In this guest post, Daria Generalova, Managing Partner at ICOBox, takes a look at how 2018 saw the decline of ICOs, and how STOs might be set to replace them.
Late 2017 was a time of explosive growth in blockchain, when many projects made money virtually out of thin air. In the recent months, the cryptomarket went through an expected cooling-off period and is now entering a new stage in its development. Many countries informally leading the crypto industry are getting closer and closer to regulating the sphere, and market players are revising their approaches accordingly. It is entirely natural therefore that this dance revealed the need for newer, more versatile solutions which will help companies achieve even greater success.
The decline of utility tokens
Until recently, Initial Coin Offerings (ICO) ruled the day. Projects issued utility tokens as a sort of internal money that offered their holders certain advantages. They may have granted access to the use of the platform's services, or offered discounts, or were just used as an internal means of payment.
Through all of 2017 and the first half of 2018 ICOs were the most popular way to gain financial backing in the crypto market, and the vast majority of companies issued utility tokens. Largely this was because from the legal standpoint this approach was mostly in the grey zone, so projects and their token holders were not subject to laws governing investments and financial instruments. But the market situation has changed, and the lack of clear, specialized regulation became a serious drawback rather than an advantage.
STOs instead of ICOs
For the past year tokens issued by ICO startups failed to rapidly grow in exchange value – in fact, their rates have dropped, and token holders had no leverage over projects. As a result, new ICOs were unsuccessful in their efforts to collect money, and the market started to grind to a halt. Compared to late 2017-early 2018, the market capitalization and the value of all main cryptocurrencies plunged by two thirds, with new ICOs now collecting just 25% of what was possible just a year before. In fact, the numbers demonstrate that over half of all ICOs conducted in Q2 2018 failed.
All this inspired market players to look for new solutions to develop their businesses. What they found was a Security Token Offering (STO) model. The interest in this new paradigm is growing by the day.
Advantages of Security Tokens
Security tokens and STOs allow projects to raise funds rather than sell their services, thereby clearly dividing their buyers into their future users and those who would just like to invest capital. For serious market players, securities underlying these tokens are a familiar and well understood tool, an investment asset purchased in order to make a future profit. This asset may be issued in the form of bonds, equity shares, or any other instruments bringing passive income.
Issues surrounding security token regulation
Security tokens may well become a new but familiar financial tool for the market, but that would require the projects seeking investors to change their business logic pretty much overnight. The process would encompass a serious shift in business and financial planning, a new approach to transaction structuring, and learning to work with professional securities market players, among other things.
Another obstacle to overcome is the inconsistencies in securities regulation in different jurisdictions. This means that projects have to be extremely careful about their choice of countries where they sell their security tokens. However, the presence of clear and definitive legal framework gives project founders a much greater space for creativity in terms of what exactly they can or cannot do. They would also be able to obtain funding from institutional investors and hedge funds, which are now getting ready to enter the crypto market.
Institutional investors and the crypto market
Institutional investors and hedge funds are truly interested in the crypto market. It is not inconceivable that in the days to come they will gradually replace larger individual buyers as main holders of digital assets. This speaks to the increasing maturity and professionalism of the market and demonstrates its decreased volatility, which makes it much more attractive for long-term investments.
Many in the industry expect serious competition between crypto projects for the attention of institutional investors – because their support will be on an entirely different level than even that of major individual token holders.
Shuttling between IPOs and the crypto market
A couple of other trends need to be noted. First, it appears entirely plausible that many major companies with recent IPOs under their belt but with no previous crypto experience will soon start showing up in the marketplace. These are full-fledged projects with real offices, competent teams, financial reporting, etc. They will now be turning their sights to STOs as another way to attract funding for their innovations.
The second trend is the opposite: many companies that successfully conducted ICOs, collected serious funds, created money-making businesses and did not turn out to be a scam, will be contemplating their IPOs. It is reasonable to expect that quite a few crypto companies which did their ICOs in 2017-2018 would be gearing up for IPOs in 2021-2022.
The shift from utility to security tokens, the enthusiasm regarding STOs, the imminent participation of institutional investors and major companies which have never before worked in the crypto space but are now finding it potentially promising – these will be the defining trends for the development of the crypto market. Transition to more sophisticated, legally-regulated products will make it even more attractive to future investors. And this, despite the current slump, gives one plenty of cause for optimism.