Goodbye initial coin offerings. We hardly knew ye

For the sake of clarity and transparency, we should just embrace STO and the regulations that come with it
John Wu
CEO, Digital Assets Group

When we launched a research tool last month to track the performance of top cryptocurrencies, we originally called it the SharesPost ICO Growth Index.

We ultimately dropped ICO from the title, a change that might seem cosmetic or even trivial. But the move reflects a new industry reality: the term “initial coin offerings” have become a liability. Instead of an innovative way for companies to raise capital, ICOs have become synonymous with volatility, regulatory opacity, and even fraud.

The stunning fall of ICOs shows how fast the industry has changed over the past year—and continues to do so. So far this year, ICOs have raised $14 billion, more than double than 2017, according to Coinbase. But that number masks several problems.

Aside from EOS and Telegram, which accounted for about half of that sum, the market was littered with low quality ICOs. Scams and fraud constitute as much as 20 percent of project white papers, over 50 percent of ICO projects have failed to raise funds or are no longer operational, according to a report by AutonomousNext.

The U.S. Securities and Exchange has been scrutinizing anything with “ICO” in its name. In the beginning, companies used “ICO” because the term was vague enough to perhaps avoid SEC deeming the token a security and therefore subject to regulation. But ICO has become an automatic red flag for the agency.

Embrace STOs and the regulations come with it

Instead of ICO, we should start using the term STO, or security token offerings. For one thing, many tokens have elements of a utility (access to a service or a product on the Blockchain) and a security (an asset that provides an expectation of a financial return). That’s why the SEC has declined to offer broad guidance on the matter.

But while the SEC said it would judge each token on an individual basis, the only cryptocurrencies the agency has exempted from securities regulation thus far has been Bitcoin and Ethereum.

To stabilize the volatile crypto markets, we need institutional investors and institutional investors are only interested in tokens because they expect a financial return. So for the sake of clarity and transparency, we should just embrace STO and the regulations that come with it.

“The term ICO does not distinguish what class of token is being offered,” Securitize CEO and co-founder Carlos Domingo wrote in a blog post on Medium. “Many ICO issuers decided to issue utility tokens, which in theory cleared them from having to go through costly and complicated compliance measures, but in fact almost all utility token ICOs are considered by regulatory bodies to actually be securities, which means a large number of utility token issuers will be heavily scrutinized by regulators like the SEC.”

“On the other hand, security tokens, and STOs, are treated as securities from day one,” Domingo said. “They are digital assets that are subject to federal and global security regulations.”

SharesPost recently struck an agreement with Securitize to allow companies and investors to issue and trade security tokens on the SharesPost Marketplace.

Security tokens will emerge in 2019

The market is clearly moving toward tokenizing assets like stock, real estate, and artwork. SharesPost research director Rohit Kulkarni predicts 2019 will be a big year for security tokens. “So far, security token offerings make up only a relatively small percentage of ICOs,” Kulkarni wrote in a blog post. “But that will soon change. Security tokens, not utility coins, will likely attract significant amounts of Wall Street money.”

“As the regulatory environment for cryptocurrencies improves, we believe the broader infrastructure to help connect issuers and investors is starting to take shape,” Kulkarni said. “The market forces that drove the evolution of the digital currencies - democratization, globalization, transparency and liquidity – could prompt a flurry of private tech firms to raise money through security token offerings.”

Words are important things. Therefore, we should invest in STOs not just with our financial resources but also our language.