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The difference between ICOs and STOs

Posted Sunday, January 27, 2019 by
Konstantin Kaiser • 2 min read

Not long ago, the SEC caused a stir in the blockchain community by stating that most of the tokens issued by ICOs could be declared as securities. As a result, ICOs would have been an illegal issuing of non-registered securities. In fact, the cryptocurrency space is known for its speculative and trading interested community which makes it hard to deny the capital gains driven intentions of token investors.

Although blockchain empowered tokens have plenty of use-cases in theory, the reality is that there are very little actual use-cases due to the lack of maturity of the space. However, there are still a number of projects that are actually involving their tokens in a functional ecosystem, enabling the buyer of the token to use the token within the ecosystem. That being said, there is a big difference between a token without a use-case and an actual utility token.

The different tokens can be separated into two types: utility tokens and security tokens.
Characteristically, when a user invests in a utility token, they receive some particular benefits in return. This manifests as having access to a specific system, having exclusive rights, or being able to use the token for a service. This could be access to a music platform, cloud storage or the reduction of fees, as can be seen with the Binance coin.

On the contrary, a security token does not need to have a use-case. Security tokens usually don’t give benefits to investors, instead, they are awarded shares of the company. As a result, security tokens are also referred to as equity tokens and are often compared to the way buying shares on the traditional stock market confers partial ownership of a company.

While it makes sense to add a utility to the token in some cases, security tokens have a much broader interest group. The numerous benefits of the Blockchain are the incredibly fast transaction speed, the necessity of third parties and the elimination of trust due to an evidence-based database. The digitization and tokenization of stocks is the logical next step in order to adapt to the changes in technology and to transform the traditional system into a more efficient one.
While big players like Facebook, IBM and many others declared their interest in the Blockchain technology, they didn’t show any signs of conducting an ICO. ICOs are still an unregulated process and none of them declared it as a security token offering (STO). Also, ICE, the firm that owns the NY Stock Exchange, announced a new venture, Bakkt, a while ago and, additionally, the Swiss Exchange plans to build a regulated exchange for tokenized securities. Both systems aim to combine the best of both worlds: the huge amount of capital present in more traditional investment markets and the adaptability, speed, and efficiency of the blockchain technology.

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