Security Token Offering
A security token offering (STO) is a public offering where tokenized digital securities are sold.
What Is a Security Token Offering (STO)?
A security token offering (STO) is a form of initial coin offering (
ICO) where a company or organization issues a security token that is backed by a tangible asset, such as real estate, technology or other assets. The security token represents the right to ownership of the underlying asset, with the tokens being tradeable on a compliant digital asset exchange.
Additionally, security tokens are subject to stricter regulation than traditional ICOs, which means that investors can rest assured that their assets are secure and that their investment adheres to compliance rules. This helps protect investors from fraud and other risks and provides them with greater flexibility and control over their investments.
What Is a Security Token?
A security token is a type of digital asset that derives its value from an external, tradable asset. It is a cryptographic token issued on a
blockchain and represents a real-world tradable asset, such as stocks, bonds, commodities, real estate or even artwork. They offer many of the same benefits as traditional securities, such as asset ownership, voting rights and dividends. They are used to authenticate identities electronically by storing personal information. They are issued by security token services and authenticate a person's identity. They can be used alongside a password to prove an owner's identity. However, security tokens are not always secure and can potentially be lost, stolen or even hacked in the worst-case scenario.
There are three primary types of traditional securities: equities, debt and a hybrid of debt and equity. Examples of securities include stocks, bonds,
ETFs,
options and
futures. Hypothetically, any of these things can be tokenized to become a security token. In the near future, security tokens could serve as a viable alternative and competitor to stocks and other traditional securities.
Security Tokens vs Cryptocurrencies
Security tokens are not the same exact thing as cryptocurrencies. Many people make this mistake. Cryptocurrencies such as
Bitcoin,
Litecoin and
Bitcoin Cash run on their own blockchains. Security tokens run on an existing blockchain, meaning a security token could run on the
Ethereum blockchain, which is most commonly used to deploy security tokens. Many companies use
ERC-20 tokens, which are Ethereum-compatible tokens that can run on the Ethereum blockchain using
smart contracts for execution.
Security Tokens vs Utility Tokens
Security tokens differ from other
digital assets, such as cryptocurrencies and
utility tokens, in that they are subject to regulatory compliance. Any investment in a security token must comply with the applicable securities laws. Security tokens are also often backed by real-world assets and thus offer investors greater
liquidity, transparency and security than other digital assets.
The key difference between a security token and a utility token is that a security token is an investment contract that represents ownership in an underlying asset. In contrast, a utility token is designed to provide access to a specific service or platform. Security tokens often entitle holders to a share of profits, voting rights and/or dividends, while utility tokens provide access to services, features and products.