With a lot of information available over the internet, readers might feel a little confused when they are looking for specific knowledge regarding Security Token Offerings. The word token implies a representative unit for a function, process or tool. The STO is similar to an Initial Coin Offering but an STO is a representation of an investment contract for investment collateral like bond, stock fund or real estate investment trusts.
In simple words, a token is a negotiable financial instrument with a monetary value which is backed by a tangible asset in the form of an enterprise, property or product. The popularity of STOs has led to a lot of information being shared over the internet for the purpose of knowledge sharing.
Thus the token represents the ownership information of the product invested on and recorded on a blockchain. The process is very similar to investment in traditional stocks where the ownership information is recorded and documents issued with specific stock details and ownership details. When it comes to bitcoins, the ownership information is recorded on a blockchain and issued as a security token!
Regulation of Security Token Offerings
The regulation of security token offerings is an important point which needs to be discussed and understood when we are discussing Security Token Offerings. The SEC or the Securities Exchange Commission is very vocal about the way in which security tokens are defined. They also have a take on whether security token offerings should be regulated or not.
According to the SEC, ICOs will be considered as a security if they fall under the scope of an investment contract, validated by the Supreme Court.
Types of Tokens recognized by FCA:
- Exchange tokens: Purely meant for the purpose of exchange and does not have the backing of any central agency regulating the process.
- Utility tokens: Offers holders access to a particular product or service but purely restricts it to access and does not grant the special holder’s rights.
- Security tokens: These are special type of tokens having unique characteristics which meets the definition of a specified investment. It may be a share or a particular debt instrument.
Regulation of Security Token Offering and Exchanges Around the World
There are many countries where STOs are banned while there are other countries which are in a dilemma regarding the regulatory architecture for Cryptocurrency trading. Thailand is one such country which is still undecided about the STO regulations. STOs are comparatively safer than the ICO, simply because the security tokens come with greater accountability. The accountability of STOs are more compared to the ICOs. Increased government level regulations pose the biggest challenge for the STOs. The process is cheaper compared to the traditional IPO trading activity, but the additional upfront task makes things more expensive and enhances the blockade of access compared to functional ICOs.