STO and Tokenized Assets
Since its inception, an ICO (initial coin offering) has provoked different opinions from investors. While some eagerly jumped at the new opportunity, others were skeptical of the concept. Mainly, investors were confused by the lack of regulation of the ICO process and legal security when participating in initial coin offerings.
However, things are changing. With the development of the crypto business, there is a more reliable solution for founders and investors to make token-based investments legally secure and that is an STO (security token offering). This article will try to understand the main differences between these two strategies and what benefits investors can get from participating in the ICO and STO.
From ICO to STO
Over the years, the ICO instrument has proven to be an effective way to raise capital, although it has some drawbacks regarding the legal security of investors. To correct them, a newer and safer tool (STO) is designed. In contrast to the ICO, this procedure is regulated and has the necessary transparency.
It is an evolutionary step on the way to crypto business development thanks to the participation of the central authority. STOs are controlled by the U.S. Securities and Exchange Commission (SEC) and alike bodies in other countries, requiring registration. With STOs, "tokens" lead to legal liability for the business issuing them and link to the company’s financial performance and structure.
STO vs. ICO: Differences
The STO is the sale of a company's shares to investors under the guise of a tokenized asset. By buying a token at the first stage of an STO, the investor actually becomes the owner of a share in the startup. An analogy can be drawn here with regular shares traded on the stock market.
The STO does not always use blockchain, because the tokens distributed by this method are, in fact, ordinary shares. Finally, there is the main advantage of STO — because tokens are considered to be shares, crowdfunding is carried out under the strict control of regulators such as the Securities and Exchange Commission in the USA.
ICOs are not always the focus of regulatory scrutiny. They are designed for ordinary investors who fit a number of standardized criteria. For example, participation in a crowdfunding company is usually possible for people from a limited number of countries who have confirmed their identity through the KYC procedure. That is, for those who have shown their documents.
In the long run, STO has a much better chance of remaining a popular way to raise money, as it is more to the liking of financial regulators. The SEC has begun to closely monitor the crypto market, with the Commission de facto treating all tokenized assets as securities. Even companies that used to succeed with ICOs now face financial sanctions from the regulator.
ICO and STO Present Diverse Types of Tokens
The ICO involves the issuance of tokens, let's call them "classic" (payment and utility mainly) tokens. Regulators SEC (USA) and FINMA (Switzerland) proposed a classification of issued tokens:
- Payment Tokens — platform payment tokens, a currency within a startup that allows it to receive some kind of product offered by the developers.
- Utility Tokens — tokens offering benefits. They are needed to get additional options of the platform, they are auxiliary.
- Security Tokens — tokens of security or tokenized securities.
The first two types of tokens are not regulated, the third type (STO) is. Security Tokens are digital assets subject to federal securities laws, something in between "classic" tokens and financial products. They certify ownership and entitle the owner to realize investment goals: a percentage of profits, dividends. The rights are recorded in smart contracts, and the tokens themselves have the right to be traded on exchanges.
Benefits of Tokenization
Tokenization refers to the process of transferring ownership of assets into blockchain-based tokens. This allows the use of bitcoin and many other technologies while preserving all the characteristics of physical assets.
There are a huge number of assets in the world, among which the most common are:
- real estate;
- oil and cars;
- precious metals and diamonds;
Since most of them are difficult to translate physically, parties in transactions prefer to exchange documents granting ownership of these assets. The problem is the complexity of this process, both technologically and in terms of control. One solution to the problem is to switch to a token-type system, but with a link to an asset.
The Best Countries to Launch an STO
Australia is one of the first countries to officially create rules for initial coin offerings, and soon many start-up fintech companies will be able to operate without the need for a license. The only disadvantage of this jurisdiction for ICOs can be rather high tax rates.
Registering an STO company in Australia and obtaining an Australian cryptologic license can be a good option for starting an international business.
The British Virgin Islands (The BVI)
The British Virgin Islands (BVI) is by right considered a leading offshore tax haven for international business. The country pays special attention to the development of the financial and technological sectors. Entrepreneurs from all over the world are attracted by the country's flexible tax policies. One of the largest cryptocurrency exchanges, Bitfinex, and its subsidiary, Tether, are located in the BVI.
