STO – Advantages And Future Potential

STO (Security Token Offering) is attracting attention as a fundraising method using blockchain. The feature is that ST (Security Token) is not just a crypto asset, but a tokenized digital security.

Securities such as stocks and corporate bonds are generally traded through a securities company. A security company will also act as an intermediary for raising funds through IPOs (Initial Public Offerings). However, STO is fast, low-cost, and highly robust because the blockchain automatically acts as an intermediary, so security is safe.

What is STO?

STO is short for “Security Token Offering”, which means a mechanism to raise funds by issuing digitalized securities on the blockchain. Do not misunderstand that “Security” in this case is used to mean “Negotiable Instrument” rather than “Safety”.

In short, STO digitalizes a variety of assets, from stocks and corporate bonds issued and owned by companies, real estate, and even patents to copyrights, to invest on the blockchain. Since the blockchain that forms the basis of STO is Ethereum, it will be possible to receive investment funds and pay dividends automatically by smart contracts.

A security token is not a utility token that has some value in itself, like a crypto asset such as Bitcoin, but a token that expresses the value of securities. There are similar uses and mechanisms, and they are not the target of transactions on crypto asset exchanges.

Crypto assets are not guaranteed by specific property, while in The Financial Instruments and Exchange Act (FIEA), security tokens are treated the same as stocks and bonds, so they are based on assets. Since it is a financial product that can be handled by financial institutions and is officially recognized as a Negotiable Instrument by the government, it can be said that security tokens are much more secure and reliable than crypto assets.

STO Background

ICO (Initial Coin Offering), which had existed before that, is indispensable for talking about the creation of STO. Like STO, ICO is a type of funding that utilizes blockchain. The project planner publishes a white paper to show the concept, and investors who agree with the content purchase the newly issued unique token using another crypto asset.

The project can be planned by anyone without any special screening, and the tokens issued do not need to be backed by assets. Due to its ease of use, a considerable number of ICOs were held around the world from 2017 to 2018. However, when fraudulent cases such as sloppy projects with only fake content when raising funds are rampant and strict regulations are put in place in each country, ICOs will rapidly decline.

Based on this bitter experience, a security token financing method was born, in which only companies that have passed a certain level of examination are allowed to issue, and moreover, real securities are digitized. STOs, which are more difficult to process than ICOs and take less time and effort than IPOs (Initial Public Offerings), are extremely convenient for startups and other companies that need immediate financing. At the same time, the fact that it has a highly secure mechanism to protect the investors who fund is also a major significance of STO’s existence.

By the way, the number of “IDO (Initial DEX Offering)” holdings as a financing method that appeared at the same time as STO, increased visibly in 2021. The method means raising funds by listing crypto assets on a decentralized exchange (DEX), which is based on the Ethereum blockchain and has no administrator.

All transactions are automated by smart contracts and are similar to STOs, but unlike STOs, they issue utility tokens. There is no screening; anyone can hold it, and the investor does not need to prove his/ her identity, so it is easy to enter the market. However, since DEX is not approved by the Financial Services Agency and the legislation is not satisfied, it is undeniable that it lacks security compared to STO based on security tokens, which are treated in the same way as a Negotiable Instrument.

Benefits of STO

Trading Available 24/7

Regular securities trading is from 9:00 to 15:00 on weekdays. However, blockchain-based STOs can be traded 24 hours a day, 365 days a year, so you can buy and sell at any time, regardless of whether it is midnight, early morning, or even on holidays.

Instancy

STO is based on blockchain technology, and all terminals are connected by P2P without going through a client-server, so it is possible to settle various transactions immediately. In traditional trading, payment is settled by the businesses some days after the contract date when the sale stage is completed. In other words, it takes more than a full day for a buyer to hold the purchased stocks and bonds. Moreover, if the contract date is Friday, the settlement date will be extended until Monday. In that respect, STO enables very speedy transactions because execution and settlement are almost simultaneous.

Faking Data is Impossible

All transactions are recorded on the blockchain and then published. Since all nodes need to be approved to rewrite or modify the data, tampering is almost impossible. Due to this robustness, blockchain has never been hacked since its appearance and can sufficiently counter malicious third parties (Cryptocurrency-related cyber damage is crypto, not blockchain).

High Security

Unlike ICO, STO digitalizes real property and issues it as tokens. Since security tokens are treated in the same way as securities, STO will raise funds in compliance with the laws and regulations of the implementing country. Cryptocurrency assets without asset backing are highly secure because they are clearly separated from a legal perspective.

Assets Splitting

In the past, the ownership of securities has not been split due to labor and cost issues. However, with security tokens, it is possible to reduce the size of assets and own them in a decentralized manner. What’s more, it’s worth noticing that not only stocks and bonds, but also land, works of art, copyrights, and other assets that were previously physically impossible to divide, can now they divided. In addition, blockchain will enable secondary distribution, greatly expanding investment possibilities and lowering barriers to entry for individual investors, which can be expected to revitalize the market.

Low Transaction Fees

In STO, all transactions are automatically executed by smart contracts. As a result, the distance between traders is shortened, and there is no need for commissions from existing intermediaries, which makes it possible to significantly reduce costs.

The Current Status of STO

From the above-mentioned advantages, the potential of STO is expected to be very great, and we can expect great expansion of future business opportunities. However, since digital securities already exist, issuing securities as tokens is undeniably lacking in impact. Rather, if the unique features of STO, such as the ability to reduce the size of physical assets, such as land and art works that cannot be divided, and the ability to buy and sell them through secondary distribution, are widely recognized, and an environment where investment can be made at a real level is established, it will be another revolution.

STO has already begun to spread overseas, but it is still in its infancy in Japan. However, it is also true that the public and private sectors are making steady progress toward the standardization of STOs. It is the existence of Osaka Digital Exchange Co., Ltd, which was jointly established by SBI Holdings and Sumitomo Mitsui Financial Group in March 2021

The company’s goal is to handle STO deals using PTS (Private Trading System), which enables asset trading using a computer system operated by a securities company. If you have officially registered as a first-class financial instruments business operator on April 18, 2022, and if you can obtain approval for PTS operation next time, it is expected that the handling of security tokens will start as early as around the spring of 2023.

The current situation is that the number of STO cases is gradually increasing, such as a project to renovate an unoccupied house and operate it as an accommodation facility. However, its scale is small, and it has not yet gained widespread recognition from investors as an investment target.

For example, Liechtenstein has issued security tokens to European investors backed by a limited-edition Italian luxury car, the Ferrari. When the value of the model increases and it is sold, the proceeds are distributed to investors. Some STOs take advantage of the high contract fees of professional athletes. Following these cases, it would not be a dream to boost the STO market worldwide in Japan, for example, if we could tokenize assets related to anime and games that are globally recognized.

The success of public-private dissemination activities will undoubtedly be an important key to the dissemination of STO in the future, so we must keep an eye on that movement.

Summary

STO has the potential to be a breakthrough as an unprecedented financing method, with safety, speed, transparency, innovation, and low cost. It must be a great way to raise funds, especially for startups that have a difficult IPO.

At Relipa, we will help you start a blockchain or NFT business. We will continue to work with our customers as an offshore strategic partner specializing in Japan, such as software, applications, development, and implementation of various platforms, and blockchain development.

If you have any requests for any services, please feel free to contact us. We are sincerely looking forward to hearing from you!