In 2019, the cryptocurrency market seemed to have rebounded and started to grow rapidly. Today, cryptocurrencies are no longer dubious assets, and became part of a financial system that is gradually integrating and spreading more and more. With the advent of crypto spring, the previous boom in IEO returned, which completely replaced the ICO. Initial token offering raised 58 times less funds in the first quarter of 2019 than in the same period in 2018.
Now all the money went to IEO and large exchanges after Binance began to launch their specialized platforms. Most crowdsales were successful not only for projects that attracted financing in a matter of moments, but also for investors, as the cost of tokens instantly increased several times immediately after the sale. But along with a new type of fundraising, new fraudulent schemes came to us, which help to be enriched by the contributions of investors and founders. How reliable IEO is and why you should not trust to fully trust the cryptocurrency exchange, we will try to disclose in this article.
Everyone knows that in 2016, the main funding tool for blockchain startups was ICO (Initial Coin Offering). After the successful token sale of the Mastercoin project in 2013, thousands of projects chose the option of attracting financing through the Initial coin offering. As a result, the total amount of ICO-investments have raised to $ 6.2 billion by the end of 2017 and to $ 8 billion until the end of 2018. However, despite the popularity, our society has a clear idea that ICO is a scam of its kind, a Ponzi scheme that can only enrich the organizers. According to TokenData, more than 95% of ICO startups in 2018 turned out to be a scam.
A similar phenomenon could not fail to attract public attention. Luxembourg University experts have done some research, the main purpose of which was the exposure of investing in ICO projects and at the same time to draw attention to the problem of impunity type of fraud by government agencies.
The study found that out of the 100 projects reviewed, 60 were involved in various kinds of fraud, in particular — related to the resale of large consignments of tokens outside the public sale stage established by the regulations. In this case, the organizers of the ICO project and those interested in the scam had the opportunity to lobby for their interests, thereby selling the coins at the peak of the price caused by a simple stir around the release of a new crypto startup.
The study found that out of the 100 projects reviewed, 60 were involved in various kinds of fraud, in particular — related to the resale of large consignments of tokens outside the public sale stage established by the regulations. In the course of the study, it was found that 70 of the 100 cases examined lacked legal, containing information on potential risks and legal aspects of ICO projects. Moreover, it became known that often only in 40% of cases, the organizers provide their real contact information and the founders names, when about 18% of the ICOs even prefer to hide such data.
By the end of 2018, the ambiguous reputation of ICOs still attracted the attention of regulatory authorities.New projects were supervised by Finma, SEC and related organizations. All startups were analyzed in detail, discussed at forums — and this gave the first positive results.The financing process has become more civilized, and investors, in turn, have become more protected from fraud. Nevertheless, despite all the innovations, the traditional ICO model still caused a lot of controversy and was very ambiguous.This was the impetus for the emergence of a new model — IEO (Initial Exchange Offering).
What is the difference between ICO and IEO
Through IEO, startups got the opportunity to raise funds in their projects by holding a token sale on cryptocurrency exchanges. Initially, IEO was invented as a way to monetize cryptocurrency exchanges audiences . On the one hand, projects did not need to engage in a marketing campaign and search for investors (exchanges took it upon themselves). Given the fact that the sale of tokens takes place directly through the exchange, the project founders did not need to develop / buy an investor’s office or other token sale software. On the other hand, the exchange audience received proven startups and the opportunity to capitalize on the volatility of new currencies (because after the successful completion of IEO, the project tokens are listed ). Also, in the event of a failure of fees, all investors funds will be refunded.
The main difference between IEO was the absence of some risks due to the fact that crypto exchanges were involved in the process of raising funds for startups and allowed only the most promising projects to be listed. Thus, several ICO “pain points” were immediately eliminated — liquidity problems and a delayed coin listing after the completion of the token sale.
As a rule, IEOs were engaged in large exchanges with a good base of confirmed investors. The tokensales was hosted by the exchange (not the team), what increases the measures of control. In addition, the exchange also engaged in detailed analyzes and examinations of new startups, assessing their investment attractiveness. Approving the project for IEO, exchanges take on the bulk of reputational risks, thereby increasing investor confidence.
