Security Token Offering (STO) refers to the offering of financial instruments representing traditional asset classes (stocks, bonds, rights, obligations and their derivatives) or alternative asset classes (crypto assets), whose various investable underlyings (real, financial and virtual assets) are capable of producing wealth by appreciating or distributing income. It is a process similar to an ICO (Initial Coin Offering), in which an investor exchanges money for coins or tokens representing his investment.
STOs can be considered a means of payment, a way to earn money online or even a crowdfunding tool. In recent years, STOs have become a viable method of financing start-up and scale-up projects because they allow to approach investors directly, avoiding the costs and time-consuming nature of traditional forms of financing and intermediaries.
STOs function in a similar way to shares in a company, but with the advantages of the digital economy. Any type of physical asset can be tokenized or used to back a security token.
Platforms wishing to offer security token trading must be fully compliant with applicable regulations, including thorough investigations of token lists, data sharing and investor on-boarding procedures. For this reason, security tokens are only traded on specialised exchanges.
The Security Token Offering ecosystem
The entities that collaborate in the issuance and management of Security Tokens are the exchange platforms, brokerage firms and providers of compliance, legal and custody services.
ESMA (the European Securities and Markets Authority) has published an 'Advice on Initial Coin Offerings and Crypto-assets', which aims to identify the prospects for regulating crypto assets and to illustrate the practices adopted by the various national supervisory authorities.
ESMA's analysis showed that although there is a general consensus to regulate all types of crypto-assets in the European Union, some countries still have divergent views on the applicability of the MiFID II directive on crypto-assets.
What are the benefits of Security Token Offering?
STOs aim to correct perceived investor inequities, including securing security token holders' rights to dividends or other pre-defined revenue streams.
Security tokens allow companies to create a new set of stakeholders with new permutations of debt, equity or contributor roles. They are generally considered an improvement over ICOs, as they address the fundamental flaws of utility token sales and have the potential to enhance traditional securities.
Other advantages offered by security tokens are:
Credibility. STOs strictly follow current regulations and allow the blockchain and cryptocurrencies to restore some credibility, which was unfortunately lost due to fraudulent transactions that occurred in the ICO world.
Enhancing traditional finance. While the infrastructure that supports the issuance of traditional securities is slow and expensive, security tokens facilitate access to investment assets at a lower cost.
Programmability. Security tokens can be easily programmed and enforced through smart contracts.
Free market. Local borders or regulations do not restrict security tokens.
Plurality of investors. Traditional security agreements only cover local players, whereas security tokens are open to anyone who can access a digital exchange platform.
Increased liquidity. STOs are traded on specialised security exchanges, so investors have a convenient way to liquidate their assets if necessary.
Consob's position on Security Token Offering
Through the publication of a 'Documento per la Discussione' (Discussion Document), Consob has decided to launch a debate in Italy on the possible regulation of 'initial public offerings of crypto-assets’.
The main objective is to define crypto-assets as an autonomous category, so to apply a less rigid regulation than that provided by the TUF for financial instruments or products.
Consob defines crypto-assets as 'digital records representing rights related to investments in entrepreneurial projects'. According to Consob, 'crypto-assets' must be defined in relation to:
· the use of innovative technologies, such as blockchain, in order to incorporate in the tokens the rights of the subjects who have invested with the aim of financing the underlying business project;
· the destination for subsequent trading of the tokens (crypto-assets), the transferability of which is closely linked to the technology used, i.e. its ability to record and maintain evidence of the ownership of the rights connected with the crypto-assets in circulation.
According to this definition, cryptocurrencies would only include Italian offers of utility tokens, which qualify as financial products and have a clear expectation of return that differs from that of financial instruments, traded on supervised exchanges and aimed at investing in entrepreneurial projects.
A young market with great potential
Despite the considerable progress made in the development of security tokens, there are still many aspects to be improved. Questions regarding the verification of proper custody of funds and other issues make the adoption of STOs still not as smooth as one would like. Fortunately, in most countries, current legislation restricts the issuance of security tokens to accredited investors, reducing the possibility of fraud.
Those who believe in blockchain and cryptocurrencies should not be deterred by the fraudulent activity that has unfortunately tainted this world at times. The need to overcome obstacles has only accelerated the rate of innovation to make investments safer and fairer quickly. We believe that there are excellent future prospects for STOs, with a view to opening up the financial markets more and more to democratic and liquid forms of investment.
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