With the advent of transparency of blockchain technology, it has become possible to create autonomous platforms for the reliable storage of information with integrated regulations and data management. Decentralized networks are characterized by the fact that many nodes reach consensus among themselves, making the data stored on the blockchain almost impossible to delete or falsify.
Asset tokenization has opened up new opportunities for traditional types of assets such as stocks, gold, and other exchange assets: owners gain access to financial services in decentralized finance. In other words, tokens bring traditional financial instruments and DeFi together. The release of tokenized digital assets and public sales are carried out by special Security Token Offering Services, which ensure that projects fully comply with the requirements of financial regulators.
What is a Security Token, and how does it differ from a Utility Token? How do you create Security Tokens, and can you do it without an STO development company? What is a Security Token Offering (STO), and how can you start one? How do you find Security Token Offering services to prepare for a public token sale? We will answer these and other questions in this article.
What Is a Security Token?
Let us start with what a token is and how it differs from cryptocurrencies. Tokens do not have their own blockchain – they are issued based on another platform that uses smart contracts technology to create digital tokens. These platforms include Ethereum, Binance Smart Chain, Solana, Cardano, Tron, Polkadot and the like. Most often, developers issue utility tokens such as USDT, UNI, and 1INCH.
Security Tokens Definition
Security tokens are tokenized assets (which were created on the blockchain) that are analog of any real assets and are tied to their value: financial securities, bonds, derivative financial instruments, real estate, and land. In other words, this is the digital form of any physical asset that has become available with the introduction of asset tokenization.
However, digital assets can also be tokenized, and companies can issue equity tokens instantly on the blockchain, bypassing the IPO process. This allows companies to significantly reduce the cost of selling securities, as going public is an expensive and time-consuming process.
Features of Security Tokens
The main feature of Security Tokens is that STO development services issue them under the supervision of financial regulators such as the U.S. Securities and Exchange Commission (SEC) or the Swiss Financial Market Supervisory Authority (FINMA). In other words, a security token is a legally secure token.
The Many Names of Security Tokens
Security tokens can be referred to differently depending on the characteristics of certain assets: tokenized securities, for example, are called equity tokens, and a digital asset used as an IOU is a debt token.
Major Divisions of Security Tokens:
These are asset tokens whose price is formed the same way for each unit. For example, the price of a Security Token of a Tesla share will always be equal to the price of another token.
These digital tokens that represent a unique asset that cannot be replaced by another or split into multiple parts. These assets include NFTs. While tokenized stocks or bonds are fungible, real estate is not.
This is another distinguishing feature of the Security Token: unlike NFTs and Utility Tokens, tokenized asset tokens can be either fungible or non-fungible.
Types of Security Tokens
This is a digital asset backed by or representing shares/bonds. They grant token holders the right to receive a dividend payout or own a share of the issuing company. Unlike ordinary shares, the equity token stores information about the buyer on the blockchain, which allows you to refuse the services of custodians and reduce the cost of owning shares, and also greatly simplifies the process of exchange.
Reserve Assets Token
The issuance of such tokens requires reserve assets at a 1:1 ratio, which does not apply to assets originally issued on the blockchain. For example, Tesla shares are initially issued via a traditional IPO. So, to create their digital equivalent, it is necessary to reserve the same number of TSLA shares.
This type of digital asset represents debt instruments on the blockchain. The price of a debt token is directly related to risks and dividends. A smart contract can set additional repayment terms for token debt owners and debt investors for this asset class.
How Are Security Tokens Different From Utility Tokens?
First, the security token grants the token holder the right to own an asset. This solves many problems with the authenticity of real assets, which can be difficult to prove or disprove, and originals, such as art, can be counterfeited. In addition, the authentication process can be expensive and time-consuming.
On the blockchain, it is easy to track the digital footprint from the point of token creation, which remains authentic and unchanged. This approach has revolutionized the field of intellectual property and copyright.
Second, utility tokens do not give their holders the right to issue dividends and ownership of company shares.
Third, the formats of token sales are different. Security tokens are issued through Security Token Offerings (STOs), which are regulated by financial regulators just like IPOs. We will talk about this in a bit more detail later. The rest of the tokens are sold via ICO, IEO, IDO or other forms of public sale. Moreover, a Security or Equity Token is a legally compliant token that protects its investors in accordance with the rules of regulatory authorities.
And What Do They Have in Common?
Although both types of tokens have many differences, they also have common features:
- They are issued through built-in smart contracts.
- Both can be asset-backed tokens, but only security tokens may be used to back stocks and bonds.
- They provide access to a unified DeFi ecosystem. In other words: Security Digital Token holders can farm assets or add them to liquidity pools just like utility token holders can.
- These tokens are of the same format. There are no differences in the standards used to issue tokenized assets. All tokens except NFTs are ERC20 on the Ethereum platform, BEP20 on the Binance Smart Chain, TRC20 on the Tron Network and so on. Of course, unless the security token represents a unique object such as a property or a piece of land. In this case, the digital token on the blockchain can only be issued in ERC721 or ERC1155 format, for example.
What Is Security Token Offering (Sto)?
Security Token Offering is the process of token issuance for public sale. In fact, an STO is a simplified analog of an IPO for asset tokens. In other words, STOs help raise funds for companies that, for one reason or another, cannot go public or want to use blockchain technology to make their assets compatible with other digital assets and allow investors to exchange them.
Advantages of Sto Over IPO
Unlike the Initial Coin Offering (ICO), which can be conducted by development service providers anytime, anywhere without restrictions, STOs must fully comply with the requirements of financial regulators such as the SEC and FINMA, depending on the country in which they take place.
