In the last couple of years, Initial Coin Offerings (ICOs) have become a popular alternative to the more traditional Initial Public Offerings (IPOs). The most basic difference between the two is the use of tokens instead of stocks. These tokens are supposed to act as the currency to be used or exchanged outside of the platform investors chose to invest in. However, the use of utility tokens or coin apps in earlier ICOs proved to be detrimental to the model because they did not give investors the results they desired. Nevertheless, this setback has not deterred companies and investors in taking part in digital token-based fundraising models, especially now with the introduction of Security Token Offerings (STOs).
STOs, unlike their predecessor, are registered with the US Securities and Exchange Commission (SEC) and in consideration to be regulated by the Swiss Financial Market Supervisory Authority (FINMA) and other European and Asian regulators. This is because this model uses security tokens instead of utility tokens. This alternative has been found to be safer than utility tokens because they act much like the investment certificates shareholders get in the traditional financial setting making them easier to regulate.
How Security Tokens are Different from Utility Tokens
While there are plenty of ways on how to buy security and utility tokens, here is a quick guide that will demystify the cryptic air surrounding them.
- Utility tokens offer investors anonymity and the absence of barriers in purchasing cryptocurrencies, but this can lead to fraudulent activity because there is no standard legal procedure in its exchange.
- Utility tokens grant investors future access to a company’s products and services. However, there is no guarantee that investors will get a share of the company even after it earns a profit.
- Utility tokens have no intention to grant their holders control, let alone partial ownership, in the company.
- Security tokens employ the use of blockchain technology that offers investors a level of transparency and accountability which is not found in other tokens.
- Security tokens are backed by real monetary assets which grow in real time alongside the company.
- Security tokens offer its holders partial ownership in the company and some even grant them control powers which allow them to participate in the decision-making process.
Why Investors are Choosing Security Tokens
Since more startups are looking toward STOs in funding their projects, experts do no see this model slowing down any time soon. Their differences clearly illustrate how security tokens are the safer choice for people who want to participate in digital token-based fundraising models. As they are considered to be digital securities, they are subject to registration with regulatory boards around the world. This in itself has attracted investors to security tokens because there are fail-safes in place which can protect them in the event that the company fails.
While there will always be risks involved in investing, particularly in newer models, seasoned investors have yet to turn their backs on STOs. Many still consider the model and security tokens, in particular, as the smarter investment choice.