In February 2018, the Canadian Securities Exchange (CSE) made an announcement that it planned to launch a new security token platform based on the Ethereum blockchain. This move marked the beginning of a new period in the existence and regulation of STOs in Canada. It should be noted that the epicenter of all events related to blockchain and cryptocurrencies in the country is Toronto. Vancouver is not behind the latter and is an attractive place for blockchain companies.
Cyprus is one of the most cryptocurrency-friendly jurisdictions in the world. The popularity of digital money on the island is such that the University of Nicosia became the first university in the world to accept tuition fees in Bitcoin.
Cyprus has one of the lowest corporate taxes in Europe and the world at 12.5%. While maintaining low tax rates, the country is also a member of the EU and is on the EUCD "white list," which makes it highly reputable in terms of transparency and stability.
Ever since the Dubai Multi Commodities Center - DMCC began promoting the cryptocurrency market, Dubai is a great place to do crypto business. DMCC is a member of the Global Blockchain Council. At the moment, cryptos and ICOs are not fully regulated in Dubai. But the state authorities of the jurisdiction consider the issue of virtual currencies as one of the most promising and relevant.
In this state, cryptocurrency refers to alternative means of payment. Estonia is one of the few states in Europe with a friendly attitude to ICO/STO activities. Here, the international business of primary issuance of coins receives favorable conditions with flexible taxation. Crypto activity licenses are issued by the state body EFSA (National Regulator of the Republic of Estonia). The country's authorities have adjusted benefits and incentives for the ICO projects.
Malta is a premium hub for financial technology. This has been facilitated by the passage of legislation regulating cryptocurrencies, ICOs/STOs, and related activities. The jurisdiction has even been nicknamed Blockchain Island. Malta's regulatory framework has the right balance between protecting consumer rights and promoting technological innovation.
Malta is home to the main and subsidiary offices of significant cryptocurrency exchanges as Binance, for example.
Singapore is one of the financial centers of the world. STO activities are profitable and promising here. Cryptocurrencies are legally exempt from the standard 7% tax under the country's Goods and Services Tax (GST) system but are subject to income tax.
In addition to established regulators and favorable taxation, Singapore is notable for the high prestige of local crypto companies. The jurisdiction was one of the first to create the most comfortable environment for STO-related activities.
ICO companies in Switzerland are subject to a number of laws that regulate crypto-activities. Some of the cantons have more favorable conditions for this business. For example, the canton of Zug is even called a Crypto Valley. Among the advantages of the jurisdiction to start an ICO/STO: low taxation, the stability of the banking system, and excellent business reputation among other countries.
One of the safest places for investors to participate in STOs is the US jurisdiction. This is possible because of the SEC, one of the toughest regulators in the world. In addition, the USA has an extensive legal framework for securities (including security tokens) and a large body of case law (Delaware).
Clevver is always on the side of progress and digitalization, so, we offer assistance with the remote incorporation in the following Crypto friendly jurisdictions:
Australia / The British Virgin Islands / Cyprus / Estonia / Georgia / Germany / Hong Kong / Malta / Singapore / Switzerland / the USA
Across the globe, there has been a surge in the number of businesses wanting to conduct STOs. Many states are in the process of adapting their legislation to the demand for transactions in virtual currencies. Financial regulators in various countries are still evaluating whether and how to regulate the cryptocurrency industry. Because of this, it is difficult for entrepreneurs to determine where it is profitable to launch an ICO or STO project, but our experts are here to help!
Clevver can provide support for the company incorporation in some of the most crypto-loyal countries for those who want to try their hand in STO.
In addition, Clevver offers a state-of-the-art White Label Solution to start your Crypto Project.
Disclaimer: Please be informed that Clevver does not advise or recommend investing in cryptocurrencies or similar digital assets. The Crypto market is very volatile and it might lead to a full loss of the investments taken. Any legal or tax advice in this communication (including any attachments) is for information purposes only and is not intended to be used, and cannot be used against Clevver or its Sender. The sender is neither an Accountant nor a Lawyer and cannot be made liable. Please, contact your tax accountant for individual consultation. Clevver does not provide any legal advice itself. Clevver works together with a network of lawyers and tax advisors that provide all necessary individual legal advice.