Initial Exchange Offerings or IEOs have become a buzzword amongst crypto enthusiasts in 2019 with many hoping that the advent of IEOs will herald the next bull run. Whether or not IEO mania will equal or exceed that of the ICO frenzy of 2017 waits to be seen. This article is going to look at what an IEO is and how we got to this stage.
What is an ICO?
Before there was an Initial Exchange Offering there was the Initial Coin Offering. At the peak of ICO mania, tens of billions of dollars of funding was raised for a wide range of projects. Some of which have gone on to be giants of the crypto space and many that were clearly scams or failed due to poor management. Anyone could hold an ICO and quite frequently the hype surrounding project did not in any way match the fundamentals of the project. By trading mainly Ether and Bitcoin for newly minted alt tokens thousands of projects launched and the total market cap of all coins rose to nearly a trillion dollars.
The path to regulation
However, following the unprecedented meteoric rise of ICOs in 2017 they dropped off in popularity massively in the latter part of 2018. As this decline occurred governments around the globe started to ask questions about the legal and regulatory future of these Initial Coin Offerings.
With the advent of the ICO, raising finance had never been so easy and at the height of the late 2017 altcoin mania, an estimated 80% of the offerings were identified as scams within that same year. Regulators had to take notice of this nascent industry and whilst they were painfully slow to roll out official guidelines eventually some decisions were made and tokens legal status started to become clearer.
The United States Securities and Exchange Commission (SEC) eventually released its much anticipated “Crypto Token Framework.” However, it received criticism for the wide range of questions left unanswered and left many feeling that certain issues required much further discussion. For all of the criticisms levelled against the Crypto Token Framework, it did represent a step in the right direction. It was a start to a clear regulatory framework and at this early stage, it is still not completely clear what its impact will be on both the ICO and IEO scene.
What is an IEO?
Initial Exchange Offerings have emerged from the space once occupied by the Initial Coin Offering. They are being marketed as an improvement over the traditional ICO, which they certainly are offering many notable advantages. However, they are not without risk. Some of this risk now lies with the intermediary exchange offering the IEO on their platform.
Initial Exchange Offerings (IEO’s) have emerged out of the crawling pace of ICOs over the last several months — seemingly improvements over the traditional ICO. While IEOs do offer some noticeable advantages, they also still have the caveat of trusting intermediaries who have proven themselves prominent players in the ‘Dark Underbelly of Cryptocurrency Markets.’
An IEO is essentially an evolution of the ICO. It is fundamentally the same thing but run by and offered through an exchange or “launchpad”. The exchange acts as an intermediary who conducts the sale. Some recent IEO’s have attracted the attention of prominent media outlets who have been following the first few sales, most notably BitTorrent’s token offering through Binance’s Launchpad.
Through Binance’s launchpad BitTorrent was able to raise $7.2 million USD in 18 minutes. Fetch.ai also recently raised $6 million USD in 22 seconds through the launchpad. Such quick and well-funded sales clearly warrant further investigation. What was so special about their offerings? Or was it the IEO platform?
Much of the success of these two IEO’s can be put down to the fact they had solid ideas and that there was much hype around the launch of the projects. However, it is also likely that the fact they were offered as some of the first IEO’s played a significant part in the offerings successes.
Currently, Binance is leading the IEO space with their Binance Launchpad platform. They have already hosted the token sales for BitTorrent Token BTT and Fetch.AI FE. Both IEO’s were met with considerable demand. OKEx is also getting in on the action and have recently announced their OK Jumpstart IEO platform.
As interest in ICO’s started to fade venture capital seed investment has seen significant growth. At the same time exchanges have been ramping up efforts to offer their own launchpads which offer new project tokens directly to the exchanges customer base.
An IEO is essentially an agreement between some project developers and an exchange whereby the initial token offering is performed through the exchange. Through this process, IEO’s hope to avoid the questionable process of getting listed on exchanges and the opaque relationship between projects, ranking sites and exchanges. With exchanges betting their reputation upon the integrity of those who offer tokens it is hoped that the process will result in a more trustworthy and reliable token offering overall.
The exchanges will audit and perform an analysis of projects before they are accepted to be offered as an IEO on the launchpad. They also manage the entire sale process directly on their platform, performing all anti-money laundering and know your client regulation. The sales parameters themselves are very similar in nature to that of a traditional ICO with things like fixed pricing, supply to be distributed and detailing if there are any hard or soft caps to be applied to the IEO.
Benefits of IEO’s
Initial Exchange Offerings are mutually beneficial for exchanges, projects and investors and as such seem likely to play a significant role in the future of decentralised finance. Let’s break down the advantages for each.
In exchange for hosting the IEO, an exchange would expect to get a listing fee. They will also use IEO to attract new customers to their platform who are looking to participate in the funding round. The exchange would hope that eventually these users can be converted into long term users of the site. Both the exchange and the project benefit from joint marketing opportunities.
Having the backing of an exchange during the token sale adds a significant amount of legitimacy to the process. As exchanges reputations are also on the line investors would hope that the exchange has fully audited the project and performed their due diligence before an IEO occurs. Another benefit for the project is that they gain access to all of the exchange’s customers. The success of both BitTorrent and Fetch.AI show that exchange customers are very willing to back projects such as these in their search for new opportunities for profit.
The advantages for investors are clear. By getting involved on a token listing on an established exchange, investors can be sure that there will be immediate liquidity and have the ability to pay for their tokens through various methods including fiat, Bitcoin and sometimes even other altcoins. Investors also have to only register their anti-money laundering and know your customer information once per platform.
So far so good with regards to the advantages. But, what are the disadvantages? Well, it turns out that by far the biggest risks are for investors when participating in an IEO. Investors are required to trust the exchanges that are performing the IEO. As everyone in the world of crypto knows – trusted third parties represent security risks. Exchanges in the past have also shown themselves to not always operate with investors best interests at heart. Money has changed hands in shady deals between those who run projects and exchanges and the industries reputation is not great by any measure.
Whilst investors fears that they are buying into a scam may be alleviated by the involvement of an exchange it should be noted that exchanges are not created equally. Different exchanges have different policies. The recent issues with QuadrigaCX’s funds going missing and even Coinbase onboarding the guys known as “one of the five corporate enemies of the internet” show us that exchanges at best make mistakes all the time.
I stated earlier that the United States Securities and Exchange Commission framework made some progress towards clear and unambiguous legal status for ICO, IEO and STO offerings. However, it does not cover some specific issues such as how foreign startups are affected and there is no clear definition of what constitutes “active participants” is which is cited in the release.
I suspect that IEOs will bring with them some exciting prospects for projects and exchanges alike to breathe new life into the crypto crowdfunding model. They definitely have the potential to. However, they do little to address many of the issues faced by investors and leave them in a similar position to before.
There appears at this time to be a consensus that IEO’s are a more conservative option when it comes to a token sale and investors seem to like this. However, lessons must be learned from the rapid rise and fall of the ICO model and investors should be cautious with this new fundraising method. As always, make sure that you do your own research. Do not rely on an exchange to ensure that a project is legitimate.
Whether the IEO model can provide the much-needed inflow of capital into the alt coin market and become the fundraising model of choice is that this moment yet to be proven. The investor pool is becoming increasingly discerning and large investment firms are entering the market. IEO’s offer a fair and open way investors and seem at this moment to be the natural evolution from an ICO.