- Unlike security tokens, utility tokens are not backed by any law or regulation
- Security tokens are designed as a tradable asset in their own right, and offer investors both flexibility and peace-of-mind
- By contrast, ICOs are gradually fading out of use, and many companies have used them as a way to commit fraud
Are you familiar with security token offerings? Do you know how they differ from initial coin offerings? If not, you’re in the right place. Here, we’ll talk about security token offerings and initial coin offerings, the differences between the two, and why STOs are gaining popularity over ICOs. Let’s get started:
Initial Coin Offerings (ICOs)
ICOs are mainly used by companies that work with projects that revolve around blockchain. They give out digital tokens to their investors as a form of record for their investments. Initially, these utility tokens were meant to give investors access to a particular product they invested in. However, the tokens slowly evolved into a form of investment in themselves. Investors started to trade them to invest in other platforms and products. And this worked, thanks to the liquidity of the tokens.
However, there is a drawback to this. Because these tokens weren’t meant to be traded in the first place, there is no real law or regulation to back them up, making them quite a risky investment.
Security Token Offerings (STO)
Although STOs may seem similar to ICOs, there are a few differences to be noted. First, although an STO and an ICO both provide tokens, security token offerings give out security tokens, whereas initial coin offerings gave out utility tokens. In other words, security tokens are built to serve as a tradable asset, whereas utility tokens were meant to provide its holders access to specific platforms and products. If you’ve ever worked with real-life securities, these are the same, except now they are digital.
Because these securities now come in digital form (tokens), they are much more liquid than ever before. In addition to that, because these security tokens hold real value and are regulated, they allow investors flexibility in terms of how they want to use the tokens. In essence, then, security tokens are a digital form of fundraising that holds value when a company trades them for money. And because they are backed up and are regulated, investors can rest easy knowing that their investments promise returns.
ICO vs. STO
Now that you have a rough idea of how the two work, why should you be opting for STOs over ICOs? Security tokens are enforced by the law, meaning they’re regulated and backed up. This makes them extremely secure compared with utility tokens offered by ICOs, and means that they promise a return on investment.
At the same time, ICOs are slowly fading out of use, due to their many drawbacks. One of the significant disadvantages of using utility tokens is that many companies use them as a way to commit fraud. ICOs provide new companies with a quick way to make money and have racked up millions doing so.
Unfortunately, many of these startups have failed to keep their promises, unable to deliver the products that attracted the investors in the first place. That and the previously mentioned lack of regulations have forced many investors to move away from ICOs.
In conclusion, ICOs are slowly dying, while STOs are becoming the new fundraising king. Because they are secured, regulated, and lower in risk, security tokens are the perfect way for anyone to invest in a company.
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