STOs vs ICOs
In the context of startup fundraising, STOs are becoming regarded as a more equitable way to raise capital than the previous ICO model.
This is because they give buyers an actual asset, such as a share of the company’s equity, rather than a utility token which is technically decoupled from the success of the underlying company.
As a result, it is likely that in the future many companies will be under pressure to issue tokens via an STO instead of an ICO, when applicable.
This is because an STO leaves buyers with a security token, rather than a utility token which is dependent on network usage to gain value. If a company issues a utility token and then later makes profits in ways that are not connected to the utility token, then unfortunately, utility token holders have no rights to share in those profits.
Furthermore, ICOs are more vulnerable to exit scams because the company issuing the utility token has no shareholders to which they are accountable.
On the other hand, if a company issues security tokens via an STO, where the security token represents something like an equity share in the company, then the holders of the token are expected to share in that success through ownership of the token. Additionally, security tokens may even entitle the holder to payouts such as dividends.
However, it is important to remember that as outlined above, a security token can be almost anything tangible such as precious metals or property, so just because you are participating in an STO does not mean you are getting shares in a company.
This isn’t to say that utility tokens are less valuable than security tokens. Rather they are two different products, with two different use-cases. The issue is that utility tokens have frequently been used to fill the role of security tokens, often leaving buyers with a product of questionable value and legality.
Now that regulatory bodies around the world have taken action on cryptocurrencies, information on whether a token is legally a utility or security is much clearer. As such, the way is now paved for security tokens to enter the market in accordance with local regulatory bodies, such as the Securities and Exchange Commission (SEC) in the US.
Therefore it is unlikely one type of token will dominate the other. Instead, companies looking to fundraise will now have the option of deciding which type of token best suits their product. However, it will still be up to savvy consumers to make sure they are getting the best deal, which will involve critical thinking about whether a security or utility token is best suited to the product.