In the world of crypto assets or cryptocurrency and blockchain in general, one common term often heard is Security Token Offering (STO).

STO is inseparable from the initial coin offering (ICO) mechanism presented earlier. It aims to raise money from digital asset investors for a new crypto project often carried out by crypto token/coin developer companies.

So, what exactly is the definition of STO in crypto, and how is it different from an ICO?

See the full review regarding the following Security Token Offering (STO) to find out.

Introduction to What is STO

Security Token Offering or STO is a fundraising mechanism carried out on a security token type.

As mentioned at the beginning of this article, STOs are different from other forms of fundraising, such as ICOs.

The reason is, in STO, the crypto tokens/assets are completely based on assets in the real world, such as stocks and bonds.

Meanwhile, in ICO, the types of assets are based on utility or usability and function.

Besides that, STO is also traded on the securities market because the token is included in the type of security token.

Regarding blockchain technology, STO is an alternative investment token that is considered safer than other existing tokens.

This can happen because the STO can guarantee investors own several shares/shares of ownership of the project run by the blockchain company.

Not only that, STO tokens offer efficiency and are more cost-effective than the previous token types.

Besides that, the blockchain will also record all transactions in the STO token type.

Thus, errors in recording investments can be minimized.

Advantages of STO in Crypto

There are several advantages of STO in crypto, including the following:

1. Confirm the ownership status of security tokens in a project or company

The first advantage of STO in crypto is that this mechanism has a concept related to the ownership status of security tokens in a project or company.

Therefore, it is not surprising that STO in crypto will be a type of token seen as more reliable than an alternative investment token.

2. Subject to strict rules and regulations, providing greater legal protection and security for investors

In the STO mechanism in crypto, token issuing companies will usually be subject to strict rules and regulations from the government, for example, the Securities and Exchange Commission (SEC) in the United States.

This will simultaneously provide greater legal protection and security for investors regarding this type of token issuance.

3. Allows projects or companies to access greater capital

Besides that, another advantage of STO in crypto is that this mechanism also allows projects or companies to access larger capital from investors.

This happened because, for investors, STO has provided an alternative investment model that is considered safer and more reliable so that they will deposit more capital.

How STO in Crypto Work

So, how does the Security Token Offering (STO) mechanism work in crypto?

It starts with issuing security tokens and then distributing them to investors.

Holders of this type of token can later exchange their assets for assets in the real world, for example, by owning stocks or bonds in the capital market.

Meanwhile, the issuance of the STO token itself can be done by the government or non-crypto developer companies.

For your information, raising funds through the STO mechanism will use blockchain technology and smart contracts.

In this case, the mechanism is almost the same as purchasing shares, but in the STO system, the transaction will be recorded on the blockchain network.

Later, investors participating in the STO mechanism will receive token ownership of digital assets with an automatic contract through a smart contract between the investor and the company.

The openness and transparency in fundraising through STO have made this mechanism increasingly attractive to investors.

With the ICO mechanism, for example, data shows that around 10% of the investment obtained from this mechanism suddenly disappears due to crimes committed by irresponsible ICO organizers.

Difference between STO and ICO in Crypto

The following are some of the differences between the STO and ICO mechanisms in crypto, including:

1. Greater legal protection and security for investors through STO

Through STO, investors will get greater legal protection and security.

The reason is, as reviewed earlier, with the STO mechanism In crypto, token issuing companies will, of course, be subject to strict rules and regulations from the government.

Meanwhile, different things will be felt by investors who are involved in raising funds with the ICO mechanism.

The reason is that the legal protection and security provided to ICO investors will usually be lower than that of STOs.

2. STO represents ownership of shares or securities in a project or company

The next difference lies in the ownership of shares or securities in a project or company that STO investors will feel.

In this type of ICO, usually, investors will only get tokens based on their utility or use, while STOs are based on securities or share ownership belonging to the company.

3. STO are subject to strict rules and regulations

Another difference is that STOs are always subject to strict rules and regulations from the authorities, for example, in the capital market.

It will also provide greater legal protection and security for investors regarding the issuance of tokens with the STO mechanism.

Meanwhile, there are no strict rules and regulations in ICO to regulate this mechanism, so the potential risk, especially for investors, will usually be much greater.

Potential Risks in STO in Crypto

Then, what are the potential risks to STOs in crypto? Here are some of them:

1. Higher setup costs for launching STO

In the STO mechanism, the setup fee will be higher to launch this project.

Thus, investors may feel a loss if the project fails later.

2. Limited accessibility to retail investors

Another potential risk of STOs in crypto is limited access for retail investors.

This, of course, will affect investors with the STO mechanism because retail investors are usually a significant contributor to purchasing assets.

3. Low liquidity risk

Low liquidity is also a potential risk for STOs in crypto.

This means that the asset will be difficult to trade on the market.

The reason is the low level of supply and demand for these assets.

Examples of STO Use Cases in Crypto

One of the projects and companies that have used STO for fundraising is Polymath.

This STO platform in the United States is even included in the top five (top 5).

With blockchain, Polymath wants to update the traditional capital market infrastructure.

In this case, Polymath uses the ST-20 standard as the latest generation of ERC-20.

By selling security tokens to the global investor community on the secondary market, Polymath is also providing liquidity.

This company also provides efficient dividend distribution by utilizing smart contracts, which means dividends will be paid automatically.

Future Prospects of STO in Crypto

The use of STO in crypto in the future is expected to become more widespread.

This is because the cryptocurrency world has the potential to continue to grow rapidly with the support of the right market infrastructure, including the mechanism for offering funds in it.

Fully adopting the STO system will enable investors and development companies to obtain alternative investment models that are more reliable and profitable in the future.

Meanwhile, in finance and investment, the impact of STOs in crypto significantly impacts the issuance of safer digital assets.

With guaranteed securities, for example, investors will be more secure in terms of ownership of their assets.

Conclusion

In conclusion, Security Token Offering or STO is a fundraising mechanism carried out on a security token type.

The STO mechanism is different from other forms of fundraising, for example, ICO.

That’s because, in STO, the crypto tokens/assets are completely based on assets in the real world, such as stocks and bonds.

As such, STOs are often seen as a safer investment alternative than other fundraising mechanisms such as ICOs.

This is because one of the benefits of the STO mechanism is to reinforce the ownership status of a security token in a project or company.

STO in crypto is a very promising concept for investors and projects or companies interested in implementing it.

This is because STO is more secure for investors, while for projects/companies, this mechanism will help to raise larger funds.

Do you know what STO is in crypto and examples of its application?

Furthermore, you can also read interesting articles, such as the difference between crypto tokens and coins, only at INDODAX Academy.