RESEARCH & ANALYSIS
FOR THE CRYPTO ECONOMY.

STOs are real, and they’re here to stay

There’s nothing like a good debate to get everyone to think about and solidify their positions, so I’d like to say a few things in defense of the existence and value of STOs.
I’ve been rather clear about my position on security token offerings (STOs): I think that 2019 will be the year of the STO, and that this is the next step in the evolution of the cryptocurrency industry.

Meanwhile, Anthony Back has gone so far as to say “There’s no such thing as an STO.”

There’s nothing like a good debate to get everyone to think about and solidify their positions, so I’d like to say a few things in defense of the existence and value of STOs. I’ll be primarily rebutting the points in Back’s article, since he’s gone so strongly on the attack against the very idea of the STO.

1. STOs are just the latest hype in the crypto market


While yes, we’re all talking about STOs, I wouldn’t say it’s “hype.” There’s no real hype surrounding STOs. Because STOs are already subject to the regulations governing existing securities, we can talk about them based on clear facts related to how traditional security markets work. The hype that you do see is coming from the same sort of people who believe bitcoin will return to a $20k level and thought that every ICO they invested in was going “to the moon!!!” If you ignore the easily excitable members of the community, you’ll find a lot more common-sense discussions about STOs.

2. There’s no liquidity


Of course there’s no liquidity yet. These are brand-new markets, and liquidity takes time to develop. This reminds me of when I got my first email address and people asked me “Why would you bother doing that? No one else is using email!” Someone has to be the first. Every new advancement has its early adopters, just waiting for the masses to catch on. If everyone said “No one else is doing it, so I won’t either” we wouldn’t have phone numbers, email addresses, or social media networks.

It’s true there are few cryptocurrency exchanges and liquidity providers available for security tokens right now, just like there were few places to get an email address in the early days of the internet. The questions we have to ask ourselves are, first of all, is it worthwhile to attempt to grow the liquidity of the security token market? And second of all, how can we do it, and who is attempting to do so?

Liquidity is a problem in many forms of investment. Major investors can afford to have their funds tied up while a start-up takes time to develop itself and turn a profit for themselves and their investors. Smaller investors, however, may find that they actually need that $5-10k they thought they could spare next year. In the investment market, there’s a need for secondary markets so that more people can invest while knowing they can get their funds back if they need them.

3. There’s no investor demand


If the ICO boom of 2016-2017 showed us anything, it was that investors are looking for something new. People are excited about the possibilities for the blockchain and cryptocurrency, and security tokens are a way to bring those possibilities into the fold of more traditional financial investments. Unfortunately, this attracted a lot of inexperienced investors who had bought into the above-mentioned hype and thought that every crypto was going to explode in value the way bitcoin had.

As more people learn about security tokens, they’ll see the benefit in them. A lot of the argument so far has been about how STOs are better than ICOs, but let’s consider how and why they’re better than IPOs.

According to Entoro Capital, an STO could cost 40% less than a traditional placement. This still makes it too costly for some startups to manage, but there’s hope that the costs will continue to come down over time. These lower costs should hopefully also make it more affordable for investors to get in on the ground floor.

As mentioned above, liquidity is a major concern for smaller investors, and STOs offer that by allowing token holders to trade on the secondary market after a year, rather than the several year waiting period for IPO investors.

Likewise, the KYC and other regulatory processes can be sped up when they are handled by the blockchain. This streamlines the process, saving time and cost for the company and allowing investors to get on board more quickly.

Currently, only around 52% of the America's population is trading stock. Where is the other 48%? They either can’t afford to invest, don’t understand the process, or feel like it’s inaccessible to them. I’m not arguing that STOs are going to bring everyone from that 48% into the world of investing, but I am suggesting that STOs could be more accessible to both businesses and investors than the current IPO model.

4. STOs don’t make fundraising cheaper or easier


The problem with this argument is that you’re comparing STOs to ICOs. This is disingenuous, as investor confidence in ICOs is shot and they can’t be seen as a good choice for fundraising in 2019 (I do think that ICOs or hybrid models will make a strong comeback in the future, but they need to take some time to grow up first).

