upstripes | Is this the end of ICO's?

upstripes (35)in #cryptocurrency • 6 years ago

Enter the "Asset-backed token"

Utility tokens have traditionally been the modus operandi for new blockchain company funding rounds, through the initial coin offering (ICO). But although utility tokens supposedly have value within the platform they operate on, they often lack a unique value proposition and likewise, by definition they do not represent an actual tangible asset. In fact, utility tokens are so far removed from real world assets, that the U.S. Securities and Exchange Commission (SEC) have recently been cracking down on those ICOs which cross the boundaries into the territory of being a security in their efforts to provide fundamental value to holders.

This is one of the main reasons that the value of utility tokens, either during their token sale or once they are trading on third party exchanges, is driven predominately pure speculation, rather than the robustness of their tokenomic model.

However, asset-backed tokens, often offered during a Security Token Offering(STO) carry an actual value, because they are correlated with an external, real-world asset’s value. Asset-backed and security tokens offer secure, rapid and minimal cost trading of traditional assets via blockchain technology, and increase liquidity for traditional securities.[2]

Couple of reasons why

extracted from pexels.com.[3]

Security tokens, or asset-backed tokens, increase the potential initial raise for fund operators and other parties who issue securities. However, the main reason it’s beneficial for crypto fund managers to create cryptographic analogues of traditional assets is to increase the underlying assets liquidity — defined as the ease and speed at which assets are purchased or sold (liquidated) at market price. Generally, bonds and stocks are assets with high liquidity, in contrast to assets such as vehicles, real estate, jewellery, art and collectibles which lack access to high trading volumes, trading opportunities on exchanges, and liquidity.
A tokenized asset trading market which trades 24 hours a day, 7 days a week and 365 days a year not only provides enhanced price discovery and reduces price volatility, but it may also reduce the risk of a sudden price crash in asset value.
The numbers speak for themselves. According to a widely-cited report by ICO legal advisory firm Satis Group LLP, an estimated 81% of ICOs are assessed to be scams. These are defined as projects that “had no intention of fulfilling project development duties with the funds” they raised through their ICO.
A further 11% of ICOs succeeded to raise funding but were subsequently abandoned before their tokens were listed on an exchange. In these cases, it can be difficult to even ascertain the difference between a scam and a failed project.[4]

Facing regulations

It is no wonder that regulatory agencies such as the SEC are seeking to engender corrections in this industry by mandating that ICOs abide by US securities laws.

Generally, ICO projects attempt to avoid being labeled by the SEC as a security at all costs. This occurs for a multitude of reasons, as we discuss in this analysis piece. One major concern for ICOs is that a securities designation will require them to meet stringent financial and business reporting requirements.

Just paper partnerships and the deep blue skies. For proof of how difficult it is to assess the fundamentals of an ICO, just look at any ICO rating website. Almost every single rating follows the basic formula: “The whitepaper is [good/bad]. The team is [strong/weak]. The vision is [great/lacking].”[4]

Bottom Line

ICOs mislead the public to varying degrees because it is easier to do so when they are not regulated as securities. Only rarely do people invest: most speculate. There are no customers – why would there be? Buying a utility token is like buying Monopoly money…before the makers of Monopoly even begin creating the game.[4]