Traditionally, blockchain has mainly been used in Cryptocurrencies. However, the technology has continued to gain more areas of application and has even given rise to security and asset-backed tokens. Some experts are optimistic that the security tokens will grow to become a multitrillion-dollar market and even replace Cryptocurrencies as the most popular assets on blockchain. Here are some of the factors that are favoring the growth of security tokens.
Regulators Are Comfortable With Security Token Offerings (STO)
Most blockchain-based startups have turned to Initial Coin Offerings (ICOs) to raise the required capital to start their businesses. However, there have been complaints that most ICOs have not lived up to their promise. This has seen many investors lose millions of dollars in such projects. This has prompted the regulators to come down hard on the new fundraising methods.
Most investors are more comfortable dealing with a regulated sector than one that is not. Luckily, most STOs are compliant with the legal requirements. Sophisticated investors prefer such investment opportunities, as they are more transparent and efficient. Furthermore, investors also enjoy a high level of indemnity.
Companies seeking to benefit from STOs only need to achieve compliance with regulations at both the local and international levels. Businesses that tokenize early will have an advantage over those who join the sector later. Moreover, a tokenize ecosystem enables businesses to raise the required capital fast.
Lack Of Recover Feature In Cryptocurrencies
Cryptocurrencies have become so popular in the last few years and many businesses are now accepting them as a form of payment. However, many Crypto enthusiasts know the risks of losing access to their digital wallets. Virtual currencies lack fund recovery feature making them unfavorable in the investment arena.
STOs shareholders do not have to worry about recovering their funds, especially when dealing with properly constructed STOs. Such firms can reissue the tokens to the investors. However, such benefits are subject to confirmations, checks, and balances. This is another reason that would make most investors to prefer STOs to ICOs.
STOs Have An Intrinsic Value
ICOs only represent a future access to the products or services of the firm issuing the tokens. However, unlike the ICO tokens, securities tokens have an intrinsic value. Security tokens are associated with benefits such as voting rights, dividends, and profit sharing among others. Investors are more likely to invest in projects that provide value at present than those that whose value will be determined after a later date.
Apart from reducing the risk, securities tokens give the investors a significantly greater value. There are various ways to calculate a security’s intrinsic value that include discounted cash flow, residual income method, and the dividend discount method among others. When you buy securities token, it has its value.
Securities Tokens Are KYC/AML Compliant
Know your customer (KYC) and anti-money laundering (AML) protocols are not an issue with STOs. Most companies offering security tokens are familiar with KYC/AML requirements and have no difficulty in ensuring they are followed. This reduces the likelihood of conflicts between token holders, companies issuing the tokens, and the regulators.
Cryptocurrencies were initially designed to allow anonymous transactions. Consequently, most of the products that were introduced in the early years did not follow KYC/AML protocol. However, regulators around the world are determined to stop the use of virtual currencies in money laundering. Although many exchanges have already complied, it remains a big challenge where wallet addresses are anonymous.