ICOs were cheap and easy to set up, especially at the beginning. This made it far too easy for anyone with a whitepaper and a website built on a template to fleece investors for millions of dollars. The vast majority of ICOs proved to be scams; either outright scams, deliberately taking money with no plan to deliver anything in return, or accidental scams, promising things they could never deliver, blowing through the money, and disappearing.

If we compare STOs to both the failed ICO model and the existing IPO model, I still think an STO will be the best choice for some businesses. While you can set up an IPO for as little as $1mil on some small exchanges in England, Canada, or Australia, you won’t be receiving the benefits of the blockchain. And yes, when compared to an ICO, an STO requires paperwork, jumping through hoops, KYC regulations, and costs more than setting up an ICO. But this higher bar of entry means we should see less scams and half-baked ideas, which should result in less failed projects, and increased investor confidence over time.

5. We’re in for a highly regulated future


I understand why this is a bitter pill for so many in the cryptocurrency community to swallow. I started out believing that regulation was unnecessary and that cryptocurrency should remain entirely decentralized and self-governing. But my time spent researching scams has shown me how desperately we need regulation.

An unregulated field simply allows criminals to come in and take advantage. The decentralized and unregulated nature of cryptocurrencies like bitcoin has lead to the public perception of this technology being that it is primarily used for drugs, terrorism, and money laundering. It’s led to innocent businesses having their bank accounts shut down due to accepting payments in cryptocurrency. And the numerous high-profile ICO scams lead to the demise of an affordable, easy method of raising funds.

Because I’ve accepted that regulation is unavoidable, I’ve also accepted that the crypto community has a responsibility to encourage our lawmakers and regulatory bodies to create special securities rules to govern STOs. I’d like to see securities made more accessible to retail investors, so that anyone could invest $500 to a few thousand dollars on an STO, as easily as they could in an ICO.

In truth, most of our regulations surrounding investments and investor protection are a joke. They’ve barely caught up to the pace of 20th century technology, let alone 21st century innovations. We’re overdue for a complete overhaul of the system, whether or not STOs are here to stay.

6. STOs are boring


A common argument against STOs is that they’re boring, stodgy, old school. They’re too institutional. Compared to the Wild Wild West of ICOs, it feels like more of the same old Wall Street mindset that we grew up with.

People liked ICOs because they felt like anyone could be an investor, in any crazy idea, and see massive returns when the idea took off and the utility tokens gained in value. But that simply didn’t prove to be the case.

Participating in crowdfunding doesn’t make you an investor. People have learned, time and again, whether through ICOs or Kickstarter, that participating in a crowdfunding model guarantees you nothing. You have no protections and the project has no obligation to deliver what they promised. You are not making an investment, and you’re not even making a donation. You’re handing your money over on the vague promise that someday, you might get something in return.

STOs, on the other hand, are an investment. The drawback to this is that currently, they’re often only accessible to the sort of “accredited investor” that has traditionally dominated Wall Street. This can feel like cryptocurrency and the blockchain have been taken out of the hands of the common people, and put into the hands of Big Money (like so many other things in life).

Are STOs boring? Maybe they are, but I don’t think it really matters. Some things in life are meant to be boring. There are still high-risk investment opportunities for those who have the capital to spare and love the thrill of the unknown.

What now?


If STOs are going to succeed and build an ecosystem for their blockchains, they’re going to have to be able to reach more than just those big accredited investors. This is a legitimate concern that the crypto industry has to find a way to address. And many in the industry are doing exactly that, by meeting with regulators, and writing to politicians, and continuing to work every day to spread awareness and encourage mass adoption.

We haven’t found the perfect solution yet. It’s only a month into 2019, and we’ll probably spend the entire year debating whether or not STOs are the next great thing or just a blip on the crypto radar. But let’s not let that debate divide us. Instead, let’s  roll up our sleeves and work together to either build the infrastructure to make STOs succeed, or to get to work on the next, even better solution that will bring together the consumer protections of regulation and the accessibility of crowdfunding.
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