August 30, 2024
By Anjali Kochhar
Security Token Offerings (STOs) are becoming a game-changing fundraising technique in the ever-changing financial industry. STOs provide a controlled, safe, and effective alternative to traditional IPOs and ICOs for raising capital, as these businesses come under more and more regulatory scrutiny. But will STOs dominate fundraising in the future? The potential of STOs, their benefits over conventional fundraising techniques, and the difficulties they encounter are all covered in this section.
STOs are a cross between blockchain technology and conventional financial securities. STOs are backed by actual assets like stocks, bonds, or real estate, as opposed to initial coin offerings (ICOs), where tokens are frequently utility-based and unregulated. Because they are issued on a blockchain, these tokens have efficiency, immutability, and transparency. In 2018, Overstock’s tZERO launched the first STO, ushering in a new era for the capital markets.
STOs are attractive because they can tokenise physical assets. Through this technique, a tangible asset is digitally represented on a blockchain, facilitating trade and increasing accessibility for a worldwide investor base. The potential for STOs is huge, as the global market for tokenised assets is expected to reach $24 trillion by 2027.
Vikram Subburaj, CEO of Giottus Crypto Platform, views Security Token Offerings (STOs) as “a significant evolution in the fundraising landscape.” He emphasizes that STOs combine the advantages of traditional securities with blockchain efficiency, offering transparency, security, and global reach. “STOs enable cost-effective access to a global pool of investors,” he notes, adding that they also provide investors with a new asset class. However, Subburaj cautions that “regulatory clarity is crucial” for broader acceptance, as STOs are still in their early stages of development but hold the potential to become mainstream.
Regulatory compliance is one of STOs main benefits. The same rules that apply to regular securities also apply to STOs, in contrast to ICOs, which frequently operate in murky legal waters. An element of security and confidence that ICOs do not offer to investors is provided by this compliance. Another benefit of regulatory control is a lower chance of fraud, which is a major worry in the ICO industry.
STOs also offer greater liquidity compared to traditional securities. By tokenizing assets, STOs enable fractional ownership, allowing investors to buy and sell smaller portions of an asset. This fractionalization can lead to increased market participation, as investors who may not have been able to afford a full asset can now invest in smaller portions . Additionally, the use of blockchain technology in STOs reduces transaction times and costs, making it easier and cheaper to trade these tokens on secondary markets.
Another key advantage is the global reach of STOs. Traditional fundraising methods are often limited by geographical and regulatory boundaries. STOs, however, can be accessed by investors worldwide, provided they comply with the relevant regulations in their jurisdiction. This global accessibility increases the potential pool of investors, making it easier for companies to raise capital .
Dr. Ravi Chamria, Co-Founder & CEO of Zeeve, believes “STOs are becoming a credible alternative to traditional fundraising.” He highlights their flexibility and speed, stating that “STOs offer more profitability compared to IPOs, combining regulatory rigor with blockchain efficiency.” Chamria adds that “the tangible backing in real assets gives STOs credibility that utility tokens lacked.” However, he cautions that “the future of STOs will hinge on how they evolve with regulatory changes and market adoption.”
Despite their advantages, STOs are not without challenges. Regulatory uncertainty remains a significant hurdle. While STOs are more compliant than ICOs, the regulatory landscape for digital assets is still evolving. Different countries have different approaches to regulating STOs, and navigating these varying regulations can be complex and costly for issuers .
Another challenge is the lack of awareness and understanding of STOs. While blockchain technology and cryptocurrencies have gained significant attention in recent years, STOs remain relatively unknown to the general public. This lack of awareness can make it difficult for companies to attract investors, particularly those who are unfamiliar with the concept of tokenized assets .
Additionally, the infrastructure for trading security tokens is still in its infancy. While there are several platforms for trading utility tokens, the market for security tokens is much smaller. This lack of established infrastructure can lead to issues with liquidity, making it difficult for investors to buy and sell tokens .
Despite these challenges, the future of STOs looks promising. As the market for tokenized assets grows and regulatory frameworks become clearer, STOs could become a mainstream method of fundraising. The potential for increased liquidity, global accessibility, and regulatory compliance makes STOs an attractive option for both issuers and investors.
Moreover, the integration of blockchain technology into traditional financial markets is likely to continue, further blurring the lines between traditional and digital assets. As more companies explore the benefits of tokenizing their assets, STOs could play a significant role in the future of capital markets.
While STOs are still in the early stages of development, they offer a compelling alternative to traditional fundraising methods. As the market matures and the infrastructure for trading security tokens improves, STOs could become a key component of the financial ecosystem, offering new opportunities for companies and investors alike.
About the author
Anjali Kochhar covers cryptocurrency stories in India as well as globally. Having been in the field of media and journalism for over three years now, she has developed a sharp news sense and works hard to present information that goes beyond the obvious. She is an avid reader and loves writing on a wide range of subjects.
