Are we entering the new era of STOs (security token offerings)?
What are the differences between an STO and an ICO? Arnab Naskar, Co-Founder of SICOS and Business Strategy (Lead) at STOKR will get your questions answered in a recent OCC interview. Read on to find out more.
OCC: Hello Arnab, and thank you for taking the time to join this interview with us. Tell us a bit about yourself. How did you get into Blockchain?
Arnab: Things unfolded for me back in 2015, when I moved to Germany and started doing some research into the intersection of law and technology. I realised there’s a huge scope for cryptocurrencies in different fields and industries, so I started experimenting with cryptocurrencies from 2013 while still in university, completing a Bachelor of Law. However, until 2016 I did not realise the true impact of Blockchain.
In early 2017, I came across a lot of people from different disciplines, who shared a passion for Blockchain and cryptocurrencies. I was fortunate enough to meet Tobias Seidl, Lukas Cremer, Dr. Ingo Fiedler, Christopher Nigischer, Lennart Ante and Travin Keith; together we realised that we shared a common vision; a vision for a new age capital market. We founded our first company, SICOS Sarl in 2017. And things kept moving with rapid speed after that, which led to the foundation of STOKR SA in August 2018.
OCC: Tell us more about STOKR. How did you come up with the concept?
Arnab: On the one hand, we spotted a problem. The SME funding gap is estimated at 1.5 trillion USD. On the other hand, retail investors (everyday humans) have limited choices when it comes to wealth management and diversification. The growth of an Initial Coin Offering (ICO) is aimed to address this issue by connecting retail investors with innovative ventures. But the legal uncertainties and the specific business model requirement for ICOs poses risks for many businesses interested to opt for this form of financing.
Also, we realised that investors’ education somewhere has been misinterpreted, affecting the investment decision of millions of people. Investor education must not be restricted to issues related to various risk metrics. In the ICO space, we spotted how lack of knowledge can be detrimental in a growing tech space. We realised that we must develop a platform that aims to address not only the financial gap between retail investors and innovative ventures but also addresses the need for substantial investor education.
Utility token-based ICOs have provided access for regular investors to participate in the most innovative early-stage ventures. No doubt about that. However, we have also seen that not all ventures looking to launch an ICO require a Blockchain-based business model. Can an innovative and profitable winery raise funding through utility token based ICOs? The answer is probably “no”.
On the other hand, projects like SAFT, that was designed in the US, also showed us that even utility tokens can be treated as securities under the US Securities laws and thereby can again provide restrictive buying options in the primary offering, to aggregated investors only; making the very idea of ICOs – which mainly implies access to innovative investment for retail investors – infructuous.
The concept for STOKR primarily came to address the need for bridging the gap between retail investors and innovative ventures. Our aim is to provide opportunities for regular people to find early-stage Unicorns and educate them about the industry in which they are investing.
STOKR will be a crowd investment platform which is powered by Ethereum Blockchain to create independent access to new capital markets. Through EU-compliant security token offerings (STO), everyday investors can directly fund innovative start-ups and SMEs in return for a share of the venture’s future profits. Our focus is on supporting projects committed to making a positive impact and creating a community of educated participants empowered to make better investment decisions.
The idea was formally materialized in 2017, when Tobias Seidl and Lukas Cremer structured the legal and technical architecture, respectively, of the upcoming STOKR platform. STOKR is built on three pillars: firstly, tokenization of profit-sharing rights of innovative ventures, secondly, creation of community around the ventures and promoting open space for discussion between ventures and investors, and finally, education of the investors regarding the venture and the industry – thereby creating a community of educated investors empowered to make better investment decisions.
We were very clear from day one that we will not develop any platform token for STOKR. Simply put, the primary reason is not to create any barrier for the investors to invest in the ventures of their choice. Investors can invest using Ether or Euro on our platform. Ventures receive the funding either in cash or in Euro and the investors receive tradable tokens entitling them to share future profits. We are on a mission to create a world where everyone is empowered to fuel innovative ventures. There is a dire need for the reinvention of the capital market that can mirror the requirements of the digital era and STOKR is here to do so.
OCC: What’s the difference between an STO and an ICO?
Arnab: Back in 2017 when Bundesblock was formed, I clearly remember that in the first few meetings of Bundesblock the definition of a token was discussed quite a lot. Up to date, a lot of writings have been published on this topic. Personally, I find the classification of token done by FINMA, Switzerland quite logical and easy to understand. I will try to take that as a reference point in the discussion here.
