This website uses cookies for reasons of functionality, convenience, and statistics. If you consent to this use of cookies, please click “Yes, I agree.”

What is the difference between an ICO and an STO?

What is the difference between an ICO and an STO?



1.ICO or  "Initial coin offering" - initial offering of tokens.

The “ICO” model was the first crowdfunding opportunity to emerge in the blockchain ecosystem. This fundraising method has made it possible for anyone and anywhere to finance the development of a company or project. ICOs were also named after the cryptocurrency version of the initial public offering (from the English Initial public offering or "IPO"). In exchange for his investment in the ICO projects, the investor receives a certain number of "utility tokens" or in other words, user tokens. These tokens represent future access to the company's product or service.


2.STO or Security token offering - security token offering.

In its essence, the STO model is similar to the ICO, but what is specific about it is that it is strictly compliant with the regulatory requirements of the crypto market. The STO emerged as a reaction to the lack of oversight when it came to ICOs to introduce regulation of blockchain-based crowdfunding, on the basis of which more guarantees were offered in the field of fundraising using tokens issued in blockchain.


3. What should we be careful about and are ICO and STO campaigns financially safe?

Anyone can start an ICO fundraising project. As already noted above, there is still a lack of detailed regulations for ICO projects from a financial point of view, which means that if you can create a blockchain technology as a concept, you can launch a fundraising model for it. That's why many of the ICO financing methods have the potential for fraud. Assuming the mentioned fact that ICO industries are not yet regulated in detail by legislation, recovering the funds you would have invested in a fraudulent token crowdsale is almost impossible.

Here is the place to point out that most ICO projects are designed to raise funds in an unregulated environment. Most ICOs actually position their offerings as service tokens to circumvent regulations. Founders of ICO projects claim to provide their users with tokens to access their decentralized applications (DApps) or native platforms. The main logic here is that the purpose of their token is usage, not speculation. Such a line of reasoning allows ICO projects to avoid regulations and required registration with the SEC  (the US "Securities and Stock Exchange Commission") or other strict regulators.

It is at this point in our ICO vs. STO comparison that we see how the latter is significantly more convenient for investors. It is important in this context to note that it may take a lot of time, money and effort for a startup blockchain company to get the green light from regulatory authorities to launch its STO, but ultimately investors in this model will have the assurance that the tokens , which they receive in exchange for their money, are backed by something tangible (assets, profits, revenue, etc.). In this context, the interest of investors in STO projects is definitely more protected than what happens in ICO blockchain token issues.


4.How do ICOs and STOs work in fundraising?

4.1. The process of launching an ICO fundraising campaign is simple, as the timing of the Presale and Token Sale phases is simply announced. With an ICO, there is no barrier to entry for either sellers or buyers, it is open to investing "spontaneously" so to speak. Once the ICO starts and the token sale schedule is set, investors can buy tokens. COs are not always the focus of regulatory scrutiny. They are intended for ordinary investors who meet 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 (Know your customer) procedure.

Compared to STOs, an ICO token position is generally viewed as a short-term investment. The project team has the freedom to use the funds raised in a way they consider most advantageous technologically, financially and legally. Ex post facto issued tokens are distributed in a simple, automated way, through smart contracts to users.

If the token issued in an ICO campaign increases in price and the team achieves results, investors enjoy high profitability and early adopter benefits. It should be noted that some ICOs allow anonymous user participation, which in some cases is used for abuse - for example, money laundering.

An ICO involves the issuance of tokens, let's call them "classic" (mostly payment and utility) tokens. Regulatory authorities SEC (USA) and FINMA (Switzerland) proposed a classification of issued tokens:

 "Tokens for payment " - tokens are an analogue of cryptocurrencies, which allows the user to receive a product offered by developers.

"Management Tokens " (Utility Tokens) - these are the tokens serving internally a given crypto project or the so-called "internal currency". They are necessary to also obtain additional options on the platform, and in this context they can also be qualified as auxiliary.

"Security tokens " - "security tokens" or tokenized securities. Through them, the investor in a given project gets his share of the project and the right to manage it.   

The first two types of tokens are not regulated, and the third type (STO) is. Security tokens are digital assets subject to regulation by US federal securities laws, something in between "classic" tokens and financial products. They certify ownership and give the right to the owner to realize investment goals: a percentage of the profit, dividends. The rights are recorded in smart contracts, and the tokens themselves are allowed to be traded on exchanges.

4.2.In contrast to the fact that ICO is more often used to raise funds for a technological product, STO is more related to financial services. Therefore, before launching and announcing the idea, the company must offer a scalable business model, which makes the projects more mature and reliable - so investors actually acquire underlying assets whose value is guaranteed. In order to launch STO, more time is needed in order to contact the regulatory authorities and perform the necessary tokenization of the assets. Usually, the sale of the issue under STO is limited to accredited investors only and the required cash amounts are larger. In fact, tokens (as a type of electronic securities) are traded ex post facto through broker-dealers supervised by regulatory authorities.

