The Initial Coin Offerings (ICOs) which have funded start-ups with more than $5.6 billion so far has been facing stringent regulation by major financial regulatory authorities such as the U.S. Securities and Exchange Commission (SEC) to ensure its legality, especially fraudulent acts. In an answer to this, the crypto-world responded with Security Token Offerings (STOs) which allows investors to purchase tokens during an offering. The purchased tokens can be traded, sell or hold depending on the investor’s choice, making it look like actual stock shares issued in an IPO. Unlike ICOs, STOs are registered with relevant financial regulations.
Since the invention of this notable crowdfunding strategy by pioneer platforms like the PolyMath team, crypto investors, businesses and communities have been assured STOs will bridge the gap between crowdfunding and legality. According to PolyMath, security tokens are expected to explode to a value of $2 trillion in 2018 alone and $10 trillion by 2020.
The STOs initiative will allow any investor to be eligible to participate in a Tier 1 security token offering with a $20 million investment limit while retail investors are limited to 10% of their annual income in a Tier 2 investment with a limit of $50 million. And the investment does not come with any restriction on how long an investor must hold the new security. This compliance is assumed by investors and other related parties to help make STOs fraud-proof and meet financial regulatory bodies criteria to prevent similar legal troubles faced by ICOs. “STOs are seen as more stable and legitimate than ICOs, as they can provide investors reassurance from the get-go that they won’t run into problems down the line.” The Merkle argued.
As much as the STO is trying to curb the vulnerability of using the crypto decentralized system for illicit acts, its good intention does not guarantee total security. “Security tokens need to be registered with the relevant financial authority (i.e. SEC in the USA). This has the main advantage of providing extra safety for the investors. However, it does drastically increase the legal cost in order to comply with financial regulations.” finds Espeo Blockchain.
The act of money laundering can still be executed by perpetrators without the strict regulators noticing. Aside from this, the enforced policy brings with it, a complex compliance according to tokeny while Espeo Blockchain also voiced its concern of the administrative burden and listing exchanges.
The fear of fraud and money laundering which gives rise to most ― if not all challenges of Security Token Offerings ― can be solved by the incorporation of InnoDT’s products such as Safeguard.money. In a press release by Digital Journal Inc, the Safeguard.money is described as “a reputation management system that helps merchant reduce regulatory and compliance risk by providing strong anti-fraud and anti-money laundering measures.”
Administrative cost and required technicality of managing generated security tokens can also be drastically reduced using InnoDT’s innovative platform because any mistake at this stage can get crypto businesses in serious financial and legal trouble. According to David Zhao, the co-founder of InnoDT, the application communicates through an API or WebSocket to help customers create study layers to trace transaction behaviors and alert of any micro-behaviors and irregularities by profiles of digital identities.
InnoDT (pronounced “in-no-dee-tee”) is building a real-time transaction study software to analyze crypto transactions and associate digital identities across various blockchains. The purpose of InnoDT is to help regulators, financial institutions, and cryptocurrency exchanges fight against illegal digital activities by providing visibility into transaction patterns.
Their MVP is complete and the platform’s beta version will be releasing early next year. More details can be found at www.innodt.com