AÂ security token offeringÂ (STO)Â / tokenized IPOÂ is a type ofÂ public offeringÂ in whichÂ tokenizedÂ digitalÂ securities, known as security tokens, are sold inÂ cryptocurrency exchanges, or security token exchanges. Tokens can be used to trade realÂ financial assetsÂ such asÂ equitiesÂ andÂ fixed income, and use aÂ blockchainÂ virtual ledger system to store and validate token transactions.
Due to tokens being classified asÂ securities, STOs are more susceptible to regulation and thus represent a more secure investment alternative thanÂ ICOs, which have been subject to numerousÂ fraudulentÂ schemes. Furthermore, since ICOs are not held inÂ traditional exchanges, they can be a less expensive funding source for small and medium-sized companies when compared to anÂ IPO. An STO on a regulated stock exchange (referred to as a tokenized IPO) has the potential to deliver significant efficiencies and cost savings, however.
By the end of 2019, STOs have been used in multiple scenarios including the trading ofÂ Nasdaq-listed company stocks,Â the pre-IPO of World Chess,Â FIDE‘s official broadcasting platform, and the creation ofÂ Singapore Exchange‘s own STO market, backed by Japan’sÂ Tokai Tokyo Financial Holdings.