An STO can also be seen as the sale of shares of a startup company to investors under the guise of a tokenized asset. By purchasing a token at the first stage of the STO, the investor actually becomes the owner of a share in the startup. An analogy can be made here with ordinary shares traded on the stock exchange.

It is important to note that blockchain is not always used in STOs, as the tokens distributed by this method are actually ordinary shares. Finally, there is the main advantage of STOs - because tokens are considered shares, crowdfunding takes place under the strict scrutiny of regulators such as the US Securities and Exchange Commission.

Based on this logic, I should say that security tokens that are subject to offering in STO projects are expected to be the next big step in traditional finance, as they are associated with less speculation and market manipulation.


5. The best countries to launch an STO .


5.1. Australia .

Australia is one of the first countries to formally establish rules for initial coin offerings, and soon many fintech startups will be able to operate without the need for a license. The only downside to this ICO jurisdiction can be the rather high tax rates.

Registering an IPO in Australia and obtaining an Australian cryptocurrency license can be a good option for starting an international business. 


5.2. British Virgin Islands (BVI) 

The British Virgin Islands (BVI) is rightfully 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 policy. One of the largest cryptocurrency exchanges, Bitfinex, and its subsidiary, Tether, are located in the BVI.


5.3. Canada .

In February 2018, the Canadian Securities Exchange (CSE) announced plans to launch a new securities token platform based on the Ethereum blockchain. This move ushered in a new era in the existence and regulation of STOs in Canada. It should be noted that the epicenter of all blockchain and cryptocurrency events in the country is Toronto. Vancouver is not far behind the latter and is an attractive location for blockchain companies.


5.4. Cyprus 

Cyprus is one of the most cryptocurrency-friendly jurisdictions in the world. Such is the popularity of the digital currency on the island that the University of Nicosia has become 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 - 12.5%. Although it maintains low tax rates, the country is a member of the EU and is included in the "white list" of the EUCD, giving it a high reputation in terms of transparency and stability.


5.5. Dubai .

Ever since the "Dubai Commodity Trading Center" - DMCC started promoting the cryptocurrency market, Dubai has been a great place for crypto business. DMCC is a member of the Global Blockchain Council. Currently, cryptocurrencies and ICOs are not fully regulated in Dubai, but the jurisdiction's government authorities consider the issue of virtual currencies to be one of the most promising and relevant topics of its own.


5.6. Estonia .

In this country, cryptocurrency refers to alternative means of payment. Estonia is one of the few countries in Europe with a friendly attitude towards ICO/STO activities. Here, the international ICO business gets favorable terms with flexible taxation. Cryptoactivity licenses are issued by the state authority EFSA (National Regulatory Authority of the Republic of Estonia). The country's authorities have adjusted benefits and incentives for ICO projects.


5.7. Malta 

Malta is a premier fintech hub. This has been facilitated by the enactment of legislation regulating cryptocurrencies, ICOs/STOs and related activities. The jurisdiction has even been dubbed “Blockchain Island”. Malta's regulatory framework strikes the right balance between protecting consumer rights and promoting technological innovation. 

Malta is home to the main and subsidiary offices of major cryptocurrency exchanges such as Binance, for example. 


5.8. Singapore 

Singapore is one of the financial centers of the world. STO activities here are profitable and promising. By law, cryptocurrencies are 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 regulatory bodies and favorable taxation, Singapore is distinguished by the high prestige of local crypto companies. The jurisdiction was one of the first to create the most conducive environment for STO-related activities.


5.9. Switzerland .

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 called "crypto valley". Among the advantages of the ICO/STO launch jurisdiction are: low taxation, stability of the banking system and excellent business reputation among other countries.


5.10. USA .

One of the safest places for investors to participate in STOs is the US jurisdiction. This is possible thanks to the Securities and Exchange Commission (SEC), one of the strictest regulatory bodies in the world. In addition, the US has an extensive legal framework for securities (including tokens as securities) and a large body of case law (eg in the state of Delaware).  


6. Conclusion.

As regulations in the blockchain space become more important, STOs have also seen significant growth, while ICO usage has seen a decline. At the Global Blockchain Summit 2022, Mr. Daniel Diemers, lecturer in the Global Master's in Blockchain Technologies, spoke about the cryptonomic space - ICO and STO respectively. Dimers, as a blockchain expert, concluded that of the existing fundraising options, STOs represent the most realistic and honest concept for the future. It is marked by the expectation of pluralism of the various forms concerning currencies and digital tokens: fiat currencies issued by central banks, respectively cryptocurrencies issued by banks, electronic money not supported by blockchain, closed-source cryptocurrencies, tokens with full privacy , hybrid cryptocurrency type tokens and probably many more innovative financial concepts. Overall, we live in an exciting time for finance.


Author: Mr. Atanas Kostov - blockchain attorney


You can watch a video on our YouTube channel on the topic of ICOs or STOs here: