South Korean blockchain developers are unable to raise capital through the initial coin offering (ICO), which the government blacklisted. As an alternative, they are seeking to raise capital through the security token offering (STO), but a report warned that the STO would become a ‘lemon’ market with many defects.

The Coinone Research Center in Seoul warned that the STO would become the second ‘mortgage-backed securities,’ which had triggered the global financial crisis in late 2007.

Theoretically, STO is better than ICO because the STO is marketable securities like stocks. However, flooding of only low-quality STOs in the market would downgrade investor confidence, it said.

Once the subprime STOs flood the market and financial companies resell them in a package, the STO might trigger a financial crisis, it warned.

The research center proposed three points to ensure the success of the STO market.

Firstly, the regulators should outline detailed regulations on the STO issuance.

Secondly, financial companies should strictly scrutinize the technical viability of the STO issuers, namely blockchain developers.

Thirdly, blockchain developers must have a viable technology to support the value of STOs they issue.

The success of STO presupposes reduction of trading fees, upgrading of transparency, an introduction of smart contracts and free cross-border trading, the research center said.