What are Digital Security Offerings (DSOs)? What are Security Token Offerings (STOs)?

Digital Security Offerings (DSOs) and Security Token Offerings (STOs) are terms that describe “offerings” of digital securities and tokenized securities respectively. [1]

In a sense, DSOs / STOs are essentially just Initial Coin Offerings (ICOs)… but of digital assets that are classified as securities.

That said, there are some unique features to discuss.

First off, right now DSOs and STOs are mostly theoretical and being worked on. In fact, at this stage both terms may end up being adopted and may or may not be used to describe the same thing.

Further, take away the “offering” part, and we are really talking about a new class of digital products which are also securities or deal with securities.

We can be talking about a traditional cryptocurrency token registered as a security, or we can be talking about an existing security that is “tokenized” (for example, using cryptocurrency tech to trade a traditional stock).

With that covered, for now, let’s generally think of both DSOs and STOs as the same thing, regulated cryptocurrency-based assets that 1. act a response to the SEC providing clarity on ICOs in 2018 (i.e. they can be crypto tokens registered as securities), and/or 2. stand on their own two feet as a new innovative way to tokenize traditional securities.

In other words, DSOs and STOs are regulated “security” tokens… and, especially since the concept is new, the implications of that are vast.

What is  a security? A security is a tradable financial asset that involves risk, like a stock. In the United States, the U.S. Securities and Exchange Commission (SEC) regulates the public offer and sale of securities. In other words, we are discussing securities as in “the securities the SEC regulates,” not as in “computer security.” Although to be honest a regulated “security token” that uses traditional crypto tech would theoretically be both these things.

What is an offering? An offering in this sense is referring to an initial offering, like the initial public offering of a stock (an IPO).

What is a token? In cryptocurrency tokens are cryptographic codes that act as a stand-in for something. In simple terms, token in this sense is just another name for cryptocurrency or, more broadly, digital asset.

The difference between DSOs and STOs: Although I could make a case that DSOs describe the offer of any type of digital security and STOs specifically describe tokenized securities, I would argue there is no difference between DSOs and STOs and that at this point the two terms can be used interchangeably to describe the same thing. Or at least that is what I am gathering based on how different entities are using this language to describe projects they are working on. That said, again, if there was a difference it would be that a Security Token is a very specific thing, a token that is a security… Meanwhile, the term Digital Security doesn’t necessarily denote that anything is being tokenized. A digital security only has to be “digital” + “a security,” it doesn’t have to be a token.

Do DSOs and STOs replace ICOs? ICOs will have some trouble operating like they did in the past, where they have a token sale and mimic an IPO without registering as a security… but that doesn’t mean ICOs can’t exist or that DSOs and STOs will replace them. A token that is a security is… a tokenized security. A tokenized security can have an initial offering, and a token that isn’t a security can still have an initial offering (assuming it can manage this without qualifying as a security). Point being, DSOs and STOs don’t replace ICOs, they just offer an answer to some of the problems of 2017 – 2018 and open up new doors. Also, this is all somewhat a case of semantics. All we are talking about here is how new coins are created and distributed in the interest of funding a development team and project or creating an investment product.

TIP: Congress is exploring legislation that would make crypto its own asset class and avoid it being labeled a security. If this happens, it could result in a comeback for traditional ICOs.

TIP: For examples crypto teams working on a security token, see ICONOMI AG security tokens (“eICN tokens”) and Coinbase and Others Invest in “Digital Security Offerings.

Understanding the Potential of Security Tokens

With the above in mind, logically we can understand what potential DSOs/STOs have… or more specifically, what a Digital Security or Security Token have.

A DSO/STO for one doesn’t have to dance around SEC rules, they are built to comply. So they can work within the current system, raising funds from existing institutions, etc.

Also, while in the past ICOs could never offer equity via their tokens, a DSO/STO can for example offer equity in a company in theory via a “security token” or some other type of digital security offering.

Offering equity gives a token a fundamental value never known in the crypto space thus far.

In fact, traditional companies could start embracing DSOs/STOs as alternatives to IPOs!

Thus, we could moving forward see equity tokens.

Potential Drawbacks of Security Tokens Vs. ICOs

One real drawback to DSOs/STOs is that right now, logically speaking, DSO/STO investments would be limited to accredited investors.

That means there is a sort of potential problem of oligarchy with DSOs/STOs.

For there not to be oligarchy, DSOs/STOs would have to offer fair deals to early investors, creating a sort of IPO round that wasn’t already price gouged six ways from Sunday.

That said, the reality of the world we live in today is that pre-sales are rampant in crypto, and it is often the case that early investors got into a coin before you ever even knew about it or had the chance.

Further, in the non-crypto world the path from VC money, to private equity, to pre-IPO, to public IPO involves mark ups that are at least five ways to Sunday if not all six themselves (main difference is that the VC to IPO process tends to take years and may never happen at all, AND prices generally relate to fundamentals and price action in a private market… while the crypto version tends to takes months, sometimes involves arbitrary mark ups, and always seems to happen whether there is a working product or not; i.e., in crypto early investors take about the same risk as later investors in terms of tech, but actually take way more risk in price, making the current system questionable in many cases).

With that in mind, a benefit to DSOs/STOs is they would have to follow disclosure rules and other such standards, which could actually ultimately result in them being more transparent and fair than many ICOs when it comes to fundraising and ongoing financials.

There is a lot that remains to be seen, simply because the idea of DSOs/STOs are in an early stage at the moment. Only time will tell.

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Citations

  1. Coinbase and Others Invest $12.75m in Project to Create “Digital Security Offerings.” TechCrunch.com.