocks and bonds in the form of equity shares and guaranteed interest payments.

Coins and tokens: feel the difference

Both coins offered through ICOs and tokens presented by the STOs are crypto assets. The core difference between the concepts is the unit of representation: coins represent cryptocurrencies, while tokens may also represent both digital and physical assets. Moreover, tokenization can be achieved on public and private blockchains whereas cryptocurrency has only a public property by default. It is possible to place tokens in the three main categories:

  • Utility tokens: primarily network-based and subscription-based.
  • Reward tokens: discount and loyalty points.
  • Asset (Security) tokens: ownership and voting rights.

Tokenization is gaining traction because of the three main reasons: simplicity, security, and liquidity. Blockchain technology excludes the intermediary and supports the transaction between various parties. Liquidity stems from the ability to liquidate and trade various types of previously illiquid assets, such as property. Tokenization is possible for the majority of the commodities traded on stock exchanges today, such as gold, certificates, property, equity, and even agricultural commodities, such as wheat and soybeans.

The shift towards STOs is possible because of the depressing tendencies in the cryptocurrency markets, namely declining prices of the major coins, BTC and ETH. In addition, regulatory oversight in the form of SEC and similar governing bodies in the other countries allow primarily STOs. Several projects have already announced their STOs with an intention to register with SEC.

What can you tokenize?

What can you tokenize

Tokenization is possible to the majority of the common physical assets, including precious metals, buildings, certificates, shares of the companies, and other assets. Several companies were able to tokenize several types of assets.

  • Gold: Digix has become the first smart asset business entity in the world. The focus of Digix is gold trading using blockchain technology. In particular, 1 DGX represents 1 ounce of gold on Ethereum.
  • Real Estate: Inveniam Capital Partners is planning to tokenize real estate in Miami, Florida. The total value of the mentioned real estate is $260 million. The tokens will represent shares of the buildings.
  • Education Certificates: Learning Machine continues its work on tokenizing education certificates for the government of Malta.
  • Real Estate: Brickblock Ltd. assists with tokenization of the physical assets; in the meantime, it is hosting a platform for direct investments. Brickblock allows investing in properties such as 50-unit residential property in the United Kingdom.
  • Securities: Polymath offers tokenization of securities with the subsequent investments using cryptocurrencies. Security tokens enhance level of liquidity for the investors.

Tokenization continues gaining popularity because of its simplicity, transparency, and availability. Regulatory oversight brings credibility to the process, effectively minimizing the associated risks. Tokenization is possible with the help of the third parties specializing in the process.

Appreciate the potential of tokenization

The mentioned projects represent the initial fraction of the possibilities for tokenization. Blockchain technology offers further opportunities for a large number of industries. The main industries embracing STOs are finance, technology, energy, and real estate sectors. The current valuation of the STO market size varies between $300 million and $1 billion in 2018. Similarly, the projected market growth for 2019 varies between $1.5 billion to $3 billion. The market growth rate will depend on the amount of successful STOs, as well as the involvement of the large corporations.

Blockchain and tokenization have significant potential. These concepts continue penetrating new industries and aspects of everyday life. It is possible to forecast that the majority of operations and processes will utilize blockchain technology in the future. Such an approach will stem from the simplicity of the process and the subsequent minimization of the security-related and privacy-related risks.

Tokenization can:

  • remove ambiguity in settlements and reconciliations
  • offer a clear understanding of the value for selected goods and services
  • eliminate needless and costly third parties
  • grant access to cheaper funding for the companies, while limiting risks for the investors
  • yield liquidity for financial instruments and even real estate

Overall, the process can minimize the costs necessary to provide financial support to various projects and companies and enable automation and interoperability between businesses. Low entry barriers will expand the financing capabilities on a global scale. Smartphone and Internet would be sufficient to engage in the new activities.

Blockchain continues bringing disruption in the main industries and sectors. The technology maximizes efficiency and effectiveness of the common processes. Purchasing a product or a service with blockchain becomes cheaper and easier. The new approach removes data security and privacy risks. Tokens contribute to liquidity and increase the speed of financial transactions. Digitalization of the modern world has begun and there is nothing to stop it.

Imagine all this to interconnect

Tokenization is the tendency of the future primarily because of its simplicity, security, and credibility. The potential of the approach stems from the development of the financial markets beyond their current boundaries. In addition, tokenization of assets becoming available to the general population will generate economic growth. In the end, the first ones to understand, implement, and embrace the technology will obtain the greatest benefits.

Make your enterprise a frontrunner

The tokens and STOs are the natural evolutionary step from the coins and ICOs. Their benefit relates to the lower level of risks and the bigger value for the investors. Regulatory oversight of the STOs prevents drastic declines in values of the tokens because of the failures to deliver on the corporate promises. Backing by the physical assets reflects the value of the tokens. STO market continues growing with a larger number of fruitful projects. Successful tokenization of gold, real estate, education certificates, and securities has already occurred. The technological process will accelerate tokenization with its simplicity and availability. Business entities partaking in the process at its early stages will be the biggest beneficiaries.