Utility token – which can be an access token and/or a payment token. As per FINMA Switzerland, utility tokens do not qualify as securities as long as their sole purpose is to confer digital access rights to an application or service and if the utility token can already be used this way at the point of issue. Ether can be a classical example of utility token. Ether is the fuel for the Ethereum network. When you send tokens, interact with a contract, send Ether, or do anything else on the Ethereum blockchain, you must pay for that computation. That payment is calculated in Gas and gas is paid in Ether
Payment token – As far as a payment token is concerned, let’s assume Uber launches its own coin – Uber token, and they say you can only use their token to pay for the ride. Technically, the only way to pay is with an Uber token. Issuance of utility tokens and payment tokens can be termed as ICO.
Securities token – the third category can be classified as a securities token. Any asset-backed tokens or tokens that can be classified as a financial instrument may fall under this category. Securities tokens can be both debt and equity instruments. The Securities law differs from country to country, so it would be wrong to generalise any definition for securities tokens. Issuance of such categories of tokens can be termed as Securities Token Offerings/ STOs.
OCC: Why would you say an STO is different from an ICO/normal financing?
Arnab: The early days of ICOs have mostly seen the issuance of the first two categories of tokens – Utility tokens and Payment tokens. However, there are some limitations to such ICOs. Firstly, only blockchain-based ventures can issue this mode of financing and secondly, most of the tokens issued in an ICO only rely on the network effect for increasing their underlying value. This creates a paradox- an investors/user conflict sneaks in. Simply put, investors have an expectation of higher profit on their investment on tokens so it is desirable that the token value increases over time.
However, for the users of the network this may be detrimental, as business suffers uncertainty risk- caused by exchange rate volatility, velocity of tokens etc. In this case, security tokens are quite stable and flexible at the same time.
Security tokens usually derive their value from an underlying asset like real-estate, profit sharing rights, company ownership etc. This makes it necessary for the securities token offering to follow the relevant financial market laws. Trading of securities tokens is more flexible, compared with utility tokens. The flexibility is derived from the fact that securities tokens can be issued by both blockchain-oriented tech companies and also by any non-tech companies such as an innovative winery (for example) for their financing.
Moreover, it is easier to structure multi financing rounds through securities token offerings. One of the biggest value propositions of securities tokens is that it gives open access to investment for both ventures and investors. Only 1% of the small and medium-sized ventures in Europe have access to the capital market. Tokenization of the equity instrument of these small and medium-sized ventures can be instrumental in providing wider access to the capital market. Financing of small and medium-sized ventures must not be restricted only to the venture capital world but must be open to everybody.
OCC: How do you gain trust in an upcoming ICO?
Arnab: Transparency is the key. We encourage ventures to be transparent about their current status and future milestones while seeking investment. While working on various ICOs through SICOS, we realised how important transparency is for the ICO participants. STOKR is designed in such a way that transparency prevails in the ecosystem. In STOKR, the community can directly communicate with the venture Founders.
We were heavily inspired by the community interaction in the ICO space and we realised transparency can be established by enhancing communication in the ecosystem. We believe that well-informed investors can make better investment decisions, and this will automatically establish trust.
OCC: Where do you see Blockchain in 10 years?
Arnab: Blockchain is not only a technological revolution but also a cultural shift. Political Democracy with a centralised technology may not be sustainable for long in the digital era. We can see the recent incidents of Facebook and Amazon as an effect of such unrestricted centralization. Blockchain will have a tremendous impact on open-source development in the coming years. We can see how Ethereum has developed a community of developers around it in the last couple of years. More and more students are getting involved in blockchain-based development. They are not only bringing fresh ideas to the ecosystem but are also challenging existing norms.
I am hopeful that in the next few years blockchains will have a tremendous impact not only in the way our technology is working but also on how our decision-making process takes place.
OCC: Do you have a question in mind you haven’t managed to answer yet?
Arnab: Interestingly, I have a lot of questions which I haven’t managed to find an answer to. From what I know, there’s no centralised database that shares the name of all the tokens out in the market; unless you do a thorough manual search. This is time-consuming and inefficient!
One thing I would personally like to see for Berlin is a heatmap of the Blockchain space. If I’m new to the city, where should I go? With whom should I meet? Where the all the communities located? Which area of Berlin has the most Blockchain developers? I believe Berlin will be one of the prime locations for blockchain-based developments in coming years. Let us make it easily navigable for the visitors coming to the city.
About STOKR: The mission of STOKR is to create a world where everyone is empowered to fuel innovative ventures. We are creating an accessible and easy to use peer-to-peer investment platform aiming to connect everyday people and business founders to finance forward-thinking ideas and to share future profits. STOKR will be a crowd investment platform which is powered by Ethereum Blockchain to create independent access to new capital markets. Through EU-compliant security token offerings, everyday investors can directly fund innovative start-ups and SMEs in return for a share of the venture’s future profits. Our focus is on supporting projects committed to making a positive impact and creating a community of educated participants empowered to make better investment decisions. We’re founded on principles of inclusivity and accessibility, clear and unambiguous processes, fairness, balance and impartiality.