ICO vs STO: Know the Difference from primafelicitas's blog

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 Offering (ICO) and Security Token Offering (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, decentralisation enables investors to check the progress of ICOs everyday.

 

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 utilised to break large assets into smaller ones. It facilitates an investor's acquisition of partial ownership of the product.

• When a 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 decentralised 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 a 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 revolutionised 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 product can get exposure thanks to token technology utilised 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.