The tokens offered in a Security Token Offering (STO) are called security tokens. They are basically crypto tokens that pass the Howey Test.

Just as the name suggests, security tokens are grouped as securities and are therefore subject to the federal securities regulations. This is why STO is said to be the most regulated method of raising funds for blockchain projects, compared to other means like ICO and IEO.

Security tokens are developed in a special way because they require an additional layer in their smart contract to make them regulatory compliant. This additional layer helps in identifying who is allowed to purchase, trade and interact using the token. That is why Security tokens are not developed using common ERC-20 standards. The ERC-20 standards lack the crucial layer that makes security tokens to comply with regulations.

Therefore, a number of companies and organizations have come up with different standards to help in creating security tokens. One of those companies is Polymath, which has gained lots of popularity since its launch a few years ago.

Polymath security token standard

Polymath designed a security token standard referred to as ST-20, which defines a number of rules for Security tokens. For instance, ST-20 tokens define who can use the token and how the token should be used within the smart contract.

 Creating a Security Token for your blockchain project using Polymath

Below is a step by step guide on how you can develop a security token for your security token.

  1. Create a funded Metamask account

To create a Metamask account, you download the Metamask chrome extension and then fund the account using Ethereum (ETH).

Metamask is an API that allows you to access Ethereum enabled Dapps using your browser. It is simply an Ethereum wallet.

Then, open the Polymath website and click on the ‘Configure Your Security Token’ so that you can start creating your security token.

Note: You cannot proceed without first downloading the Metamask plugin on your browser. If you try clicking on the ‘Configure You Security Token’ button without first downloading the Metamask, you shall be directed to the page below. However, you don’t have to worry, just click on the Metamask link on the page to download and install the Metamask.

  1. Create a Polymath account

When you click the ‘Configure Your Security Token’ button, you will be directed to the registration page where you will be required to fill in your name and preferred email address.

When you click on ‘Create Account’, you shall be required to sign in with Metamask also. This is done so as to sign your email address with your Metamask wallet.

  1. Choose your Token name, symbol and register it

After completing the registration process in Polymath, the next step is registering your security token. You will have to choose a name and abbreviation (better referred to as token symbol).

When choosing the name of your security token, it is advisable to choose a name that is in line with the name of your blockchain project.

An example of a security token name can be ‘Transporty’ with a symbol ‘TRP’.

You have to ensure that the name and symbol that you choose is not used by any other blockchain/cryptocurrency project anywhere in the world.

Once you click on the ‘Reserve Token Symbol’ button, you are given a 15-days window where you can consult with your team members and advisors before submitting the symbol name and symbol for approval.

Once you submit the name and symbol, you get a confirmation email to contain the full information about your security token.

  1. Choosing your partners

The next step is usually selecting the people that you want to help you with your STO. Here you choose the KYC/AML providers, legal team, advisory team, and marketing team.

It is, however, important to note that the portal doesn’t directly contact the selected persons or organization. It only sends you an email containing a sample of the email you would send to them.

Once you are done with selecting all the four teams (Advisory, Legal, KY/AML and Marketing), you go on to create your token.

 

  1. Creating the Token

When creating the security token, you can add a link to a file containing any additional information on the token.

  1. Setting up the details of the STO offering

Here, you are supposed to choose the currency that you want the investors to use when purchasing your security tokens.

When you click on the ‘Select And Configure STO’ button, you proceed to configure all the important aspects like the start and end date, the hard cap, the amount to be raised, and etc. of the STO.

Once you complete the process an email address containing the details of the STO configuration is sent to your email address.

  1. Whitelisting investors

The last step is whitelisting your investors. This enables the investors to buy your security token in the future. Since STOs are highly regulated, it is important to know who holds the securities.

However, the whitelist can be changed during the STO. You can add new investors along the way as the STO continues to allow them to purchase the security tokens of your STO.

Security Token Offering (STO) is considered one of the safest crowdfunding methods for blockchain and fintech companies. However, for it to be secure, there are quite a number of regulations that go along with it and anyone who chooses to use it has to adhere to all the regulations provided.

The entire scenario is complicated by the fact that there is no internationally recognized legal framework governing cryptocurrencies around the world. Therefore, individual countries are left to fetch for themselves as they race to feel the gap by establishing their own rules and regulations for cryptocurrencies together with anything else like STOs, ICOs, and IEOs that go along with them.

Generally, things have gradually changed with most governments accepting cryptocurrencies contrary to the past. For instance, when the first cryptocurrency, Bitcoin, was launched, it took some time for governments to accept it. At the time, governments were wary of digital currencies since criminals became too fond of them since they could enable them to transact anonymously.

The adoption of cryptocurrencies around the globe can be attributed to the various legal frameworks put in place by the various governments together with regional regulatory authorities.

Today, blockchain projects can almost flourish within any part of the globe. Most countries have accepted cryptocurrencies, with some even laying foundation for the development of their own state-owned cryptocurrencies. However, since blockchain technology is evolving fast, governments are now caught up with yet another handle, the regulation of the crowdfunding of blockchain projects.

To begin with, Initial Coin Offering (ICO) and Security Token Offering (STO) were among the first crowdfunding methods that were invented by blockchain developers. However, due to the fact that it was not easily regulated, scammers could easily get their hands on it to swindle funds off investors. That led some countries like China and South Korea to ban the use of ICOs in funding blockchain projects.

The embattled ICOs led to the invention of Initial Exchange Offering (IEO), which is simply an ICO run through a crypto exchange, so as to ensure that it was easy to apply some regulations to the crowdfunding.

STOs, on the other hand, were well regulated from the word go. Just as the name suggests, STOs deal with securities and governments already had certain laws governing securities within their borders. Therefore, it was easy to draft regulations for the STOs. Interestingly, these laws and regulations have made it quite difficult for developers to use it. Some fear the long process while others fear the strict rules that they have to adhere to in order to be allowed to conduct an STO.

What is an STO?

Before indulging into cracking the nut on the regulations and rules governing STOs, it is quite important to clearly understand what these STOs are.

An STO is a funding method that involves the selling security cryptocurrency tokens to potential investors.

The next question then becomes, what are these security tokens?

Security Tokens

A cryptocurrency token can only be classified as a security token if it passes the Howey Test and is consequently subject to the federal regulations. Different countries have different regulations for STOs.

Holders of security tokens become part of the company behind the security tokens and are therefore entitles to some dividends out of the overall profit that the company makes.

There are four types of security tokens that a company could choose to use. These include:

  1. Equity tokens

These tokens are basically used to state the ownership of an asset like stock or debt for a certain company.

2. Debt tokens

These are just like short-term loans to a company where there is an interest rate on the loaned amount.

3. Utility tokens

These are the most common security tokens and they give users the ability to access the products or services of the project once the project becomes operational.

4. Asset-backed tokens

These are tokens whose value is tied to a tangible or nontangible asset. For instance a company could have a security token whose value is tied to the value of real estate assets.

Reasons why security tokens stand out

  1. It provides an improved way of accessing real-world assets that have been digitized. Companies can digitize almost anything from debt, real estate assets to the parking fee.
  2. It provides investors with some degree of ownership and they are entitled to dividends out of the total amount of profit made by the company.
  3. Security tokens also provide increased liquidity.
  4. In comparison to traditional tokens, security tokens ensure that the founders or board members do not have to surrender board seats in Venture Capital deals.
  5. The regulations set in place ensure that there are no loopholes for scammers.

Steps of developing an STO

  1. Come up with a viable idea that entails solving a certain problem within the society/community.
  2. Carry out research on the probable solutions to the problem(s) that you intend to solve.
  3. Carry out research on other companies or projects offering solutions to the identified problem and identify key areas of improvement.
  4. Recruit a competent team for the development of the project and the STO. At this stage, you should also look for a competent legal advisor or a consultancy firm like Gravitas International to guide you through the regulatory handles. The regulatory mainly depends on your geographical location and you should ensure that you clearly understand what STO regulations are in place for your location.
  5. Identify the exact security within your project that you wish to tokenize. This tokenized security is what you shall offer in the STO.
  6. Choose a platform where you shall launch your STO. Examples of such platforms are Polymath and Harbor.
  7. Create a compelling website that clearly outlines your project goals and asset tokenization.
  8. Develop the security token with the help of your development team, and legal advisors.
  9. Market your STO in accordance with the set rules within your location.
  10. Launch your STO and offer the security tokens for sale to accredited investors in accordance with the set regulation within your location.
  11. Look for a good partner Security Token Exchanges where you shall list your security token.