Anyway, IEO had a number of advantages over ICO:
- Higher reliability. A lot of scammers who launched ICOs on the platform often disappeared with the money collected or simply abandoned the project, thereby devaluing the issued tokens. If we consider an IEO, then the project have to pass through several security checks before launching. Doubtful projects on the exchange were not allowed, but team and project risks still took place to be. Also, In case of IEO failure, invested funds will be refunded.
- Faster listing speed. There were times when even at first glance, promising ICO startups raised enough money, attracted the army of followers, but were not accepted for listing for a long time. This, in turn, was negatively reflected in liquidity, the price of coins issued and the popularity of the project as a whole. Some startups were never allowed to trade on online platforms, which led to huge losses for investors and a complete collapse of projects. When IEO were used for fundraising, there is no problems with listing on the exchange in future.
- No need to create a third-party wallet. When a user is registered on the exchange, a wallet is created automatically.
- Fundraising Speed. Due to the uncertainty of potential investors, poor marketing policies and a dubious media reputation, some ICO startups spent on fundraising for up to several weeks. At major exchanges when IEO is launched, coins will be sold out within a few minutes.
- Simplified investment process.In the case of IEO, you need to register on the project website, buy currency, and then send it to an unknown smart contract. It is enough for the user to replenish the account, wait for the date of the token sale and create a purchase order.
Why IEO cannot be considered a perfect model
Already today, despite all the obvious advantages, IEO cannot be considered a panacea for fraud in the cryptocurrency world. A vivid confirmation of this is the recent case with Coineal, which takes 16th place in the list of the largest cryptocurrency exchanges. Cybr project founder, Sean Kay, has lost about $ 80 thousand due to fraudulent operations on the Coineal crypto exchange.
When considering the Cybr project on IEO, Coineal put up a listing fee of 11 BTC. Then, the sales volume of Cybr tokens was artificially created, which amounted to 56.56% of the total. At some point, sales stopped and stopped completely, IEO failed. When Sean Kay demanded that Coineal explain how the project stopped developing at 56.56% of token sales, he was sent a report stating that the total amount of tokens sold was $ 3,000.
Thus, the Cybr project was removed from the listing, all participants in IEO got a refund and the founder, in turn, not only received no profit, but also suffered losses of $ 80,000 (11 BTC commission for listing).
In fact, this is not an isolated case of cryptocurrency exchange fraud. Recently, such situations arise quite often and how to act in such situations — the question remains open.
In early May 2019, a case was recorded on the Exmarkets crypto exchange. Despite the fact that there is no information on the Exmarkets exchange on Coinmarketcap, and also there was no data on the real daily volume, the startup’s founder concludes an agreement with the administration. The interaction scheme looked like this: at the first stage, 1 BTC is paid → Exmarkets administration listing the project on IEO → After a month paying another 1 BTC for listing. Founder paid 1 BTC, but after a month a total of $ 5 was raised, which caused a lot of questions. In this situation, 2 conclusions were suggested: either the marketing campaign was not carried out properly by the exchange and just no one knew about the project, or Exmarkets representatives provided inaccurate data on the real daily volume. After the one month of IEO, where as we mentioned — only $5 was raised, the found asked for the refund. Exmarkets refused to return the money and demanded from the project founder to pay another 1 BTC for the listing. As a result, fundraising was suspended, and all information about the IEO startup was deleted from the Exmarkets website. Representatives of the exchange explained such actions by the fact that the founder of the project violated the terms of the contract. Regarding this case, a journalistic investigation is underway, the results of which will help to understand how transparent the activities of the exchange and its founders are.
Thus, we can conclude that at present, cryptocurrency exchanges are not a guarantee of successful fundraising for the project. Such cases of fraudulent operations are very common, but rarely announced in the press. If you are the founder of a startup, think twice about whether it is worth investing in the development of the project through cryptocurrency exchanges or is it better to look for other channels.