ICO vs STO: What Is What?

ICO vs STO: what are the differences and what are the similarities? Today’s article is dedicated to the new fundraising methods that blockchain has enabled: Initial Coin Offering and Security Token Offering.

We have covered on numerous occasions how blockchain is a revolutionary technology that has an impact on many sectors from automobile to energy, healthcare, mobility, etc. It’s about time that we dedicated an article to ICOs and STOs that are often mentioned in relation to blockchain, and, more specifically, when it comes to fundraising.

To start, we must say that, in general, blockchain fundraising methods come with various advantages over the traditional ones helping to manage and distribute funds in a secure and transparent way. We will cover the advantages that ICOs and STOs share below after the comparison.

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What is an ICO? What is an STO?

ICO (Initial Coin Offering)

ICOs – Initial Coin Offerings – were the first crowdfunding option to surface in the blockchain ecosystem. This method of fundraising enabled anyone, from anywhere, to finance the development of a company or project. ICOs have also been baptized the cryptocurrency version of Initial Public Offering (IPO). In exchange for their investment, the investor will receive a number of utility tokens, or, user tokens in other words. These tokens represent future access to a company’s product or service.

STO (Security Token Offering)

STO – Security Token Offerings – is in its essence similar to ICO but it also conforms to regulatory requirements. STOs surfaced as a reaction to the lack of oversight when it came to ICOs, to bring regulation to blockchain-based crowdfunding and offer more guarantees in the space of raising funds using tokens issued on a blockchain.

Are ICOs and STOs safe?

ICO (Initial Coin Offering)

Anyone can launch an ICO. As said above, there’s not much regulation on ICOs which means if you can get the tech set up, you can launch. That’s why of all avenues of funding, ICOs are the easiest to set up as a scam.  And given that ICOs are not regulated, recovering funds that you invested in a fraudulent crowd sale is almost impossible. So, due to that uncertainty, the apparent fraud and speculation, the lack of regulation ICOs are probably not the safest avenues of funding.

STO (Security Token Offering)

It’s at that point of our ICO vs STO comparison, that we see how the latter is significantly more convenient for the investors. It might take a lot of time, money and effort for the fundraisers to get a green light from regulators fo launch their STO, but the investors have the guarantee that the tokens they receive in exchange for their money are backed by something tangible (assets, profits, revenue, etc.).  So, from the investor’s point of view, the STOs are definitely safer than the ICOs.

How are ICOs and STOs used in fundraising?

ICO (Initial Coin Offering)

The process of launching an ICO fundraising campaign is easy to start, you just announce it and carry out a digital campaign. There’s no entry barrier for neither sellers or buyers, it’s open to crowd investing. Once the ICO is launched and has a defined timeline, the investors can buy the tokens. Compared to STO, it’s a short-term investment. The teams have the liberty to use the funds in the way they deem most beneficial.  Later, the tokens are distributed in a simple automated way via smart contracts.

STO (Security Token Offering)

When ICOs are more commonly used to raise funds for a tech product, STOs are more linked to financial services. Therefore before the idea launch and announcement, the company has to come up with a scalable business model, which makes the projects more mature and trustworthy. To launch an STO, it takes more time to get the regulators on board and carry out the necessary tokenization of the assets. Normally, it’s limited to accredited investors only and the amounts of money required are bigger. Later on, the security tokens are going to be traded via broker-dealers supervised by regulatory bodies.

Conclusions on ICO vs STO

As the regulations in the blockchain space gain more importance, so are STOs experiencing significant growth while the use of ICOs is in decline. At Global Blockchain Summit, Daniel Diemers, a professor of Global Master’s in Blockchain Technologies spoke about cryptonomics space and ICOs and STOs among others. He concluded then that of the fundraising tokens out there, STOs are going to make the race.

He predicted that the years ahead of us will be marked by pluralism of different forms of currencies and digital tokens: central bank issued fiat currencies, central bank issued crypto currencies, e-money not backed by blockchain, closed platform cryptocurrencies, full privacy coins, tokens and hybrid cryptocurrencies and possibly something more innovative. All in all, we’re living in an exiting time for finance.

Get started with your Blockchain projects!

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