Before we had STO, we had ICO. Now the STO market is either taking a refreshing nap or in a coma – or punched by the SEC and down for a count of 10.
Before either ICO or STO became famous, somebody pointed out to me that tokenizing existing assets via what we now call Security Tokens is a big and important change but not as fundamentally game-changing as a totally new tool such as Utility Tokens. Maybe that idea of Utility Tokens is worth revisiting?
This where it pays to understand what happened with Telegram and the SEC. The scale of the Telegram offering (via a SAFT = Simple Agreement for Future Token) had the Utility Token bulls of that era (now very quiet) crowing about how it meant smart big money was flowing in. There was no question that the money was big and no question that the investors were accredited. My take was/is that big and accredited does not always make it smart money.
Anyway, the SEC and the courts have decided on Telegram, even if it will be debated and discussed for years. You can see why the SEC decided as they did and why they took their time. Telegram is a big and reputable company and lots of money was at stake, not just the initial large amount raised by Telegram. The Telegram GRAM token would have probably generated billions of dollars of trading in GRAMs on secondary and derivative markets.
STO arose in response to the broken ICO market (which was a response to the broken VC to IPO market). There are two problems with ICO:
- Branding. For too many investors ICO means at best a bad deal (at worst it means scam).
- The C in ICO means Coin or Currency. If there is one area that regulators look at even harder than a Security it is a new Currency.
Utilities on the other hand are boring and legal. They are really a tool of marketing to reduce the cost of Customer Acquisition as we explored in this chapter of the Blockchain Economy. The SEC has gone on record to say that at least some Utility Tokens are legal. If customers are willing to pre order and pay upfront and if that helps the company raise enough money to deliver as promised that is both legal and good for business. The CEO discusses Utility Tokens with the CMO, maybe with the CFO, and leaves IR (Investor Relations) out of the loop. All investors want to know is how efficient the company’s marketing is.
There are two theories for how this will play out – regulated and unregulated:
- Regulated. The markets and infrastructure for the exchange of security tokens mature and we attach lots of things such as revenue share/royalties, or the rights to listen to music, read a report or watch a video. In other words a Security Token may include what we call a Utility Token today.
- Unregulated. Tokens for what the SEC classes as not a security are bought and sold in the same way we buy and sell other digital assets such as music, writing, video etc.
Yes, it is time for a new look at Utility Tokens, but we should never say ICO again or any three letters starting with I and ending with O that sounds like IPO.
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