The involvement of exchanges could bring back ICO investor confidence, as it adds extra security and oversight; could IEOs be the future of ICOs?
The concept appeared first in 2018. The main difference to an ICO is the role of the exchange, which selects those projects it deems promising. It’s basically the same as an ICO, but the involvement of an exchange is – supposedly – adding an extra element of security and fraud protection.
STOs are not the future of ICOs
ICOs have seen a decline in popularity over the last year. Fraud cases, security concerns, and the ongoing crypto bear market are investors’ main concerns. Thus, STOs, Security Token Offerings, are touted as the future of blockchain-based fundraising.
But ICOs and STOs are fundamentally different in nature. STOs issue security tokens – tokenized securities – which are regulated investment vehicles. ICOs, on the other hand, issue utility tokens, which can come with whatever value proposition you can possibly imagine – from offering access to cloud storage space to purchasing services on an insurance platform.
Hence, saying STOs are the future of ICOs is a bit like saying apples are the future of bananas. It’s just a different thing altogether. While it’s likely that we will soon see an uptick in STOs, the question remains: What does the future of ICOs look like?
IEOs are exchange listed ICOs
Bring in IEOs: Instead of an ICO, where an investor sends funds to the developer’s smart contract, an IEO investor has to open an account with a crypto exchange. He will verify his identity on the exchange, transfer funds, and can then purchase the token from the exchange.
The issuing company will negotiate an agreement with the exchange, clarifying the IEO conditions: maximum token amount per investor, a predetermined asset price, hard cap, soft cap, distribution of marketing costs, etc.
Every time an exchange takes on an IEO, it is putting its reputation on the line. Thus, exchanges will conduct solid due diligence. The issuing company will also have to pay considerable listing fees, which it is unlikely to do if it was just looking for fast money. Thus, IEOs are a way to increase investor confidence and add an extra layer of oversight and security.
Besides that, larger exchanges have an existing base of loyal exchange users. Listing an IEO thus allows companies to tap into that user base. The exchanges themselves also have an incentive to promote the tokens among their user base, as they make their money from trade commissions. Most exchanges will also charge a percentage of the total issuance amount.
Another benefit of IEOs is increased liquidity. Typically, the exchange will keep trading the token after the first issuance. Hence, access to the secondary market is already included in the package.
On the flipside are the high costs. In South Korea, where IEOs have recently seen an uptick, listing fees are usually at least 20 BTC and exchanges collect 10% of the funds raised on their platform. The issuing entity also bears the lion’s share of the marketing costs.
Exchanges could become institutional IEO investors
Sang Wook Kim, CEO of Korea Crypto eXchange (KCX) says crypto exchanges might eventually also become institutional investors. “Some coins may then receive liquidity after investment from exchanges, hence, receiving a lifeline that would ‘resurrect’ under-valued coins,” he says.
Kim adds, “Initial exchange offerings (IEOs) may in the near future, serve as a model that could soon replace ICOs by listing projects directly on exchanges—without them necessarily needing to go through an ICO.”
ICOs in their current form will never become a mainstream fundraising instrument. Could IEOs become the game-changer?