Security token development

This is normally one of the hardest phases of STOs that make developers crack their heads. However, it is not as hard as people may think. All that is needed is the right team and legal advisor.

With STOs, you have to be careful to ensure that you stick to all the set regulations within your location from the word go. Normally, you should go for a consultancy firm that will help in auditing both the financial and legal matters concerning your project. The legal team should run jurisdiction checks on the security titles like credit ratings among others that you may specify for use.

STO becomes an exception when it comes to the type of tokens. Contrary to other crowdfunding methods that easily depend on Ethereum ERC-20 tokens, STOs do not use ERC-20 tokens due to the gas prices, protocol changes and network congestion that is associated with the ERC-20 tokens.

You could be wondering if Ethereum is not used, then what other platform is there for token creation.

Well, experts had to come up with platforms that could solve the issues with the ERC-20. Organizers and companies came up with new standards that enabled whitelisting and locking, which could enable tokens to comply with the required security regulations.  These standards include ST-20, R-Token, ERC-1404, and ERC-1400. These standards still use Ethereum smart contracts, but they are improved versions that have an additional layer to accommodate regulations.

To make the process of creating security tokens, there are platforms dedicated to the creation of security tokens. Examples of these platforms are the Polymath, and Harbor platforms. These platforms provide an easy way of creating your security tokens.

The selected security token issuance platform should ensure that the value of the token is well scrutinized and in line with all the required regulations. It also takes you through all the remaining steps from setting the STO start or end date/time and payment acceptance.

The most important thing with STOs is that the required regulations have to be embedded within the smart contracts used for the STO.

What happens if your STO doesn’t meet all the requirements

  1. You will have problems getting your security token listed on security token exchanges. Normally, security token exchanges do not list STOs with legal issues. Worst, delisting from an exchange could greatly hamper your project brand.
  2. Failure to comply with the Anti-Money Laundering (AML) and Know-Your-Customer (KYC) requirements makes future relationships with banks a problem. In case you already had funds deposited in the banks, the banks could seize the funds.
  3. If you do not comply with all the regulations and laws set in place by the regulatory authorities within your location, the authorities could penalize you or even shut down the STO.

Another giant is coming up in the cryptocurrency arena; by the name of Initial Exchange Offering (IEO). Following the unprecedented rise of fame of ICOs in 2017 and the subsequent turmoil surrounding their regulations and scamming incidences, developers seem to have found another better way of raising funds for their blockchain and cryptocurrency projects through Initial Exchange Offering (IEO).

What is IEO?

Initial Exchange Offering is an ICO that is run through a Cryptocurrency Exchange Launchpad. Therefore, the Launchpad act as the intermediary that conducts the token sale.

Compared to ICOs, IEOs have succeeded in raising staggering amounts of funds in very short time spans. For instance, BitTorrent was able to raise $7.2 million in just 18 minutes through an IEO conducted via Binance Launchpad. Fetch.AI also raised $6 million in just 22 seconds via Binance Launchpad.

From statistics like in the examples highlighted above, investors seem to be more confident buying tokens via exchange platforms like Binance because they are certain that the exchanges are regulated and any activity that the exchanges are involved in must be legal and well analyzed by experts.

But how does the Launchpads work?

Launchpads are basically platforms that cryptocurrency exchanges have fostered to enable blockchain projects to offer their tokens for sale directly to the exchanges’’ customers. In the process, the buyers (Investors) of the tokens end up buying tokens from projects they are sure they are not scams.

To be allowed to use the exchanges’ launchpads, the blockchain developers have to enter an agreement with the exchanges so that their tokens can be initially placed on the exchanges.

