Security token offering

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A security token offering (STO) / tokenized IPO is a type of public offering in which tokenized digital securities, known as security tokens, are sold in cryptocurrency exchanges, or security token exchanges. Tokens can be used to trade real financial assets such as equities and fixed income, and use a blockchain virtual ledger system to store and validate token transactions.[1][2]

Due to tokens being classified as securities, STOs are more susceptible to regulation and thus represent a more secure investment alternative than ICOs, which have been subject to numerous fraudulent schemes.[3][4][5] Furthermore, since ICOs are not held in traditional exchanges, they can be a less expensive funding source for small and medium-sized companies when compared to an IPO.[6][7] An STO on a regulated stock exchange (referred to as a tokenized IPO) has the potential to deliver significant efficiencies and cost savings, however.

By the end of 2019, STOs have been used in multiple scenarios including the trading of Nasdaq-listed company stocks,[1] the pre-IPO of World Chess, FIDE's official broadcasting platform,[7][8] and the creation of Singapore Exchange's own STO market, backed by Japan's Tokai Tokyo Financial Holdings.[2]

Controversy regarding ICOs[edit]

Though sharing some core concepts with ICOs and IPOs, STOs are in fact different from both, standing as an intermediary model. Similarly to ICOs, STOs are offerings that are made by selling digital tokens to the general public in cryptocurrency exchanges. The main difference stands in the fact that ICO tokens are the offered cryptocurrency's actual coins, entirely digital, and classified as utilities. New ICO currencies can be generated ad infinitum, as might in some cases their tokens. Additionally, their value is almost entirely speculative and arises from the perceived utility value buyers expect them to provide.[9] Security tokens, on the other hand, are actual securities, like bonds or stocks, tied to a real company. In this sense, STOs are actually more similar to IPOs, with the difference being that one isn't required to be an accredited investor with a high net worth to take part in the initial offering. Just like securities obtained from IPOs, security tokens can guarantee voting rights, dividends, among other entitlements. This democratization of initial company share offerings has caused STOs to be labeled "The Everyman's IPO".[6]

In terms of legislation, some jurisdictions do treat STOs, ICOs, and other cryptocurrency-related operations under the same legislative umbrella.[10] In general, though, STOs are placed under securities legislation (together with traditional IPOs), and ICOs under utilities, with the differentiation being made mostly on a case-by-case basis.[11] It is worth noting that even in countries where STOs and ICOs are under the same legislation, security tokens still require a connection to a registered company with real assets being sold.[12]

The main debate surrounding security tokens is, thus, the legal differentiation of what can be qualified as a utility instead of a security. Generally, legislation understands that if a passive financial return is expected from the investment, then it is classified as a security. This way, even if the offering company understands their tokens are merely a utility asset with no expected return investment, if it can be proven otherwise then the ICO becomes an unregulated STO, passive of legal punishment. Moreover, this assumption of utility has been abused by some STO offering companies to sell securities without regulatory compliance (maliciously labeled as ICOs).[13][14]

This legal ambiguity has led to some ICO offerers being prosecuted by the SEC as a security offering part, though their tokens were announced as utilities. Such companies include messaging apps Kik and Telegram, the former being sued by the SEC for over $100 million and the latter delaying their offering plans after similar prosecution.[15][16][17]


One of the main selling points of cryptocurrencies such as Bitcoin has been the decentralization aspect, by which no government can influence or control the currency. By extension, a cryptocurrency is not directly affected by a specific country's jurisdiction, sociopolitical environment, or economic events[18] (although volatility to such matters has been perceived numerous times).[12][19] Such a lack of regulation has led to the rising of large-scale crypto-related criminal activity, ranging from terrorist funding to tax evasion, most of which go untracked and unpunished.[20][21] Similarly, ICO scams have been an increasingly troublesome matter, causing billions of dollars in losses and damaging the cryptocurrency market's value as a whole.[22][23]

Security token offerings are seen as a direct response to such matters, being tied to real, registered assets, and regulated by a specific jurisdiction while still allowing such jurisdiction to be picked by the offering party (upon legal registration and permission request). Criticism regarding this attribute includes the possibility of evading one's country's laws to digitally perform the same action somewhere else.[12] So far, STOs have been regulated and legalized in many countries where ICOs have not, due to fitting in many already pre-existing regulations regarding securities.[24][25]

