On the 16th, tZERO, a blockchain subsidiary of the US e-commerce giant Overstock, sent an email claiming that it had completed the STO (Securities Token Offering) on ​​the 12th, meeting the requirements of the US SEC Securities Law. The news has aroused widespread concern in the industry about STO. At present, ICO is strictly regulated by the governments of various countries. Will STO that meets the regulatory requirements become a better financing option for blockchain projects?

The explosion of the blockchain has completely promoted ICO. This new fundraising method greatly shortens the project financing cycle and makes "issuing coins" easier. At the same time, there are many loopholes in ICO, and it has become a fertile ground for "air coins". At the end of 2017, in response to the fraud risk of ICO, someone proposed the STO (Security Token Offering) fundraising form, that is, financing through securitized tokens.

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01 Origin of STO

Whether it is ICO or STO, they are all transformed from IPO.

IPO is Initial Public Offering (Initial Public Offerings), which refers to the first time a company or company sells its shares to the public. The company's shares flow into the market, you and I can invest, which means for the company to start a public offering to the public. It can be said that the modern financial system revolves around IPOs.

In 2013, blockchain projects borrowed from the IPO concept and formed a new fundraising model of Initial Coin Offering. The meaning of ICO is "initial coin issuance", that is, the blockchain project issues tokens for the first time, and the target of raising is BTC, ETH and other digital currencies.

Since ICO does not need to register for a business license, it is not subject to supervision and bears its own risks. "Novices" account for half of the huge investment team. Therefore, ICO was spoiled by some "smart people", investors were harvested, the project team "run away", and the market order was disrupted. Therefore, the STO fundraising form was proposed at the end of 2017.

STO (Security Token Offerings) refers to the issuance of security tokens. It is a securities issuance with Token as the carrier. Token issuance is regulated by the government and represents certain assets or rights, such as the company's equity, creditor's rights, gold, funds, etc. STO not only represents a new method of fundraising, but also means ST that integrates the blockchain. Traditional assets can be uploaded to the chain, increasing the liquidity of assets and reducing liquidity costs.

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02 STO is "excellent"?

Under normal circumstances, it takes several years for a company to prepare for an IPO. After submitting the materials, they have to go through the review and questioning of the regulatory authorities. This process is complicated and time-consuming. Relatively speaking, STO relies on the underlying technology of the blockchain, which can realize some regulatory functions, filter the complicated processes in the middle, and shorten the fundraising time.

Although ICO’s fundraising time is also very short, it has no physical target, and has even become a “private land” outside the supervision, generating a large number of “air coins”, which is extremely destructive to the market. For the blockchain, STO promotes the transformation of the blockchain from virtual to real, with real underlying asset support and clear valuation logic.

Therefore, industry insiders believe that "in the next two years, STO fundraising will reach trillions of dollars." However, as a part of economic activity, it is only truly "excellent" when the benefits outweigh the costs.

According to the analysis of foreign analysts, STO can create faster and more cost-effective financial instruments. Compared with traditional fundraising methods, STO saves costs in terms of legality, compliance, administration, management, and time.

Cost comparison between traditional fundraising methods and STO

Due to its own regulatory attributes and the advantages of saving fundraising costs, STO is currently highly respected. However, if STO becomes the mainstream of the market in the future, some risks will follow.

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03 Risks that STO may face

Although STO has inherited some of the advantages of IPO, it is still an "upgraded version" of ICO. The internal logic of the two is the same, so it cannot be perfect.

The stability of Token is also an unavoidable problem. Although foreign regulatory agencies have been studying how to ensure the stability of Token, there is still no clear and feasible policy. Therefore, based on the issuance of STO tokens, Token is very likely to experience excessive price fluctuations. Coupled with the fact that STO is also a Token issued based on technology, hackers have become a potential threat.

In addition, compliance is the "throat" of STO. Only with reasonable supervision can STO develop healthily.

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04 Who will hold the "throat" of STO?

“Last year’s ICO craze created a toxic financial asset dump,” Overstock.com CEO Patrick Byrne told CNBC. “I think ICO is a super fund website. We’re now The researched (STO) is very compliant and does not create any new toxic financial asset junk.”

In 2017, ICO suffered a global "encirclement and suppression". Even in some countries with relatively relaxed policies, the relevant regulations of STO have not been relaxed.

In the United States, ICO is supervised by the SEC and CFTC. SEC Chairman Jay Clayton said that no matter what method is used to issue securities, securities laws must be followed. In the U.S. securities market, there is a "Security Token". According to the U.S. Federal Securities Law, securities mainly include two aspects:

1. Stocks, bills, bonds, and other forms of equity and debt instruments;

2. Any form of investment contract.

Therefore, as far as the core of STO is concerned, it is in line with US securities regulation, but this is just wishful thinking. It is not known what attitude the US will take in the end.

It is said that the US project tZERO recently stated in a statement email to investors that it completed the issuance and generation of the preferred token on October 12 and met the requirements of the US SEC Securities Law (Regulation D and Regulation S Section 506(c) exemption from registration under Article). If the content of the email is true, it is undoubtedly a positive signal for STO.

Japan's policy is relatively loose, BTC has been legalized in the country, and registered Token is allowed to be used as currency. Regulatory authorities stipulate that each Token issuance must cooperate with a local licensed exchange. However, there is currently no policy to regulate STOs in Japan.

The Monetary Authority of Singapore (MAS) stated that STOs fall within the scope of Singapore’s Securities and Futures Act, and issuers of such tokens will need to submit and register a prospectus with MAS prior to a public offering, unless there are exemptions.

Malta is also drafting a financial instrument testing bill, stipulating that STO issuers are obliged to pass relevant tests and apply to the “Virtual Financial Assets Act”.