ICO vs STO: Know the Difference
Blockchain has been around for a long time, but it wasn't widely used until Bitcoin came along in 2009. Even though Bitcoin is still a gamble because of its reputation for being unstable and risky, blockchain technology and other distributed ledger technologies have grown in value in the finance industry.
Big companies like BNY
Mellon, Tesla Inc., and Mastercard Inc. have invested in or made use of
cryptocurrencies. JP Morgan, the biggest bank in the United States, made JPM
coins, a digital token that can be used to make a transaction instantly using
blockchain technology.
Big banks and companies
that are getting into blockchain tell us that the market for tokens in the
blockchain ecosystem is growing. Initial Coin Offering (ICO) and Security Token
Offering (STO) are types of tokens used in the finance industry to support
crowdfunding projects, make financial transactions, etc. Let's read this blog
to learn more about ICO and STO.
What are crypto
tokens?
Many people find the
concept of transferring non-physical currency to be confusing. What, if anything,
is truly being transmitted, and what does a cryptocurrency look like? These are
all legitimate questions that are easily explicable.
Typically, crypto tokens
act as units of cryptocurrency. Designed to perform the same function as real
tokens or coins such as U.S. cents, British pounds, etc. They are simple units
of value that can be transferred between individuals.
A crypto token is a
small bit of code that is tied to the public wallet address of a particular
user. Each user's tokens are stored in a crypto 'wallet,' which is a sort of
computer software created specifically to connect with blockchains.
In contrast to directly
exchanging cash from one person to another, transferring cryptocurrency
involves no transfer of value. Simply update the address associated with
certain tokens to the new owner's address. It is not the tokens themselves that
are transferred between network members, but rather the addresses connected to
each token.
The increasing demand
for tokens in the blockchain ecosystem has been confirmed by major financial
institutions and corporations entering the sector. Tokens, such as Initial Coin
Offerings (ICO) and Security Token Offerings (STO), are used in the financial
sector for a variety of purposes, including crowdsourcing projects, financial
transactions, etc.
What are ICOs and STOs?
Let's find out here.
What is ICO?
ICO or Initial Coin
Offering is comparable to an IPO, which is used to raise capital for a
company's shares. ICO is the cryptocurrency equivalent of crowdsourcing and
IPO. According to the smart contract, ICO gives tokens to investors in exchange
for their investment in the business. These investments are given to the issuer
in the form of cryptocurrency as money for the enterprise.
This differs from an IPO
in that anyone in the globe can invest in the initiative. To invest in the
project, you must first comply with certain restrictions, in contrast to an
initial public offering. Depending on the terms of the smart contract, the
token given to the investor represents future returns the project will provide.
It is basically a utility token that grants investors access to the project's
services and app.
Major ICOs include
Ethereum, NXT, EOS, Stratis, etc.
Several advantages of
ICO include:
- Connecting
with the public and raising capital is simplified compared to older
techniques.
- Everyone
may invest in ICOs with a few mouse clicks via the internet, which is
advantageous for investors.
- Since
the status of every ICO is documented daily, decentralization enables
investors to check the progress of ICOs every day.
What is STO?
STO, or Security Token
Offering, is quite similar to ICO, or Initial Coin Offering, as both are
strategies for startups to raise capital. Nevertheless, STO is more regulated
by the government and must strictly conform to the laws established by the
governing agencies. STOs are asset-backed, which means they have some monetary
worth in the real world; this creates a secure environment for investors and
boosts their trust.
Initial Coin Offerings
are prone to several scams; this is a well-known reality. Due to its
uncontrolled environment and the lack of collateral provided by the corporation
in support of the token, it creates a low entrance barrier and increases the
likelihood of fraud and cheating. Before entering the mainstream, Security
Token Offering requires all compliance requirements to be completed. Due to the
oversight of a governing body, STOs are able to circumvent the constraints of
ICOs, such as investor money scams and fraud.
Some benefits of
STO include:
- STO
is significantly less expensive to execute than an IPO because it
eliminates all middlemen including brokerages.
- STO
are digital assets that can be utilized to break large assets into smaller
ones. It facilitates an investor's acquisition of partial ownership of the
product.
- When
an STO is completely regulated by a regulating body, investors are
protected. The investor's confidence in the security of their assets
encourages new investors to the project.
Difference between
ICO and STO
- When
a company issues a token to investors in exchange for funding for a
Blockchain-based project, this is known as an initial coin offering (ICO).
In STOs, corporations issue tokens to investors in exchange for financial
backing for a project via a crowdfunding mechanism, adhering strictly to
any and all applicable rules and guidelines established by the relevant
regulatory agency.
- The
initial coin offering (ICO) was the pioneering effort in decentralized
crowdfunding. The introduction of STOs has helped to alleviate some of the
concerns that people have about investing in ICOs, such as the possibility
of being duped.
- The
low barrier to entry for ICOs makes them attractive to startups and small
businesses. Since the corporation needs to ensure there is no compliance
risk before issuing an STO, the entry hurdle is lower than with an IPO but
greater than with an ICO.
- The
initial coin offering (ICO) industry is unchecked and not under the
purview of any government. The US Securities and Exchange Commission (SEC)
enforces the rules governing STOs. They are subject to the same
regulations as other types of securities.
- In
order to raise capital, businesses often use initial coin offerings (ICOs)
to sell their wares and services to potential backers. Securities issued
by the corporation are backed by the firm's assets, income, interest, etc.
- Due
to the ease of entry and the lack of oversight, ICOs are more widespread
in the scanning industry. When compared to ICOs, STOs have greater
security measures in place.
The financial sector
as we know it is being revolutionized by blockchain technology. On the
blockchain, alternatives to the IPO include initial coin offerings (ICOs) and
security token offerings (STOs). Small enterprises with a solid products can get
exposure thanks to token technology utilized for funding.
From 2018 to 2024, the
tokenized market in the EU is predicted to increase at a CAGR of 85.1 percent.
Token demand in the EU is expected to reach €1.4trn by 2024. The fact that 39
of the top 100 banks in the world are developing applications for blockchain
and security tokens demonstrates the transition toward a Blockchain-dominated
future.
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