Jurisdiction Status Comments
European Union Regulated Regulated by MiFID II. Newly issued security tokens must fulfill requirements of the Prospectus Directive.[26]
Germany Regulated MiFID licenses are issued by BaFin.
United Kingdom Regulated Categorized by the FCA under the category of Specified Investments.[27]
Switzerland Regulated Regulated by FINMA and subject to the same laws as traditional securities.[28]
Russia No Regulation Regulatory hurdles have been an impediment to the development of STO technologies in the country.[29]
United States Regulated Security tokens are subject to the SEC under the same laws as traditional securities.[24]
Canada Regulated Must obtain approval from the CSA.[25]
Brazil Regulated STOs must be registered and approved by the CVM.[30]
Australia Regulated Legal under the regulation of ASIC. Traditional and tokenized securities are treated differently.[31]
Israel Regulated Must follow the legal framework provided by the ISA and are subject to the same laws as traditional securities.[32][33]
United Arab Emirates No Regulation Even with no formal regulation, remains a strong STO market.[34]
Thailand No Regulation Legal approval of ICOs has already been made by Thailand's Securities and Exchange Commission. STO application criteria expected to be released soon.[35]
Singapore Regulated Must receive approval from the MAS and be compliant with the Securities and Futures Act.[36]
Japan Regulated Regulated under the FIEA.
Hong Kong Regulated Regulated under a framework provided by the SFC.[37]
China Banned STOs and ICOs are banned and constitute illegal financial activity.[10]
South Korea Banned Security tokens are under the same prohibition as standard ICOs.[38]
Malaysia Regulated Must receive approval from the Securities Commission Malaysia and Labuan Fiancial Services Authority [39][40]

Examples of security token offerings[edit]

There have been various STOs globally. The article from Oxford School of Law identified 185 projects until now.[41] The largest STO was tZERO that raised over $130 million.[42][dead link] The success rate of the projects lies somewhere near the 50% threshold.[citation needed] Ethereum is the leading blockchain platform used for issuance.[citation needed] Stellar comes in second position with a major German STO of the restaurant chain L'Osteria in late 2019.

Security token offering service providers[edit]

There are at least 30 confirmed security token offering service providers.[43]

See also[edit]


