Raising capital with STOs is poised to become the next billion-dollar market in 2019 as the financing method proves safer than ICOs.
After the fallout from initial coin offerings (ICOs) resulting from not following strict securities regulations, raising capital with STOs (security token offerings) that are highly regulatory-compliant may revive the reputation of cryptocurrency in the financial markets.
In January 2019, Estonia-based cryptofirm DX.Exchange launched a blockchain based trading platform that tokenizes shares in a group of 10 Nasdaq-listed companies including Apple (NASDAQ:APPL) and Netflix (NASDAQ:NFLX), effectively putting stocks on the blockchain. Known as security tokens, these blockchain investment products are expected to become one of the key emerging markets to watch in 2019.
The rise and fall of ICOs
Issuing forms of cryptocurrency to raise money is not a new phenomenon. The use of digital tokens for crowdfunding early-stage ventures began a few years back through ICOs. The popularity of this fundraising method reportedly led to nearly $6.6 billion in funds raised in 2017 and an astonishing $21.5 billion in 2018. However, much of that came in the first half of 2018, and the market has seen a decline in ICO transactions since the second half of 2018, as the legality of such financing has come into question.
ICOs are based on the issuance of utility tokens, which are in their truest sense meant for use by two parties engaging in an electronic transaction involving access to goods or services. Unbeknownst to many of the issuers and purchasers, utility tokens are not a legal means of raising capital under securities laws worldwide — meaning the issuers were violating the securities laws of the jurisdiction in which the tokens were issued.
This lack of regulatory oversight or approval for ICOs has led to some questionable practices and has damaged investor trust — counter intuitive to blockchains underpinning message of trust and reliability. Hence the need for a better method that can ensure the trading of digital assets as a source of fundraising for both start-ups and larger companies can be legally executed with investors protected under established securities laws.
The STO model, which fits well with the established regulations in most jurisdictions around the world, may provide the answer. These regulations are not new, but the industry has matured and the people enabling these transactions are part of a much more regulated, and licensed regime of service providers.
“2019 is on pace to be a pivotal year for security tokens,” Trevor Koverko, founder of security token issuance platform Polymath, said in a recent Forbes interview.