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Opinion: STOs Won't Save Blockchain
Today, the market remains bearish. With the cooling of the ICO boom, the price of Ether fell off a cliff. Some may fear that the blockchain and cryptocurrency industries are heading toward decay.
Given this environment, it’s not hard to understand why people are racing to find possible breakthroughs. That helps explain the excitement over Security Token Offerings, or STOs. Security tokens are crypto tokens that are tied to real-world securities (like equity stakes) and thus more closely regulated than most ICO tokens. Security tokens have become so hot that some investors are calling them the next crypto bubble.
It may be tempting to believe that STOs will save the blockchain industry. They won’t. STOs are like using the Internet to send a fax.
More precisely, the STO is just another WinFax. In the early days of the Internet, there was a software called WinFax that was able to simulate faxes on Windows via software. Back then, computers connected to the Internet via modems, and many traditional office workers had yet to understand what the Internet meant or how to use e-mail. They were most familiar with fax machines, and they were more comfortable sending faxes than using email.
For this reason, someone developed software that worked like a fax on Windows, allowing people to use the Internet like a fax machine. This may sound funny now, but at the time there really were people who saw the Internet as just another kind of faxing system. In 1998 Paul Krugman, who later went on to win the Nobel Prize in economics, said that “By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's."
In a similar way, on the surface STOs might appear to just be another way to issue tokens. But STOs are very different from ICOs. The most notable feature of STOs is that the issued tokens have securities attributes and are thus regulated by securities institutions (such as the U.S. Securities and Exchange Commission) and thus must follow related securities laws and regulations.
Although security tokens are distributed on the blockchain, which is supposed to be a completely decentralized platform, they must still meet know your customer (KYC) requirements and be traded according to regulations.
An STO might look like a kind of happy medium. For both blockchain projects and investors, the barrier to entry is far lower than for an IPO. At the same time, the threshold is much higher than an ICO, since pretty much anyone can create an ICO token and sell it to the public. So an STO sounds good, right?
Not exactly. STOs undermine the very essence of blockchain technology — its decentralization. Pretty much every step of the STO process, from token issuance to regulation, must be done in a centralized manner.
When a decentralized system has an influential center node, an STO is just an empty title. It is also incomprehensible why we would want to use a blockchain platform to emulate existing securities issuance platforms. After all, we already have a fully validated functional securities platforms like the Nasdaq and the NYSE. Why do we need a less efficient imitation?
To a certain extent, we can regard STOs as a large-scale enlistment campaign for blockchain projects that are regulated by European and American regulators, But in the end, this campaign may still end in failure. After all, a fax is not an email, and assets on the blockchain are not securities. Any decentralized system that attempts to centralize regulation and operations will find inconsistency in itself. The blockchain’s decentralized nature is what is makes it a unique and powerful technology. Once that feature is removed, a blockchain is no more than an inefficient database.
Today, many young people have no idea what a fax is, nor have they ever seen a fax machine. It is now clear to everyone that the Internet is not a simple extension of fax technology, nor are emails similar to faxes. In both efficiency and function, the Internet has gone far beyond the concept of faxing.
Still, we have to admit that at the time, WinFax did serve a certain purpose. By helping people use the Internet in a way that made them feel comfortable, WinFax perhaps got more offices to buy computers and try using the Web. We might even say it was a useful step toward mainstream Internet use.
In the same way, regulation is needed for more widespread crypto adoption. But STOs are not the answer. Blockchain technology is brand new, and has its own unique characteristics and path of development. It should thus be regulated accordingly.
Just as we wouldn’t try to govern the Internet by the same rules that we use for newspapers or magazines, we shouldn’t force blockchain assets to adhere to securities laws. We can’t supervise a new technology by forcing it to conform to an older regulatory framework, and suppressing blockchain’s decentralized nature will only be counterproductive.