It is the second half of 2019 and security token offerings haven’t overshadowed initial coin offerings like everyone thought they would. However, IEOs (initial exchange offerings) have gained massive popularity over the past six months. More and more of them are taking place with the help of cryptocurrency exchanges.
From ICOs to IEOs
Funds that previously flowed into ICOs in 2017 are now making their way into IEOs. So far in 2019, over half of a billion dollars ($518 million) has been raised by blockchain startups on Initial Exchange Offerings. Certainly, the recent bull markets in cryptocurrency have likely contributed to the increase in IEO investments.
Cryptocurrency exchanges administer IEOs. ICOs, on the other hand, are typically carried out by the blockchain project raising funds. In a sense, the exchange acts as a middle man in facilitating the sale of the coins to investors. The exchange provides several advantages who choose to raise funds through an IEO.
Advantages
One of the primary advantages of carrying out an IEO is that investors do not have to worry about using multiple wallets to carry out their investments in a project. Users simply need to use wallets on one exchange to acquire the cryptocurrencies they invest in. This makes the management of their investment less complicated.
For some investors, an exchange serves as a form of due diligence or second opinion with respect to the efficacy of the project that they invest in. Many exchanges that facilitate IEOs are expected to carry out due diligence checks to ensure that the projects raising funds meet minimum standards for investment. The reputation of exchanges may put on the line with respect to IEOs provides “skin in the game” that could be an incentive for exchanges to carry out good due diligence exercises of IEOs that they administer.
Disadvantages
IEO investors are likely to remain exposed to certain risks which investors in ICOs were exposed to. Regulatory risks, for example, are unlikely to be much less for IEO investors than ICO investors. Coins purchased through IEOs are not by nature security tokens. It is unlikely that the legal nature of coins raised through IEOs is different from coins raised through ICOs. This could, in the future, give rise to many questions surrounding Trust Law.
The centralized nature of many exchanges which IEOs take place could be concerning for many investors. Many cryptocurrency exchanges expose IEOs to cybersecurity risks and other operational risks which may not be experienced on completely decentralized exchanges. Carrying out IEO investments on more than one exchange help reduce the risk of losses arising from security breaches that may take place on an exchange.
Even many of the most reputable cryptocurrency exchanges have been subject to public scrutiny in light of a rising number of findings of unlawful practices. Many exchanges gladly accept money to list poorly audited IEOs. Some overlook the clear red flags of projects that carry out IEOs. Until the right balance is found between regulations and free movement of the cryptocurrency markets, such acts will continue.
Edel is an Editor with a decade of print and digital media experience – specializing in Science, Technology, Finance, Entertainment, and Advertising. He is also a stock and cryptocurrency investor. When Edel is not editing or analyzing charts, you can find him with his DIY lightbox taking timelapses of plants.