Stos Relative Simplicity
The Security Token Offering allowed companies to issue digital shares or bonds not only to reduce costs and simplify the process of issuing shares for trading but also to eliminate the need for financial intermediaries. Another key difference is that the IPO itself and the preparation are done on the secondary market – the shares can only be sold on a specialized exchange.
Security Token Offerings Without Third Party Involvement
Companies can participate in the development of STOs and conduct a token sale for potential investors on their own blockchain STO platform without involving third-party intermediaries. At the same time, they retain their existing privileges and can continue to attract venture capital and accredited investors to purchase Security Tokens.
Benefits of Security Token Development for Companies and Token Holders
Simplified Registration and Public Sale Procedure
According to IPO rules, only issuers and fund managers that meet strict selection criteria can become participants. Here are the criteria:
The purchase of shares through an IPO is only possible for accredited investors who have direct access to stock exchanges. It is not possible for retail investors to buy shares in an IPO company directly.
All tokens within the same blockchain ecosystem can be exchanged for each other. This means, for example, that you can easily exchange UNI for USDT and vice versa. The same goes for security tokens – you can easily exchange them for other digital assets on the same blockchain, not to mention the fact that cross-chain solutions are actively being developed that allows you to quickly transfer coins and tokens from one blockchain to another.
Tokenization of assets gives investors the opportunity to access all financial services on the blockchain: Farming, Staking, Saving, Liquidity Mining, and Landing. For example, you could get a loan in a cryptocurrency backed by security tokens.
Users must use the services of brokers and other transfer agents who provide access to exchange assets and to whom they must entrust their funds and personal information. Decentralized (DEX) and licensed centralized crypto exchanges (CEX) allow you to buy tokens in a more secure way.
Automated Market Maker or AMM protocols such as Balancer provide incentives for investors to inject liquidity to traders by paying rewards for locking assets in smart contracts. Any illiquid asset, along with strict exit rules, introduces additional risks for investors.
Removal of Restrictions
Traditional shares are traded exclusively on exchanges, and only licensed brokers and institutional investors have access to them. Security tokens are also traded on crypto exchanges, so they can even be purchased with cryptocurrencies such as Bitcoin or Ethereum.
Why Conduct a Security Token Offering (Sto)?
Token sales help raise capital and attract investments for your blockchain startup. The advantage is that you can give your investors privileges that owners of other digital assets do not have, which will only increase the chances of STO development success.
The Advantage of the Legality
Moreover, this is legal fundraising, which means that there will not be any problems with the regulators because, without their permission, it is not possible to conduct Security Token Offerings. Your investors are legally protected, which will only boost their confidence before buying your Security Token. Therefore, it is advisable to conduct your own STO.
Security Token Development: How to Create and Issue Your Own Crypto Tokens
Although the process for conducting an STO is more complicated than that of an Initial Coin Offering, it is still significantly simpler than an Initial Public Offering (IPO). Security token development follows certain rules, and if you know them, you can avoid problems with financial regulators.
Let us talk about what to do to conduct your own STO, how to find a security token development company to create tokens and smart contracts, and what nuances you will face in asset tokenization.
How to Create a Security Token?
Due to the specifics of this class of tokens, it will not be possible to create and issue a token on your own. You need strong support from the Security Token development company, which will provide assistance at all stages, from token, smart contract and STO development to the promotion and implementation of the Security Token Offering.
Finding Security Token Development Services
The first step is to find a suitable Security token development company. Such a company should be able to present real-life cases of successful security token offering development and holding token sales. Make sure its services meet business requirements.
ICODA has extensive experience in fundraising campaigns. It will help your project successfully pass all the tests – from issuing an equity token and developing a smart contract to conducting an STO. A free consultation is available. Here you can attain ready-made solutions and make STO development smoother with ICODA!
Conducting a Security Token Offering (STO)
In order to conduct an STO, a company must comply with regulatory requirements. You may need expert help with this. Security Token Offering services, who are involved in STO development, know how to prepare a company for Security Token Offering, what requirements it must meet, and how to get regulatory approval for STO in the fastest and easiest way.
Security Tokens Sales Legality
Security token offering development company conducts token sales in conjunction with legal frameworks and, therefore, at all times, complies with the rules of the regulator to counter money laundering activities and other financial crimes.
Listing on Security Token Exchanges
Security tokens cannot be traded on an exchange like other types of crypto tokens. To date, the list of exchanges that conduct STOs and provide access to trading Security Tokens is rather modest. This is due to regulatory requirements, but these requirements are tough not only for cryptocurrency exchanges but also for projects planning to issue their digital tokens. Therefore, in this matter, it is important to have the support of experienced companies that will guide the project entering the STO.
ICODA provides Security Token Offering development services and has experience in preparing startups for participation in IEOs on crypto exchanges.
Besides developing Security Tokens and launching an STO, a startup also needs to be promoted to build a large community around it. A Security Token consulting team will help in developing an effective marketing strategy to attract more investors.
The Need for an Experienced Security Token Advisory Team
As with the development of the Security Token Offering, you should not rely on inexperienced companies in this matter, which will cause your project to fail. After all, not only the success of the STO depends on this: in case of failure, the reputation of the entire company will be under attack, which will be difficult to restore, and will require remarkable effort. Needless to say, most projects that failed at ICO or IEO are not on the radar of crypto investors. You don’t want to be one of them, do you?
Developing security tokens offering is a cost-effective way to issue shares or other assets of a company. To conduct security token issuance, you will need to create a token, prepare a platform for managing it, select a company to develop the Security Token Offering, assemble or find a marketing team, and conduct token sales to raise funds for your project.
Even if you follow the requirements and recommendations consistently, a positive outcome of the Security Token Offering is not guaranteed, but you can increase your chances of successful fundraising with an experienced company such as ICODA!