ICO-STO
26
May

Initial Coin Offering vs. Security Token Offering: Do You Know the Difference?

Reading Time: 6 minutes

While blockchain has been around for quite a while, it was the appearance of Bitcoin in 2009 that brought blockchain mainstream. While today Bitcoin remains speculative of its reputation of being volatile and risky, blockchain technology and other distributed ledger technology have amassed quite a unison in its value in the finance industry.

Large firms like BNY Mellon, Tesla Inc, Mastercard Inc have invested or embraced cryptocurrencies in their portfolio. JP Morgan, America’s largest bank, created its digital token, JPM coins used to make an instantaneous transaction using blockchain technology. Big banks and companies moving into the blockchain industry tell us about the growing market of tokens in the blockchain ecosystem. Initial Coin Offering (ICO) and Security Token Offering (STO) are tokens used in the finance industry to support crowdfunding projects, carry out financial transactions, etc. Let us find out more about ICO and STO in this blog.

What Is a Cryptocurrency Token?

Crypto token is synonymous with cryptocurrency. It is a denominated version of cryptocurrency. In the financial market, tokens are used for investment to purchase or store assets. People have used tokens as a means of transaction for ages, a token has the same functioning as a currency, but they are exclusive to a private entity or a company. Similarly, the crypto token is a virtual cryptocurrency on blockchain technology. It is used in the blockchain ecosystem to carry out the transaction, getting funding for the project, etc.

Some benefits of cryptocurrency tokens are:

  • They will decentralize the funding process and technology. For funding, companies will not be needed to be from ‘Silicon Valley’ but could be from anywhere in the world.
  • They can be sold internationally over the internet with just a few clicks. This ease of access brings much need audience or investor to the finance world.

What Is Smart Contract?

A smart contract is a contract that executes automatically when the pre-derived conditions are met. These contracts are written in lines of code and are stored on Blockchain.  These contracts are digital and stored in the public domain for everyone to verify and check on their authenticity. Some benefits of the smart contract are:

  • Speed: Smart contracts are on the internet and are codes that execute once the contract conditions are fulfilled. Smart contracts run over the internet, thus taking less time than traditional contracts.
  • Security: Smart contract uses the highest level of encryption method like that of blockchain technology. It makes it very hard to crack and breach the agreement.
  • Paper Free: These are on the internet, and one benefit of being on the internet it brings is it is eco-friendly. Unlike a traditional contract, these cuts the need to maintain heaps of paper to process the contract.
  • Transparency: Smart contracts are visible to every participating party, and there is no scope of miscommunication or information withholding in the smart contract.

What Is ICO?

ICO or Initial Coin Offering is similar to Initial Public Offering (IPO), which is used to raise funds for the company’s share. ICO is a cryptocurrency version of the online crowdfunding and IPO mix. ICO offers investor tokens in return for the investment in the project according to the smart contract. These investments are in the form of cryptocurrency, given to the issuer in funding to help with the project. This is different from IPO since anyone worldwide can invest in the project. Unlike in IPO, you need to go through some regulations first to invest in the project. The token shared with the investor is in the form of future returns the project will give to them depending on the smart contract. It is primarily a utility token offering access to the project services and app to the investor.

Some of the famous ICOs are Ethereum, NXT, EOS, Stratis, etc.

Some of the advantages of ICO are:

  • Easier for founders to connect to the public and raise funds quickly than by traditional methods.
  • Advantageous to investors, anyone and everyone can invest in ICO with just some click over the internet.
  • Decentralization allows investors to track the process of ICOs daily since the status of every ICO is recorded every time.

What Is STO?

STO or Security Token offering is quite similar to Initial Coin Offering, as they both are fundraising methods for start-ups. Still, STO is more regularized by the government and needs to adhere 100% to the rules set by the governance bodies. STO are assets backed, and it means they have some monetary value in the real world; this creates a safe environment for investors and increases their trust.

It is not a hidden fact that Initial Coin Offerings are subjected to many scams. Due to its unregulated environment and no collateral by the company to back up the token, it creates a low entry barrier and more chances of fraud and cheating. Security Token Offering mandates companies to complete all the compliance work upfront before going mainstream. STO deals with ICO’s limitations like scams and fraud of investor money due to being regulated by a governance body.

Some advantages of STO are:

  • Lower upfront investment than IPO, STO, is much cheaper to carry out since STO cut all middlemen and brokerages.
  • STO are digital assets and could be used to divide significant assets into a smaller asset. It makes it easier for an investor to have fractional ownership of the product.
  • STO being fully regulated by governing body ensures the security of the investor. The trust of the investor about their asset’s safety attracts more investors to the project.

ICO vs. STO: Summary

Initial Coin Offering (ICO) Security Token Offering (STO)
ICO is the token issued by companies for the investor to support the projects on Blockchain technology. STO is a token issued by companies for the crowdfunding method of the project, with companies following all the regulations set up by the governing body.
ICO was the first crowdfunding method to come up in the blockchain ecosystem. STO has been introduced to carter the risk associated with ICO, like investors getting scammed due by ICO issuer.
Penetration tester is expected to be aware of executing different methodologies and knowing the purpose of every methodology, how and when to execute. Ethical hacker should have a comprehensive knowledge of the hacking methodologies.
ICO has a very low entry barrier, making it easy for new and small companies to issue an ICO. The entry barrier is lower than IPO but higher than ICO since the company needs to check there is no compliance risk upfront for issuing STO.
ICO is unregulated and does not come under the jurisdiction of any governing body. STO is regulated by U.S. Securities and Exchange Commission (SEC) laws. The same law governs them as traditional securities.
ICO is primarily used for fundraising methods by offering company service and products to the investor. The company offers actual tangible securities backed by the company’s assets, profits, interest, etc.
ICO is more commonplace for a scan due to low barriers and an unregulated environment. STO is much safer than ICO in the matter of security.

Blockchain is changing the traditional financial market for the better. IPO is being replaced with ICO and STO on the blockchain platform. Token technology used for fundraising is even giving audience to small companies with a good product.

According to reports by Plutoneo, the tokenized market will see compound annual growth of 85% from 2018 to 2024 in the European Union. The demand for tokens is predicted to grow to €1.4trn in the European Union by 2024. We are observing a shift to a Blockchain-dominated future which is evident with the fact that out of the 100 of the largest banks in the world, 39 of the largest banks are working with blockchain and security token technology.

For a blockchain enthusiast reading this blog, blockchain certification will help you fast track your career as a blockchain professional. One such certification by EC-Council is a Certified blockchain professional course developed by top experts worldwide. It will impart the knowledge and skills required to become a professional blockchain expert and grow your career in the fast-growing market of blockchain and cryptocurrency.

References:

  1. https://www.investopedia.com/terms/i/initial-coin-offering-ico.asp
  2. https://www.leewayhertz.com/launch-sto-security-token-offering/

FAQs

What is distributed ledger technology in blockchain?
Distributed Ledger Technology (DLT) is the technological infrastructure and protocols used to validate and provide simultaneous access to multiple locations through a widespread network. DLT is immutable, and therefore, records stored cannot be modified. Its distributed feature allows all participants to have a copy of the ledger as it is not stored in a single place.

Read more: What Is a Smart Contract in Blockchain?

What is a cryptocurrency?
A cryptocurrency is a digital form of currency used to carry out financial transactions. It uses blockchain technology to carry out the operations of the cryptocurrency. Blockchain uses a decentralized approach to manage ledgers’ data, making it very safe and secure from hackers trying to tamper with ledgers’ data.

Read more: How Blockchain Technology Made Cryptocurrency What It Is Today

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