421
views

ICO vs. STO – Understanding the Differences

As a savvy blockchain investor, it’s smart to understand the differences between an ICO vs. STO. Recently, there has been a lot of hype surrounding STOs and their ability to service institutional clientele. Here is how these unique financial instruments came to be and why so many analysts see them as the evolution of Initial Coin Offerings (ICOs).

What is an ICO? – ICO vs. STO

The first step in this journey is to understand precisely what an ICO is and what purpose it serves. ICOs are blockchain-based crowdfunding campaigns. What makes them so unique is their ability to streamline the crowdfunding process.

Before the ICOs, crowdfunding campaigns consisted of Initial public offerings (IPOs).  IPOs are the process by which a private company can go public through its stocks to the general population. The problem with IPOs is that they are expensive to host and require the company hosting the event to traverse an intensive regulatory framework. 

On average, hosting an ICO costs a company around $1 million. Additionally, there are specific requirements every company that wishes to host an IPO must follow. These regulations include publicly listing financial disclosure. Firms must also provide in-depth information regarding their executives and their network. Once you take all of these factors into account, it’s easy to see why SMEs decided to search for alternatives. 

 ICOs Eliminate these Costs

Through blockchain technology, ICOs provide a more secure and efficient means to accomplish the same goals as an IPO. Blockchain leverages transparency and real-time monitoring capabilities to ensure the network remains secure. These systems also eliminate the need for third-party verification systems.

These systems are responsible for much of the costs and delays encountered in the IPO strategy. Eliminating these concerns lowers the entry bar for startups seeking to secure public funding. Consequently, it was only a matter of time before ICOs began to take flight.

The First ICOs

The first ICO took place in July 2013. The event, hosted by the Mastercoin, demonstrated how ICOs could provide the same services as IPOs but at a fraction of the cost. In 2014, Ethereum launched an ICO that secured the network 3,700 BTC in its first 12 hours (approximately $2.3 million at the time).

2017 Break Out Year

In 2017, the entire crypto market experienced a breakout year. The value of most cryptocurrencies skyrocketed as more investors poured into the sector. At this time, it seemed as if all blockchain-centric companies were well on their way to success. However, this was not the case. 

Billions Made

Despite companies such as EOS securing billions during their ICOs, traditional investment firms and major corporations still avoided the practice. These companies felt as if the ICO sector was the wild west of investments, and the lack of an established regulatory framework left their investments open to unnecessary risks.

Sadly, many of their concerns proved to be true as scammers began to dominate the ICO sector. At one point, reports suggested that as many as 80% of the ICOs available to the public were scams. These scams resulted in billions of lost revenue. 

Regulators Step In

As the number of jolted investors increased, so did their voices demanding retribution. Eventually, regulators had no choice but to intervene. This intervention is known as the ICO crackdown. Officially, the ICO crackdown started in China after the government banned ICOs and cryptocurrency exchanges.

Over the following years, regulatory bodies such as the SEC began to go after major ICOs from 2017. These firms had to pay fines and penalties for “the illegal sales of securities.” In some instances, the firms had to refund investors fully.

Howie Test

Usually, regulators turned to the half-century-old “Howie Test” to determine if a particular digital asset fell under the strict securities guidelines currently in place globally. The Howie Test is simply a set of questions regarding a specific investment. If you answer yes to two of these questions, your investment falls under the scope of securities regulations. 

  1. It is an investment of money.
  2. There is an expectation of profits from the investment.
  3. The investment of money is in a common enterprise.
  4. Any profit comes from the efforts of a promoter or third party.

If You Can’t Beat’em, join ’em

As the regulatory climate became hostile towards ICOs, blockchain developers sought out other ways to continue to leverage blockchain technology within the crowdfunding sector. Soon it became evident that a new type of token was needed. 

What is an STO?

This token, known as a security token, would include all of the regulations required by the SEC directly in its protocols. These tokens featured advanced smart contracts that could approve and deny transactions based on their regulatory compliance. These new offerings received the name – Security Token Offerings.

What Makes STOs so Great

STOs provide traditional institutions the ability to conduct crowdfunding campaigns via the blockchain without the risk of future regulatory concerns emerging. These token can include a host of regulatory requirements. These regulations can include KYC/AML, geo-location-based restrictions, and minimum investment amounts.

Different than ICOs

Although STOs operate similarly to ICOs, they are very different in many ways. For example, in an ICO, anyone can participate from around the world. Additionally, there is little to no additional requirements to meet. In most instances, the only real concern is the ICO start and completion dates.

An STO requires a lot more work on the part of investors. Investors will need to meet all of the predefined stipulations before they can even invest in an STO. Additionally, STO investors are unable to trade their tokens to unauthorized parties. In this way, STOs retain regulatory compliance throughout the lifecycle of their tokens.

So Which is Better – ICO vs. STO?

