Chainalysis – a commonly used blockchain data company – recently invested in an unspecified amount of Bitcoin. The investment comes as Bitcoin's price creeps ever closer to all-time highs and surpasses its market cap record from May. Chainalysis Plans to HODL The data provider announced its latest investment in a blog post today and simultaneously confirmed a new partnership with NYDIG. NYDIG is a Fintech service provider for banks, corporations, and institutions. The financial company has allowed Chainalysis to add…
Initial Coin Offerings (ICOs) and Initial Exchange Offerings (IEOs) have been around for a couple of years. They represent a viable form of raising money for companies developing blockchain-based projects. For a long time, developers could not get enough of them. That is until Security Token Offerings (STOs) entered the scene and kicked speculative secondary markets in the teeth.
Now, we are looking at a slow but steady fading away of ICOs & IEOs as fundraising methods in favor of STOs. The latter’s compliance with regulations, public trust, and accountability seem to lead the crypto world into a new era of investment security. How will it impact Bitcoin evolution and crowdfunding? Let’s find out!
Before we dive in, it is best to get a quick reminder of what ICOs are, how IEOs work, and what is so great about STOs.
What is an ICO?
An Initial Coin Offering is one of the basic methods through which a company gathers funds for developing a product or a service. The concept is very similar to the traditional IPOs (Initial Public Offerings) through which companies would sell shares under the direct supervision of one or multiple banking institutions.
A company that uses an ICO to raise funds for a blockchain-based product or service does so to avoid regulatory limitations that usually apply to IPOs. In exchange, they offer investors unique crypto tokens that are attached to the project.
Investors may choose to purchase tokens in exchange for fiat currency or other cryptos, depending on the company’s white paper. Once the blockchain-based product or service is up and running, token holders can use their assets to support its further development, create DApps, or engage in smart contracts. Additionally, they can sell or trade them, more than often at a higher price than their initial investment.
In theory, ICOs can be a high-stakes financial enterprise with a significant investment return if the project develops into a successful, scalable platform. However, things are not as rosy as they seem on this matter. We will talk about that a bit later.
What is an IEO?
An Initial Exchange Offering or IEO is an ICO operated by a cryptocurrency exchange on behalf of the company that aims to gather funds for a token-based project.
Users can buy crypto tokens only on the exchange that administers the IEO. They do so by abiding by certain rules and listing fees that the exchange platform imposes. Also, buyers must open accounts and exchange wallets on the exchange platform instead of sending their money to smart contracts on the company’s blockchain.
Additionally, the exchange takes a share of the tokens from every transaction. In return, it also deals with the marketing operations of the company that issues the tokens.
While they offer a higher level of trust than ICOs, IEOs still have their flaws. One downside is that startups who want to use them must pay higher costs and get less money to sell tokens.
What is an STO?
Here is where things get interesting! A Security Token Offering (STO) is a cryptocurrency token that gives its owner additional investor rights than a token purchased through an ICO or an IEO.
An STO allows the investor to choose between several reward forms once the issuing company is up and running. One can have their pick from owning stakes within the enterprise, get a share of the profits or traditional stocks.
A Security Token Offering is the crypto version of classic certifications that an investor would get when buying stocks within a company. In that case, you would receive a paper document as evidence of your investment.
When you invest in STO, your purchase becomes a visible and unalterable part of a blockchain. Therefore, your contribution to the company’s fundraising campaign is a digital asset that you can later exchange for one of the rewards mentioned above.
The Benefits of an STO
First off, investing in an STO is much more advantageous than taking part in an ICO. When you purchase tokens as part of an Initial Coin Offering, you get only utility tokens in return. Therefore, you are limited to use those tokens for DApps or other blockchain applications that the issuing company enforces.
When you buy STO, your investment is backed by an asset. The tokens that you purchase can later be the subject of further investment or financial reward due to the company’s successful development.
Secondly, an STO complies with reliable regulatory governance. When a company launches them in a country, they abide by the laws and regulations that the government has for securities.
Furthermore, companies that issue an STO in a country and have investors from other countries must comply with governmental regulations from every country involved in the process. As a result, the investment risk diminishes significantly, and the investor can rely on additional security layers.
Issuing companies also benefit from launching STOs instead of traditional IPOs. Raising funds and attracting new investors costs less because they do not rely on middlemen like brokers or banks to supervise them.
Even the environment benefits from STOs as companies do not have to issue palpable, paper-printed certifications to investors. Those who want to participate in the fundraising can always verify their digital assets as part of the blockchain.
Finally, since STOs are legally compliant, they can easily attract institutional investors. An STO can link private and public enterprises in grand-scale fundraising projects.
Why ICOs & IEOs are doomed
A recent study from Inwara shows that the beginning of 2019 has seen a remarkable increase in STO launchings of up to 130% and a simultaneous drop in ICOs. It is a clear image of how blockchain technology increases in both popularity and real-life implementation.
ICOs were faulty investments ever since their inception. Companies and investors chose to go ahead with this method of fundraising for the sake of technological development. However, they were always liable and vulnerable to fraudulent activities, manipulation, and even Ponzi schemes.
ICOs also have a poor reputation for bad reporting and over-promising results. The same disadvantages give IEO investors terrible nightmares when they have to rely on an exchange to intermediate their fundraising campaign participation.
All of these problems with ICOs and IEOs led to the appearance of STOs.
A Security Token Offering benefits from a higher level of regulation, better protection for investors, and moderate costs for the issuing companies. An asset-backed token is more appealing to investors. Therefore the probability of fundraising campaigns exceeding their goals is higher than with ICOs and IEOs.
At the moment, there is no turning back to these risky and redundant ways of raising money for developing a business.
STOs are the future of fundraising for both startups and industry veteran companies. They give investors more control of their financial enterprises and improve the reputation of the crypto market.