Security token offering – Solving the ICO problem


What is STO?

STO stands for Security Token Offering. It is also known as a Tokenized IPO (Initial Public Offering). This is where tokenized digital securities are sold on cryptocurrency exchanges. They are known as a security token and is offered to the public.

What is STO used for?

The security tokens can be used in the blockchain ledger system where the value can be stored. It can also be used for the trading of financial assets.

Why is there a need for STO?

STO exists to overcome the perceived challenges of ICO (Initial Coin Offering) which became popular in 2017. Investors acquire coins or tokens during ICOs but there has been a lack of regulation and control which has since caused several scams and fraud cases. With the popularity of blockchain rising rapidly, a better solution is needed. A security token could solve this issue. STO allows regulators to ensure that token offerings are compliant with the existing laws. This inadvertently results in firms complying with the legal obligations when they issue equities in that specific market.

What is a security token?

With a security token, a stake in an asset is offered, much like how a stock works. This is issued on both a permissionless or permissioned blockchain. Security tokens can be issued by businesses or organizations the same way conventional equities like bonds and stocks are issued.

What are the benefits of using a security token?

Security tokens have similar benefits to stocks where a holder has shares and voting rights with the potential for dividends. As this is a technologically advanced platform, there are other benefits including:

  • Market availability for trading – The blockchain marketplace is active throughout the day, any time in contrast with other financial markets that only run during office hours.
  • Transparency – As it runs on a ledger on the blockchain, an audit is possible where members of the blockchain are able to track and view activities on the blockchain.
  • Speed of transactions – On the public ledger, the process of clearance and settlements are way faster than conventional assets. This includes the transfer of ownership as well.
  • Divisibility – With asset tokenization, there will be more ways to invest with better accessibility. For instance, a masterpiece painting worth US$1 million can be tokenized into 100 tokens which means each token is worth US$10,000 each.

What are the types of security tokens available?

There are in general 3 types of security tokens which are:

  • Equity Tokens  – This is quite the same as conventional shares. The only difference is how the ownership is managed in terms of transfers and records. While conventional shares are tracked in a database, the equity token uses a ledger maintained on a decentralized platform. In terms of shareholder rights, a holder of the equity token has a stake in the profit or loss of the firm and voting rights as well.
  • Debt Tokens – This is like a short-term loan with interest. It is an amount that investors provide to the firm which will affect the risk and dividend concept. This information is available on the blockchain that covers repayment terms, dividend opportunities and other factors.
  • Asset-backed Tokens  – This type of token represents the ownership of assets like art or real estate. This type of token is very effective on the blockchain because of its security and transparency features.

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Six Capital Pte Ltd. Singapore

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