It’s fair to say that the term ICO has entered common usage, with even the average layman likely to have heard this collection of letters being bandied about. Despite this, the existing process certainly has its flaws – ones that the Securities and Exchange Commission (SEC) have done much to crack down on in recent months.
This is why Overstock CEO Patrick Byrne is amongst those working towards creating a safer way to raise money through crypto, a proposal he refers to as ‘security token offerings’. “It’s the new term,” he explains. “The industry is distinguishing very clearly now between ICOs and STOs.”
It’s an idea that Overstock is already putting into action, as evidenced by the launch of their ElioCoin, an STO which will fund the production of their most recent investment, the three-wheel cars manufactured by Elio Motors.
The problem with ICOs
The perceived need for such a substitution raises the question of what exactly is wrong with ICOs. The answer to this is a complex one; they certainly have their attractions, or else how does one explain how $11.2 billion has been raised via this medium since 2016?
However, the SEC has not only warned of pump-and-dump schemes, but has gone as far as to shut multiple ICOs down and charge others with fraud. It paints a worrying picture, and one which undoubtedly requires further exploration.
The way that ICOs function is by placing coins or tokens for sale. This acts as a means of crowdfunding, but instead of the voting rights or dividends that would be ‘purchased’ with shares in a company, the tokens provide access to a network, platform, or service – one which is often little more than an unformed idea. The negative implications of this are obvious as token holders have no rigths if the project fails.
The difference between ICOs and STOs
So how do STOs seek to remedy the problems inherent in the ICO process? The difference is a simple one: they are backed by something tangible, whether assets or profits or revenue. Functioning in a way not so dissimilar to shares, STOs can be ‘programmed’ to allow actions such as proxy voting, whilst still using blockchain technology as their backbone.
As Trevor Koverko, CEO of Polymath, a platform which enables people to launch security tokens, explains:
“You can program a token, but a static share certificate just sits there and collects dust.”
This is not their only boon. As Mr Byrne has pointed out, STOs also ensure that issuers are being more upfront about the nature of their offerings, following comments from SEC chairman Jay Clayton that all ICOs are securities.
As the Overstock CEO elucidates:
“The ICO craze of last year created a toxic waste dump of financial assets… What we’re developing is a mechanism so that there will be a legal way to go forward and not create any new toxic waste.”
