A security token is likened to a stake in an asset in or outside the company. Technically, a token is a security token if federal law governs it and it gets its value from outside marketable assets or businesses.
Organisations or governments may release security tokens. These tokens, therefore, have similar functions to stocks or bonds. Because they represent the right of ownership to an asset, there is a clear difference between security tokens and utility tokens.
They are liquid digital contracts representing shares in valuable assets like company stock, property, or automobiles. Ownership interests are found on a public ledger (blockchain) using security tokens.
Startups engaging in initial coin offerings (ICOs) can increase the liquidity of their assets and draw in additional investors by tokenising securities. Other advantages include fractional ownership, high market efficiency, accessibility to digitalised versions of real-world assets, and reduced issuance fees.
Types Of Security Tokens
1. Debt Tokens
Debt tokens are interest-bearing tokens. They are comparable to the interest rate, or short-term loan on the sum lent to an individual or business. They stand in for the debt the token owner owes. Debt tokens come in two varieties: those that represent debts with stable interest rates and those that indicate debts with variable interest rates.
2. Utility Tokens
A utility token aids in the funding and capital-raising efforts of businesses, startups, and project development teams to create blockchain initiatives. These tokens may later help buy products or services from the cryptocurrency’s creator.
3. Equity Tokens
An equity token denotes possession of an underlying asset, such as stock in a corporation. We may qualify a token holder of stock for dividends, voting privileges, or both. Similar to shares, a contract specifies the terms and circumstances that apply to such.
4. Asset-Backed Tokens
Asset-backed tokens are blockchain-based tokens that tangible assets support. Real estate, stock in a firm, commodities, and even diamonds are examples of these assets. They grant users ownership rights over priceless things, whether they are ethereal, material, or digital.
How Does An STO Work?
Security tokens allow entrepreneurs to generate funds for cryptocurrency projects and new business initiatives, much like ICOs. Other methods of raising funds, such as STOs, quickly gained popularity due to the challenges and restrictions involved with obtaining funding through conventional venture capitalists. STOs are a safe way for businesses to get much-needed cash because they are legal and regulated.
Crypto-fractionalization, which secures existing assets in the real world through tokenisation or securitisation, is another use for security tokens. While the overall market capitalisation of the globe could be $91 trillion, the value of global real estate assets is around $326.5 trillion.
Factors To Consider Before Launching An STO
1. What Is Tokenized?
Security tokens can represent a range of assets and interests, including debt, equity, and physical support. As a result, the sort of asset tokenisation will not only need a variety of legal attachments but also appeal to investors. Therefore, it is important to know the type of interest when starting an STO.
2. AML And KYC
Nowadays, Know Your Customer (KYC) regulations are present in the majority of nations. These apply to financial companies, particularly those that issue security tokens. AML and KYC confirm that the source of the investment capital was legitimate.
3. Proper Corporate Framework And Governance
It is a crucial factor to take into account before establishing an STO. For example, if the token is similar to the standard stock instruments, the issuer’s corporate filings should permit their issuance.
As required by law, further restrictions and guidelines can be in place. There may be restrictions on certain factors, such as the total number of token holders.
4. Tokenization Platform
Online tokenisation platforms include Token IQ, Tokensoft, etc. Choosing a platform is crucial because they all take a different approach. Additionally, it would help if you considered the cost of partnering, post-launch support, and the proportion of commission on the money raised.
How To Launch An STO
Step 1: Preparation
You must have a robust and risk-free concept to attract potential investors before starting an STO. It is advisable to seek legal counsel at this phase to sort out restrictions and speak with specialists about how the token can increase in value.
A token’s worth is often a function of its goal, feature, and function. Your token will provide a purpose in line with the role you designate for it. You can choose and adjust Its features to match corporate objectives.
Before releasing your STO, it’s crucial to resolve these issues and make final adjustments.
Step 2: Pre-STO
Keep in mind that you ought to have made your STO known to the market before ever releasing it. Your marketing plan will be useful in this situation. There must be the maximisation of the cryptocurrency community forums and websites that list STOs and ICOs. Make sure you get accurate information, such as:
- Token structure
- Your whitepaper
- Team Credentials
Step 3: Launching STO
Running a public sale, the most critical aspect of an STO project is the next step in the security token offering process. It is the point at which your business will ultimately offer your tokens to the broader public to raise money.
There should be the publishing of the selling section of your website at this point. Ensure the display of team and buttons for token sales, which must be simple to find on your website. Investors can register, undergo KYC and AML checks, and buy tokens from this page. At this point, you may also enlist the aid of STO launch services.
Set up your neighbourhood support services to provide prompt help to investors. Investor assistance and questions should be available from your support team on social media and cryptocurrency forums. Responding to inquiries as soon as possible is essential since it can mean the difference between a successful token sale and a failed one.
Step 4: Post-STO
After the crowd sale is over, you should start building your product. The moment to create a blockchain-based application is now. Make sure your software is simple to use, reliable, and, most importantly, secure.
Make sure that the product you develop supports the freshly launched security token. Employing developers with experience in STO and blockchain app development is crucial at this time.
It would help if you kept your investors informed as you constructed your product. They’ll want confirmation that you carry out the business plan as intended and that it satisfies their requirements and expectations.
Benefits And Challenges Of STO
STOs are thought to be safer and involve less risk than ICOs. It is due to the strict enforcement of rules regarding STOs. A potential investor can more easily determine the relative price of a security token because it is technically tied to a real-world asset in addition to its present market worth.
STOs are also less expensive than other types of financing, such as initial public offerings (IPO). Smart contracts eliminate the need for pricey legal representation. Meanwhile, the blockchain also removes conventional paperwork and dependencies, substantially cutting down on processing time.
Regulation is one of STOs’ benefits as well as one of its biggest challenges. STO platforms are subject to heightened law, which complicates administrative procedures. STO platforms must continually stay on top of new rules relating to KYC, AML, tracking ownership, exchange approvals, etc., to guarantee compliance with existing laws.
Initial coin offerings, which are vulnerable to fraud, are thought to be a less safe option than STOs. Token holders have secure and legal investment alternatives thanks to STOs, which are also governed by laws and regulations because tokens are considered securities.