  1. ^ a b Browne, Ryan (8 January 2019). "Apple and Tesla shares on the blockchain could be the next big thing in crypto". CNBC. Retrieved 2019-11-26.
  2. ^ a b Shimada, Yu (14 November 2019). "Singapore brings Japan into Asia's first digital securities market". Nikkei Asian Review. Retrieved 2019-11-26.
  3. ^ Chen, Qian (21 November 2019). "The good, the bad and the ugly of a Chinese state-backed digital currency". CNBC. Retrieved 2019-11-26.
  4. ^ Allison, Ian (26 November 2019). "Tokenized Real Estate Falters as Another Hyped Deal Falls Apart". Yahoo! Finance. Retrieved 2019-11-26.
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  6. ^ a b Aitken, Roger (18 February 2019). "Bitcoin Aside, After ICO's Are STO's The Everyman's IPO?". Forbes. Retrieved 2019-11-26.
  7. ^ a b Murphy, Hannah (21 November 2019). "World Chess announces plans for 'hybrid IPO'". Financial Times. Retrieved 2019-11-26.
  8. ^ Jolly, Jasper (21 November 2019). "World Chess to issue digital tokens in stock market flotation". The Guardian. Retrieved 2019-11-26.
  9. ^ Wolf, Martin (12 February 2019). "The libertarian fantasies of cryptocurrencies". Financial Times. Retrieved 2019-11-28.
  10. ^ a b França de Mello, Leandro (24 November 2019). "Desvendando a extensão das regulações impostas às criptomoedas na China" [Uncovering the extension of regulations imposed on cryptocurrencies in China]. Money Times (in Portuguese). Retrieved 2019-11-27.
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  12. ^ a b c Bussler, Frederik (30 July 2019). "The Future Of Crypto: Security Tokens As A 'Boring' Reality". Forbes. Retrieved 2019-11-27.
  13. ^ Rooney, Kate (6 June 2018). "SEC chief says agency won't change securities laws to cater to cryptocurrencies". CNBC. Retrieved 2019-11-27.
  14. ^ Knight, Robert (21 June 2018). "Five SEC-Compliant Reg A+ STOs Worth Watching". Hackernoon. Retrieved 2019-11-27.
  15. ^ Badkar, Mamta (4 June 2019). "SEC sues messaging app Kik over $100m ICO". Financial Times. Retrieved 2019-11-27.
  16. ^ McIntosh, Rachel (18 October 2019). "SEC vs. Telegram: Will Gram Tokens Ever Be Distributed?". Finance Magnates. Retrieved 2019-11-27.
  17. ^ Rooney, Kate (16 November 2018). "In bigger crackdown of crypto abuses, SEC goes after unregistered coin offerings". CNBC. Retrieved 2019-11-27.
  18. ^ Baldwin, Rosecrans (26 November 2019). "Cryptocurrency Will Not Die". GQ. Retrieved 2019-11-27.
  19. ^ Young, Joseph (25 November 2019). "The Recent Bitcoin Drop Could be Different Than Prior Pullbacks, Here's Why". Forbes. Retrieved 2019-11-27.
  20. ^ Popper, Nathaniel (18 August 2019). "Terrorists Turn to Bitcoin for Funding, and They're Learning Fast". The New York Times. Retrieved 2019-11-27.
  21. ^ Helmore, Edward (27 July 2019). "IRS warns crypto holders: dodge tax and we'll hand out stiff punishments". The Guardian. Retrieved 2019-11-27.
  22. ^ "Cryptoqueen: How this woman scammed the world, then vanished". BBC News. 24 November 2019. Retrieved 2019-11-27.
  23. ^ Morris, David (27 November 2019). "Crypto Needs Journalists More Than It Wants to Admit". Fortune. Retrieved 2019-11-27.
  24. ^ a b "The Laws That Govern the Securities Industry" (Press release). U.S. Securities and Exchange Commission. 1 October 2013. Retrieved 2019-11-27.
  25. ^ a b "Canadian securities regulators provide additional guidance on securities law implications for offerings of tokens" (Press release). 11 June 2018. Retrieved 2019-11-27.
  26. ^ Regulation (EU) No 2017/1129 of 14 June 2017
  27. ^ "Cryptoassets: our work" (Press release). United Kingdom. Financial Conduct Authority. 23 January 2019. Retrieved 2019-11-26.
  28. ^ "FINMA publishes ICO guidelines" (Press release). Swiss Financial Market Supervisory Authority. 16 February 2018. Retrieved 2019-11-26.
  29. ^ Rapoza, Kenneth (2 January 2019). "Will Russia Make Any Waves In Crypto This Year?". Forbes. Retrieved 2019-11-27.
  30. ^ "Initial Coin Offerings (ICOs)" (Press release) (in Portuguese). Securities and Exchange Commission of Brazil. 16 November 2019. Retrieved 2019-11-27.
  31. ^ "Initial coin offerings and crypto-assets" (Press release). Australian Securities & Investments Commission. May 2019. Retrieved 2019-11-27.
  32. ^ "Israel market regulator sees room for cryptocurrency trading". Reuters. 6 March 2019. Retrieved 2019-11-27.
  33. ^ Beedham, Matthew (6 March 2019). "Israel regulators support 'heavily regulated' cryptocurrency trading platform". The Next Web. Retrieved 2019-11-27.
  34. ^ Gonçalves, Pedro (17 April 2019). "UAE emerging as global hotspot for security token sales". International Investment. Retrieved 2019-11-27.
  35. ^ Chudasri, Darana (13 March 2019). "SEC approves first ICO portal, still unnamed". Bangkok Post. Retrieved 2019-11-27.
  36. ^ "Securities and Futures Act" (Press release). Singapore Statutes Online. 1 April 2019. Retrieved 2019-11-27.
  37. ^ Lee, Georgina (7 November 2019). "Hong Kong sets out regulatory framework for virtual asset trading platforms, emphasises investor protection". South China Morning Post. Retrieved 2019-11-27.
  38. ^ Lee, Jung Min. "Blockchain & Cryptocurrency Regulation 2020 Korea". Global Legal Insights. Retrieved 2019-11-27.
  39. ^ "Securities Commission Malaysia Act 1993 - Acts | Securities Commission Malaysia". Retrieved 2020-11-29.
  40. ^ "Legislation - Legislation | Labuan FSA". Retrieved 2020-11-29.
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