Bitcoin has even been classified as legal tender in the country of El Salvador. These are massive steps for the industry and signal that despite the volatility in the market over the last two months, crypto is well on its way to mass adoption.
The arrival of crypto into the mainstream presents many exciting opportunities. As more people become familiar with blockchain technology, the applications for it will increase dramatically. Blockchain has the potential to decentralize many different financial processes and provide genuine real-world solutions to a myriad of different problems.
One of the most revolutionary applications of blockchain is the security token offering (STO), which could genuinely represent the next stage in crypto evolution. An STO is a public offering where tokenized digital securities represented by “security tokens” are sold on crypto exchanges.
Unlike ICOs where tokens exist only as a digital currency, tokens issued in STOs represent securities such as bonds or stocks that are tied to a real-world company.
Essentially, an STO is a tokenized version of an IPO. The lucrative nature of IPOs was perfectly demonstrated earlier this year during Coinbase’s IPO when the value of the company reached more than $80 billion. However, IPOs are a very centralized and heavily regulated process. They are typically underwritten by multiple investment banks who will organize the listing of shares on a regulated exchange.
To participate in an IPO, one must be an accredited investor with a sufficiently high net worth. This makes IPOs inaccessible for retail investors, and they instead become a means for the wealthy to further increase their wealth.
An STO allows investors direct access to a company’s shares without having to play by the rules of a centralized bank. It’s a fairer platform to sell ownership of a company as retail investors can be given just as much access as institutions, creating a level playing field for all investors.
But STOs benefit more than just small investors. IPOs held on traditional exchanges can be very expensive affairs for the company issuing the stock. Some of the costs associated with an IPO include banking and legal fees. In addition to that, there is also the requirement for a company to disclose sometimes sensitive information.
This is potentially a barrier for any small and medium-sized company looking to go public. An STO, even one on a regulated stock exchange, is significantly more efficient and cost-saving. Like with most things in crypto, an STO is less dependent on a middleman, which offers more value for companies and investors.
STOs have been around for a while and have already achieved great success. Blockchain Capital, a blockchain investment firm, was able to raise $50 million for a new venture capital fund. SpiceVC, another tokenized blockchain venture capital firm, was able to raise $15 million in 2018. Most of the STOs so far has been centred around blockchain-based companies but this could all be about to change.
One of the biggest problems for a company issuing stock as an STO is that the investor base is currently much smaller on-chain than in traditional markets. The drive towards mass adoption allows other more traditional companies the facility to tokenize their own offerings. Once enough people are crypto literate, the advantages of issuing an STO will be un-ignorable.
The stock market is a truly massive industry. The US stock market alone is currently valued at nearly $47 trillion and the ability to issue security tokens creates the potential to bring that business into the crypto sphere. Crypto currently has a total market cap of less than $1.5 trillion which demonstrates the effect that would have on the crypto sphere.
More than that though, the arrival of the STO could be one of the biggest-ever shifts in the entire financial sector. STOs are the democratization of initial company share offerings. They provide companies with a regulated and low-cost means to raise funds and access a much broader investor base than would be possible through traditional stock offerings. They provide access for average investors to one of the biggest markets in the world.
If the crypto industry is to challenge the banking sector, then it must provide an alternative to every service the banking sector offers. STOs are essential to crypto realizing its potential.