In Binance We Trust? How IEOs Clean Up Crypto, Help Stakeholders Win & Create Further Capital Market Disruption
Discover two key reasons Initial Exchange Offerings could be better than ICOs for cryptocurrency market investment.
Reports of a crypto project raising $6 million in 22 seconds could cause warm memories — or cold Crypto Winter nightmares — to be re-lived.
But Fetch.ai — a project focused on “creating a decentralized digital world in which useful economic activity takes place” — didn’t raise funds via ICO.
No, its raise was conducted through Binance, the world’s largest cryptocurrency exchange by volume. With Binance Launchpad, the Changping Zhao led company introduced the IEO fundraising model, and so far, it is proving to be a win for those with a vested interest in the crypto market.
But What is an IEO, Exactly?
An IEO — or, Initial Exchange Offering — is conducted on the platform of a cryptocurrency exchange. Unlike Initial Coin Offerings or ICOs, an IEO is administered by crypto exchanges on behalf of crypto project founders looking to issue their tokens.
Founders pay a listing fee along with a percentage of the tokens sold during the IEO. In return, the project’s tokens are sold on the exchange’s platforms, and the project’s coins are listed on the exchange after the IEO is completed. As the cryptocurrency exchange takes a percentage of the tokens sold by the startup crypto project, the exchange is incentivized to help with the token issuer’s marketing operations.
Crypto projects electing to go the IEO fundraising route also don’t utilize their own smart contract to take investor contributions. Instead, investors interested in the project would create an account on the exchange’s platform where the IEO is conducted, fund their wallets with coins and then purchase the project’s coins during the IEO.
This method of fundraising is beginning to turn heads in the crypto community, and although not a perfect solution, two key questions are:
Is the IEO model a positive development for the cryptocurrency market?
Could IEOs forever supplant ICOs?
Why IEOs Are Better Than Heavily-Regulated ICOs
Here’s the way it seems, to me at least:
By running crypto project fundraising activities through exchanges, better quality control of crypto projects is done prior to public fundraising events, and this creates less — although not the complete removal of — concern about the risks of investors supporting scams or less-than-worthy projects.
What’s more, the IEO model provides a more favorable form of retail investor protection than the unmitigated free reign — or, conversely, the severe restriction or outright banning of — the ICO model, which has served as the catalyst for the majority of funds raised in the crypto space.
The emergence of STOs — or Security Token Offerings — present a good development for the crypto community, as an old-new-world compromise so to speak, but up until now there hadn’t been a viable alternative to ICO fundraising which offered non-accredited retail investors opportunities with greater protections.
And the mass adoption of crypto needs investors at every level.
The IEO fundraising model, at the moment, makes a strong case for innovation — and not government bans or restrictions — as a better form of crypto market regulation and retail investor protection.
There are two key reasons for this, worth highlighting.
Two Ways IEOs Benefit Crypto Stakeholders
Exchanges Do (The Most Important) Pre-Fundraising Crypto Project Evaluation
Firstly, because the longevity of a (major) crypto exchange is largely dependent on the satisfaction — and profits — realized by its user base, it’s in an exchanges’ best interest to only approve high-quality IEOs, as its reputation is on the line with every approved project.
Case in Point:
Days before crypto exchange Bittrex was set to conduct an IEO for RAID, the fundraising event was shut down when the exchange learned that RAID no longer had a partnership with e-gaming data analytics company OP.GG.
Bittrex understood the RAID-OP.GG partnership as integral to the strength of the RAID project overall.
This is an example of the increased role exchanges can play.
The crypto market has already seen the “when Binance” and “when Bittrex” effects, respectively, with a project’s listing on these exchanges, post-ICO being an accepted quality indicator, and numerous IEO fundraising results represent a more stabilized convergence of interests on the part of project founders & developers, exchanges & investors.
Results such as the previously mentioned Fetch.ai raise, as well as that of BitTorrent, which is also among the top IEOs of 2019, and hit its hard cap of $7.2 Million in less than 15 minutes during its IEO (administered by Binance Launchpad as well).
As long as exchanges maintain trustworthy vetting processes, the trust placed in them could benefit the entire crypto market.
Exchanges Do (Most of) The Pre-Fundraising Marketing
Secondly, marketing activities for ICOs are too often driven by the need to persuade the masses with the sole goal of having successful fundraising, and although the market can self-regulate with proper education, the hype effect can often take over. This is no surprise.
Marketing activities for IEOs — on the other hand — are shared by both an individual project and the exchange, with the exchange likely providing the majority of this, since an exchange like Binance stands to gain significantly from conducting an IEO through its platform. As mentioned, crypto project founders would be mainly responsible for paying a listing fee to the exchange. This could lead to — or force — better usage of marketing budgets as well as help protect investors from harmful market forces, such as the relationship between ICO fundraising and social engineering threats, as an example.
Moreover, token issuers — themselves — can be at ease about crowdsale security as the exchange manages the IEO’s smart contract. The KYC/AML process is also handled by the crypto exchange (The most reputable exchanges carry out KYC/AML checks after customers create their accounts).
What’s more, crypto project founders and developers benefit even further from the exchanges already having established user bases.
So, What’s The Verdict On IEOs?
This is perhaps too early to conclude.
All of the positive elements to IEOs notwithstanding, a cause for concern could develop within the crypto market, due to the fact that the IEO fundraising method places so much responsibility into the hands of crypto exchanges like Binance, KuCoin or Huobi.
As well, there is a looming SEC crackdown on IEOs to think about.
Each crypto project must carefully evaluate which fundraising option is best for its goals, understand how to properly navigate the legal context surrounding crypto project fundraising, and proceed accordingly.
The IEO fundraising model has great promise — and results.
And, for now, it does seem that IEOs are a welcome addition to the crypto market, where founders, developers, exchanges, and investors can win.
But how sustainable is the IEO model?
And in the end, will it survive the concerns of the SEC?