If 2017 was the year of the ICO, 2018 will be the year of the STO. As we now know, the amazing amount of ICO’s, or Initial Coin Offerings, that occured in 2017 is now partly to blame in causing the “crash” of 2018. All of those ICO teams have stacks and stacks of Ethererum that they are starting to dump unceremoniously on the market. The predicted “double digit” ETH scenario has not happened yet, but mega-ICO’s such as EOS ($4 billion raised) and others still have plenty of ETH to sell.
True fiat on-ramps will help with this problem, as investors would be able to buy their fresh tokens with cash and not have to deal with the headache-inducing intermediate step of going from fiat to ETH or Bitcoin, and then sending their ETH/BTC to the crowdsale or ICO address. There is always slippage and fees involved, not to mention time wasted and the stomach-dropping fear of accidentally punching in the wrong crypto address and sending your money/tokens off into the abyss.
The old ICO model is: send your Ether and get your ERC-20 “ICO” token back in return. Very little know-your-customer or anti money-laundering checks are done, if any, which no government is going to let happen forever. Drug dealing, human trafficking, and terrorism are still very real use cases for crypto so we need to be vigilant about their abuses. Along with the custody issues, trading your funds for these placeholder ICO tokens almost always amounts to the creation of a security because there is an expectation of a return on your investment, it’s as simple as that. Otherwise, why does anyone buy them? One possibility is utility tokens.
Some crypto assets are utility tokens which is for some a legitimate use-case and for some coins it’s just a way to try and skirt securities laws. A utility token is supposed to stay inside the system and have some explicit reason for needing to be a token. Think of a bus token. The token itself has no real value or expectation of a return, but it does represent some kind of service or other value. The utility token (for example a bus token) moves around inside the system and does something. Maybe it buys processing time or storage on the blockchain, or pays for some other service like a bus ride. The reason why an investor would buy these utility tokens is if there is a limited number of them, and there is a lot of demand, then they could understandably have bought tokens low and sold them high as the company or service became more widespread and used in the real world.
A security token is a different beast, and usually means that there is an actual backing to the token. The backing could come in the form of actual holdings of the company, or it could infer a promise that the company will work hard to raise the value of itself, therefore making you money in the process if you had bought in early enough to enjoy the rise in market cap. Along with this backing is also the idea that the coin would have gone through a process to ensure that it was created and operated in full compliance with the law (almost always meaning United States or European Union law but could be any locality that has jurisdiction).
The New York Stock Exchange alone contains something like $22 billion in securities and derivatives, and it is now known that the parent company of the NYSE, the Intercontinental Exchange (ICE) is actively seeking to add crypto to their listings. Only properly backed and compliant coins will ever make the cut, which should help minimize some of the fraud and useless ERC-20 tokens that do not have and will never have any real use or value.
Be assured that data streams, compliance and legal teams, and trading desks are being set up now so that when more clear SEC regulation does come the best tokens will rise to the top and should experience massive growth. The next big wave in crypto should be a lot safer for investors and will go a long way towards the institutionalization of the crypto markets as a whole. STO and their derivatives could end up replacing even traditional investment products, if not create their own new asset class that is more safe and secure for investors.