Bitcoin live price
Btc
Bitcoin
$28.831
price
0.80253%
price change
BUY NOW

In the end, there is no one size fits all when it comes to blockchain crowdfunding. If you live in a region with little regulatory oversight, an ICO will cost much less to host and provide you with the same opportunities as an STO. However, if you live in the US or EU, you will want to evaluate your project to see if it is wise to host an STO or an ICO based on its merits.

Stay up to date with our latest articles

More posts

How Can You Determine the Rarity of an NFT?

The rarity of a non-fungible token (NFT) is one of the most often debated topics on the internet. The rarity of an NFT is one of the most critical elements in determining its value. Understanding how rarity works is a significant advantage for anyone investing in the NFT market. How can traders learn to measure this feature for any digital asset? Our guide today will share more insight on this critical aspect. Is It Possible to Measure Rarity? There has…

What is Tornado Cash, and How Does It Work?

Decentralized and non-custodial, Tornado Cash is an Ethereum-based solution for privacy and anonymity. Severing the on-chain link between those who send and receive coins enhances transaction anonymity.  This guide will provide our readers with more insight into Tornado Cash. We will start with a general introduction and move deeper into how Tornado Cash works. We will also add a list of pros and cons to this system for the reader's benefit. Understanding Tornado Cash Decentralized protocols such as Tornado Cash…

How Can Crypto Trading Bots Help You Manage Your Investments?

Bots are computer programs designed to carry out specific activities automatically. They operate with the least amount of human input possible.  Crypto trading bots are automated programs that trade a single coin or a portfolio of cryptocurrencies. They trade on one or more exchanges on behalf of the owner or user.  Cryptocurrency bots can automate trading tactics to increase portfolio profits. Today, we'll take a closer look at this ever-expanding technology.  A Simple Way to See Crypto Trading Bots Artificial…

Can You Really Protect Your Crypto Investments Against Whales?

It is only natural that the price of BTC changes following whales' transactions. Because altcoins have smaller market capitalizations, this effect is even more pronounced on their prices. The ways whales manage to manipulate the market are inventive and can lead to heavy losses for small traders. In our guide, we look into the matter and reflect on how to protect a wallet against whales. Understanding the Concept of Whales The term "crypto whale" refers to a person or organization…

What Are Fractionalized NFTs?

Most people who use the internet regularly, whether for business or pleasure, are familiar with NFTs. Everyone in the crypto/blockchain community looks at these "Non-Fungible Tokens” with interest.  The only problem is that NFTs are becoming extremely popular and too costly to own.  In this context, Fractional NFTs, or F-NFTs, have entered the market to attract new investors. Imagine dividing a single NFT into smaller parts and making it available for purchase. This concept is the principle governing the growing…

Diluted Market Cap – A Beginners’ Guide

The value of a cryptocurrency is difficult to predict, especially if we are dealing with a new token. If you're looking to invest in cryptocurrency, measures like the fully diluted market cap can guide your choices.  The term "fully diluted market cap” will represent the core of today’s guide. We'll begin by defining the sector's market capitalization before moving on to more advanced notions. Market Cap in the Crypto Industry The total worth of an asset now in circulation corresponds…

Top Crypto Marketing Agencies to Promote Your Cryptocurrency Project in 2022

Nowadays, launching a crypto project can be a daunting task for most developers, especially considering the competition. This report claims that the industry amasses over 18,000 cryptocurrencies as of March 2022. Whether you focus on NFTs, DeFi, or any other crypto-related activity, you will have to face stiff competition. Fortunately, you can gain a competitive advantage over your peers with the help of crypto marketing agencies. These services cover all the promotional aspects your project needs to get into the…

The Difference Between Capped and Uncapped ICOs

Some ICOs decide to set a cap on how many coins investors can buy. However, some people choose to offer unlimited coins at the sale. Different teams can follow different strategies to obtain success in this growing market. Today, our guide aims to make a clear distinction between capped and uncapped ICOs. Understanding the Concept of ICOs An ICO (“Initial Coin Offering”) is a way to launch a new cryptocurrency. ICOs are a way to raise money for a project…

Is It Possible to Spot a Fake NFT?

Blockchain technology should have made life simpler for digital artists selling unique tokens of ownership to other people. A public ledger can give buyers a record of who owns a piece of art in perpetuity. Blockchain gave some artists a new chance to earn money. However, some artists admit that the last year's crypto boom has been a real mess.  Anyone can "mint" a digital asset as an NFT, even if they don't own it. How do you spot a…

Unstoppable Domains – A Beginner’s Guide

Unstoppable Domains are an intriguing and unique new option that is gaining traction in the crypto industry as more people become aware of them. Even though you may be inclined to dismiss them as simply another "crypto craze,” you may not want to be so hasty in your judgment. Whether you have your wallet or just learning about crypto, unstoppable domains have some unique advantages that you might consider utilizing for your website. This post will go over all you…