ICO vs. STO: What’s the Difference and Which is Right for You?

Introduction

ICO is a fundraising method where new projects or companies issue a new cryptocurrency or token in exchange for funding from investors. The token is often offered at a discounted rate during the ICO and is expected to increase in value as the project develops. ICOs are generally unregulated and often marketed to cryptocurrency enthusiasts.

STO, on the other hand, is a fundraising method that involves issuing tokens backed by a financial asset or security, such as stocks or bonds. STOs are subject to securities regulations and provide investors with more protection than ICOs. STOs are often marketed to traditional investors who are familiar with securities regulations and investment practices.

How is STO different from ICO?

STO (Security Token Offering) and ICO (Initial Coin Offering) are both fundraising methods companies and startups use to raise capital for their projects or businesses. However, there are significant differences between the two:

1. Security vs. Utility:

The primary difference between STO and ICO is that STO is considered a security token offering. At the same time, ICO is an initial coin offering. Security tokens represent an investment contract, giving investors ownership of the underlying asset or company, while utility tokens give users access to a product or service.

2. Regulatory Compliance:

STOs are more heavily regulated than ICOs because they are considered securities and are subject to securities laws. STOs must comply with regulatory requirements, such as filing with the Securities and Exchange Commission (SEC) in the United States, which ICOs do not have to adhere to.

3. Investor Protection:

STOs offer more investor protection than ICOs crypto, as they provide greater transparency and regulation. STOs typically provide more detailed information about the investment opportunity and are subject to strict reporting requirements. In contrast, ICOs are often less transparent, with less regulatory oversight.

4. Investment Potential:

STOs tend to be better investments than ICOs tokens, as they offer investors a greater degree of ownership and a share in the potential profits of the underlying asset or company. ICOs, on the other hand, are often speculative and offer no real ownership or investment potential.

How Do ICOs and STOs Work?

ICOs (Initial Coin Offerings) and STOs (Security Token Offerings) are two fundraising methods in the world of cryptocurrency.

ICO

An ICO is a crowdfunding method that involves the sale of digital tokens in exchange for other cryptocurrencies, typically Bitcoin or Ethereum. These tokens represent a stake in a new project or company and can be traded on cryptocurrency exchanges. ICOs are typically used to raise funds for a new blockchain-based project or cryptocurrency venture.

Launching an ICO involves creating a white paper explaining the project’s goals, technology, and how the funds will be used. Investors can then purchase the digital tokens using Bitcoin or Ethereum, and the funds raised are used to develop the project.

STO

An STO is similar to an ICO, but the tokens sold are considered securities and are subject to regulation by government authorities. STOs are typically used to raise funds for more established companies, and the tokens represent ownership in the company, similar to traditional stocks or shares.

The process for launching an STO is more complex than launching an ICO and involves compliance with securities regulations in the jurisdiction where the offering is taking place. The company issuing the tokens must also provide detailed financial information, including audited financial statements and information about the company’s management team.

Bridging the gap between crowdfunding and regulation in blockchain

STOs are registered with the Securities and Exchange Commission (SEC) and they take advantage of securities exemptions such as Reg A+. They, therefore, have a lot of similarities to share. For example, tokens issued in STOs give investors some rights to the firm or organization issuing them.

Registration with the SEC is one of the ways in which STOs promise to offer more security to the investor. This is because the registration with the regulator discourages fraudulent individuals, thus allowing only the projects that are legitimate and serious about their pursuit. The registration process is also similar to the Initial Public Offers (IPOs) registration process. This is not only a positive step for investors, but it should also eliminate government concerns.

Market experts are highly confident about STOs and believe the market cap will be more than $10 trillion by 2020. In comparison, ICOs have raised roughly $4 billion so far. ICOs might have dominated the crowdfunding market in 2017, but this year, the concept of STOs is expected to take off hugely by providing investors with safe investment opportunities. It may finally be the highly sought-after solution for crowdfunding through the cryptocurrency market.

Comparison between ICO vs. STO

Examples:

Blockchain Platform to develop ICO:

• Ethereum: Ethereum is one of the most popular blockchain platforms for developing ICOs. It has a flexible and powerful programming language called Solidity that can be used to create smart contracts, which are the backbone of ICOs.
• Stellar: Stellar is a blockchain platform specifically designed for creating and managing digital assets, making it a popular choice for ICOs. It has a fast transaction speed and low transaction fees.
• NEO: NEO is a blockchain platform often called the “Chinese Ethereum.” It has a powerful smart contract platform that can be used to create ICOs, and it has a large developer community.

Blockchain Platform to develop STO:

• Polymath: Polymath is a blockchain platform specifically designed for creating and managing security tokens. It has a compliance-focused approach and provides a range of features for regulatory compliance.
• Hyperledger Fabric: Hyperledger Fabric is an open-source blockchain platform for building enterprise-grade blockchain applications. It provides a modular architecture and supports the creation of smart contracts for STOs.
• Tezos: Tezos is a blockchain platform known for its self-amendment mechanism and formal verification features, which can be useful for creating STOs. It has a large developer community and a strong focus on security.

Conclusion

In today’s decentralized finance ecosystem, securities token offerings and initial coin offerings are two of the most common methods of raising funds. Except for the differences in the underlying assets, they are similar to Initial Public Offerings (IPOs). STO tokens are traded on regulated exchanges, whereas ICO tokens are traded on dedicated digital currency trading platforms.

Originally published at Reveation Labs Blog page — ICO vs. STO: What’s the Difference and Which is Right for You?