In the middle of 2022 a “collapse of the cryptocurrency market” happened, which led to the development of new business models. Needless to say, the global financial crisis has caused the fall of all types of assets, not just crypto, and a huge increase in inflation has only reinforced unstable economic sentiment. However, crypto investors, despite all the obstacles, do not give up – they continue to look for new investment tools and ways to save their business. And Security Token Offering (STO) is one of these ways.

What’s the difference between security and utility tokens?

Unlike utility tokens, which often do not have any real value, and only give access to some service of the blockchain platform to the user, security tokens are linked to real assets. Utility tokens are not considered to be an investment. Despite all their current popularity, they only give access to specific products of the company, which means that they cost nothing. Such tokens are good for attracting the attention of investors.

Let’s take the BAT token for instance – utility token from the Brave Browser. We can use BAT only for tipping content creators through Brave browser. This token does not have any other use.

Security tokens on the contrary give traders an opportunity for safe investments – it is always possible to exchange them for fiat. Such tokens either already have a certain product behind them (real estate, art, etc.), or they can play the role of a “digital share” of a company, providing access to its real capital. In addition, they can give investors a number of rights, such as ownership of shares, dividends, voting rights and more.

Now STOs are officially accepted as security, which means that they fall under government regulations according to the laws. The centralization of this cryptocurrency, of course, means that there are some restrictions, but at the same time STO officially protects its owners from illegal actions in their address.

By the way, do you know the difference between tokens and coins? If not, then we have a perfect article for you.

Benefits of STO

The emergence of security tokens (tokenization) in the financial market has its advantages:

• Safety. STOs are backed by tangible assets, so the true value of your security token depends on some real item. It’s regulated by governments and it is completely transparent but secured by blockchain technology.
• Liquidity. The main benefit of tokenizing traditional securities is the increase of the liquidity. Tokenization is well suited for low-liquid assets like art and real estate. Such high-value assets can be split into tens, hundreds of tokens,
• International trade. Another advantage of tokenization is the possibility of cross-border transactions. STO gives an opportunity to invest to traders from all over the world.
• Regulated. The STO has been certified by the SEC, which means that it is legally traded. And due to the use of blockchain, regulators can  track all transactions, and smart contracts determine the identity of the buyer, the time of the transaction, etc

Why do we need security tokens?

If utility tokens are purchased only for internal use in the system, and people do not intend to get a profit from their resale, security tokens on the contrary are actively involved in the crypto trading. STO secure the digital ownership right to a particular asset and allow the owner to carry out further financial activities – trading, resale, re-investment, and others.

Anthony Pompliano, Partner at «Morgan Creek Blockchain Capital» wrote in his blog:

“Security tokens bring a number of improvements to traditional financial products by removing the middleman from investment transactions (usually some form of a banker). The removal of middlemen leads to lower fees, faster deal execution, free market exposure, larger potential investor base, automated service functions, and lack of financial institution manipulation.”

Security tokens platforms

1) Polymath 

A blockchain protocol that aims to improve the process of issuing and distributing security tokens. The platform also controls the process of issuing and registering security tokens in accordance with official requirements, protects the rights of investors and provides them with access to the developers' marketplace.

2) Securitize 

A cloud service that allows you to tokenize companies, funds and other structures in accordance with legal regulations. Developers pay great attention to the private sector. Securitize was the first program to digitize private market securities.

3) Templum

This platform provides investors with a new capital markets infrastructure for alternative assets and private securities.

Cases of STO use

Below are a few examples of projects that have successfully launched STOs.

• Resort Hotel St. Regis in Colorado, USA sold 18.9% of the resort through STO. Elevated Returns, which owns the hotel, tokenized part of the resort and formed a real estate investment fund (REIT) specifically for this. STO members were invited to purchase stakes in the St. Regis through the purchase of Aspen Coin tokens, which are shares of the fund. Aspen Coin provides owners with the right to receive dividends and the right to resell on the exchange.
• The Maecenas platform conducts online auctions, where digital certificates (tokens) are presented as a lot, symbolizing shares in art objects. These tokens are freely traded on the exchange and their value reflects fluctuations in the price of the underlying object. If the painting is bought out in its entirety, the profits are distributed proportionately among the co-owners.
• Spice VC is one of the first tokenized venture funds. Instead of raising funds in the traditional way from a limited number of investors, the fund raised $15 million in one month by issuing and selling its tokens to many people through an STO. Fund managers invest the collected funds in blockchain startups. In the event that the fund sells positions in portfolio companies, the profit is distributed among investors in accordance with their shares, i.e. the number of purchased tokens.

The future of security tokens

Some crypto enthusiasts think that the popularity of security tokens will soon increase so much that they will be able to compete with traditional stock exchanges. According to the most optimistic forecasts, by 2030 security tokens will grow to $162 trillion in trading volume.

The easiest way to buy or exchange coins is to use SimpleSwap services.

SimpleSwap reminds you that this article is provided for informational purposes only and does not provide investment advice. All purchases and cryptocurrency investments are your own responsibility.