Goodbye ICO, Welcome STO: Can Security Token Offerings be a new way of crowdfunding?
After over 2,000 tokens and several billion dollars raised through it, the era of Initial Coin Offerings (ICOs) seem to be well and truly over. ICOs have raised record low funds in the past few months making it hard to hope for a resurgence in the once booming crowdfunding practice.
Here, we x-ray the factors that led to the demise of ICO and a new challenger-laying claim to its coveted crown.
Short-lived ICO Frenzy
These projects raised several million dollars in cryptocurrency without even having actual working products, something analysts agreed was going to haunt the industry later on. Investors hedged their bets based on speculations about future token prices rather than the tradition indices such as the real-life value these projects were offering. This frenzy will soon be over as previous projects turned out a lot worse than investors had expectedЧseveral of them literally disappeared after raising significant sums through token sales.
High failure Rate of ICOs
Some analysts claim that as much as 90 percent of blockchain projects that raised money through token sales in 2017 were already in a blind alley by the second half of 2018. Reasons given for the massive failure rate include infeasible products and regulatory roadblocks. Furthermore, many of these ICO tokens are 90 percent lower than their all-time high prices and this can be attributed in part to a general downturn in the crypto market.
Prolonged Bear Market
The recent market downturn has seen bitcoin [BTC] price drop from its all-time high of around $20,000 to below $4,000. Other top cryptocurrencies; Ether, Litecoin, Bitcoin Cash, etc., were not spared and neither was newly released ICO tokens. That fact that bitcoin dominance grew from 33 percent last year to over 50 percent this year, shows that these tokens suffered an even more fatal blow than BTC.
Tough Regulatory Condition
Many ICOs have found themselves on the bad side of the law in recent months. With a better understanding of the crypto space, regulatory agencies are moving swiftly from a position of neutrality to strong control of ICO activities. In some countries like the United States, ICOs are banned outright while other countries which did not ban the practice are putting strict regulations in place mostly to protect investors from fraudulent and risky ICOs.
These regulations have not been favorable to many ICOs, to say the least. The U.S. SEC has led the way with an onslaught on ICOs in the ending months of 2018. This focus on ICOs has seen the agency charge at least a dozen projects in the third quarter of 2018 and a couple more in the last quarter including controversial ICO Centra Tech which was endorsed by celebrities Floyd Mayweather and DJ Khaled.
Institutional Investors will Favor Regulated STOs
As the curtain closes on the ICO era, it brings into prominence another digital asset class which seems favored by current conditionsЧeconomic and regulatoryЧthat is the tokenized securities or STOs.
STO short for Security Token Offering is poised to take the place of the initial coin offerings as the crowd-funding source for not only crypto projects but any business whatsoever.
STOs are proving to be a lot of things ICOs could not be. In regulation, for instance, there are uncertainties about which ICOs constituted securities and which did not but STOs are clear on the matter. They are issued following standard securities laws. This is perfect for the crypto sphere as institutional investors, who operate in regulated environments, move from interest parties to key players in the space. STOs have already been touted as the future of stock market where companies can easily issue their shares as tokens which are transferable between parties.
If 2017 was the year of ICOs, 2018 was the year of Institutional Interest, then 2019 is poised to be the year of STOs.