Then, before any token sale is done on an exchange, the exchange performs a thorough audit on the project to find out its viability and potential of the token. The exchanges also directly manage the token sale.

The main participants of IEOs are the project developers, Exchanges and investors.

Through the IEOs, the exchange platforms get revenue from a listing fee for the token placement and also attract more customers since people will join the exchanges to participate in the IEOs and eventually stick in the exchange for other trading activities.

For investors, they get a reliable investment opportunity. It is hard to get a scam token sale being conducted via an exchange platform. Therefore, the investors can rest assured that they are investing in a genuine project that is well vetted.

Benefits of investing in an IEO

For the project developers, they are assured of a more legitimized token sale since they get the backing of the crypto exchanges who investors are sure to have done their due diligence on the integrity of the project. On the same hand, projects have their tokens exposed to a larger customer base since exchanges already have a wide customer base. The large customer base makes it possible for the projects to raise very large sums of money within a short timeframe.

Investors, on the other hand, get an opportunity of investing in a token that has immediate liquidity. They can also pay for the token through a variety of methods that are already established in the exchange platform.

Conclusion

Despite the fact that IEOs are not scams, it is good to remember that the investors are the ones left with the short end of the stick. They are the once that face the most risk in IEO. They can only trust the exchanges to be good at what they do.

The IEO policies also differ from one exchange to the other and the problems faced in one exchange may not be similar to those faced on another exchange platform.

Blockchain technology is known to be making a very great impact due to its features especially its privacy. However, the very features that make blockchain technology a darling too many, seems to be causing headaches with both authorities and some enterprises.

Although blockchain networks provide users with a very high degree of privacy, the stored public ledgers are irreversible. Experts warn that this ‘privacy poisoning’ is the biggest risks facing organizations, centerpieces, and governments.

Blockchain privacy poisoning: what is it?

The European Union recently came up with the General Data Protection Regulation (GDPR), which states that every individual has “the right to be forgotten”. However, this is practically impossible with blockchain networks since you cannot alter the content of the ledger files stored in a blockchain network.

Blockchain privacy poisoning refers to the poisoning of blockchain networks with personal data that cannot be deleted as per the GDPR.

The fact that blockchain networks provide a solution for storing original data in a manner that it cannot be adulterated, the same advantage creates a major problem for organizations, especially in the European nations. You have personal data on a network, but it is impossible to destroy that data. If the data is deleted, it would mean compromising the entire blockchain. Blockchain is a chain of blocks that contain ledger files.

Initially, blockchain privacy poisoning was not a major issue since the only information that was predominantly stored on blockchain networks was transaction detail. However, with the adoption of blockchain technology across different fields like medicine, industries, and businesses, other information is being stored in blockchain networks.

One of the key areas that blockchain technology is being used is in consent management. Blockchain is being used in the proof of consent and in the coming years this will see a widespread application. However, this is double-edged since the information provided by the user for the proof of consent is irreversible or cannot be deleted without destroying the entire blockchain network.

Does blockchain privacy poisoning apply to private blockchain networks?

There are two types of blockchain networks; the public blockchain networks and the private blockchain networks.

For public blockchain networks, anyone can access the network and participate in the networks but the information entered in the network cannot be altered in any way. This squarely falls under the GDPR.

Private Blockchain networks, on the other hand, can only be accessed by those who have been granted permission. The users and the kind of transactions are restricted. They are mostly used in military, national defense, supply chain management, construction, filling returns among other places. The GDPR laws do not apply when it comes to private blockchain networks.

Normally, if any private data is shared through the private blockchain networks that information would never be available to the public contrary to the public blockchain networks. Therefore, even if a private blockchain network becomes “poisoned” by the personal data, it somehow doesn’t really matter.

What does the future hold?

One thing is for sure: new regulations especially those aimed at regulating individuals’ privacy could pose major complications when it comes to blockchain implementation.  The GDPR has already proved that such rules might not apply to blockchain technology although experts could also opt for a way to make blockchain comply with such rules. The question is when?