Good news! STOs are not ICO 2.0! Here’s what that means

STO ICO
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Two years ago, ICOs were all the rage – until scammers went wild and regulators stepped in. Now we’re starting to see growing interest in STOs (security token offerings), and they’re apparently going to be a thing in 2019 – but don’t call them ICO 2.0, advises a panel of experts.

Some background:

The rise of cryptocurrency and blockchain in the last couple of years sparked a boom in so-called ICOs (initial coin offerings) in 2017, but it all went south in 2018 thanks to a combination of hype colliding with reality as projects failed to deliver, and a lack of regulation that enabled scammers to get in the game. The subsequent regulatory clampdown on ICOs led to the subsequent “crypto winter” that saw the toxic ICO model largely abandoned.

However, cryptocurrencies and blockchain haven’t gone away, and the crypto community has still been pursuing the digital tokenization of real-world assets. Securities are one such asset being tokenized – and earlier this year, a crypto firm called DX.Exchange launched a trading platform where investors can indirectly buy shares of Nasdaq companies like Apple, Facebook and Netflix via security tokens, according to CNBC.

Moreover, CNBC reports, those security tokens can be bought and sold via blockchains to raise capital in a manner similar to ICOs – hence the term ‘STO’, which analysts expect to be a big deal in 2019.

However, the apparent similarity of STOs to ICOs has led some to describe STOs as ‘ICO 2.0’, which raises the question of whether they’re essentially ICOs in new packaging – and whether that’s a bad thing, given how ICOs flamed out.

That question – “Are STOs really ICO 2.0?” – was put to a panel of FinTech and crypto experts at last week’s Hong Kong Blockchain Week conference, and the short (and unanimous) answer was no, although some people perhaps wish they were, said Urszula McCormack, partner at King & Wood Mallesons covering Financial Regulatory & Emerging Technology.

“What I see is a lot of people looking for the next hype cycle, and that’s why I don’t like to hear about it being ‘ICO 2.0’,” she said. “There were many good things that have come out of the ‘crypto winter’ one of which is to help get the rubbish out the system. There was just too much money that was floating around last year and the year before.”

Mun Shing Cheong, managing director for C Block Capital, agreed that STOs and ICOs are “completely different things”, not least because the former is well regulated and the latter isn’t.

“I would rather say that STOs is more akin to IPOs,” she said. “It’s regulated, it’s backed by an asset, and there is an expectation for profits for the token holders.”

STO ICO
From left: panel moderator Genevieve Leveille, CEO of AgriLedger and co-chair of Distributed Technologies Working Group, techUK; Urszula McCormack, partner, Financial Regulatory & Emerging Technology, King & Wood Mallesons; Mun Shing Cheong, managing director, C Block Capital; Elizabeth Yeung, co-founder, BrX Exchange

BrX Exchange co-founder Elizabeth Yeung agreed, adding that ICOs are typically retail-oriented, while securities mainly target institutions.

“STOs aren’t all that different from traditional securities – it’s just tokenized into a different format,” Yeung said. “At the same time, the tokenization is actually not that different from the traditional tokens. So the tech side is similar. That’s where you can draw the parallel. But the target audience and also the regulations are completely different.”

As for why STOs are now a thing, McCormack of King & Wood Mallesons puts it down to the fact that people are starting to see the benefits of distributed ledger technology, which is starting to deliver the kinds of solutions that traditional financial markets need.

“There’s a lot of friction in those markets. There is very little transparency in those markets. In some points of the market there is very little liquidity, compliance is hard,” she said. “So there’s a lot of talk now about how we can use security tokens, because they’re programmable securities, and that’s what makes it exciting.”

McCormack acknowledged that some exchanges see STOs as a potential ICO sequel because there’s been so much focus on the retail side of STOs. On the other hand, she pointed out, “there were conversations we had during the last year where people were wanting to give purchasers something other than access to their platform. They wanted to give revenue benefit – you know, something – and they couldn’t because it would breach a whole host of regulations.”

Put simply, doing something like an STO wasn’t as viable an option as it is today, now that there are more regulatory pathways to deliver brokerages, exchanges and issuance platforms that make it a viable option.

“So yes, there are a lot of people who have pivoted opportunistically, but at the same time, I think it’s really just opening out ideas that that were there a year and a half ago,” she said.

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