Much is currently being talked about in the crypto industry about Security Token Offerings (STO). Which could become a new source of revenue for startups after ICOs. But before STOs become a big thing, there is now a new trend. The so-called Initial Exchange Offerings, in short IEO.
These are token sales of crypto projects that are handled through an Exchange. “The stock exchange acts as a guarantor and carries out a project related due diligence check with the project team. By streamlining the process using IEO, developers no longer need to perform KYC verification, “say the Exchange OKEx, headquartered in Malta.
OKEx intends to launch a new platform for IEOs under the name OK Jumpstart in order to promote projects with high potential and support entrepreneurs in the early stages.
Millions of dollars in minutes
As a result, OKEx is following a trend that has become noticeable since the beginning of 2019. The crypto exchange Binance, which operates also from Malta, has with its launchpad since recently its own platform for token sales. Two big IEOs have already been settled. Tron’s BitTorrent Token (BTT) raised more than $ 7 million in less than 15 minutes, and the Fetch.AI project also raised $ 6 million in a very short time by selling FET tokens.
Also exciting is how the first IEO will run on the Bittrex Stock Exchange. Which officially kicks off tomorrow, Friday, March 15th. Then users of Bittrex can buy against Bitcoin XRD tokens that are being circulated by the Raid game data blockchain project. Again, Malta is again an important factor as the token sale on Bittrex International, which is based on the Mediterranean island, will expire.
Sell directly to crypto traders
“The big advantage is that you can build on the entire user base of the Exchanges and do not have to go through the KYC process with the investors themselves,” says Florian Wimmer of the Austrian Startup Blockpit, who deals intensively with the issue.
Another benefit is, while many startups who used to collect money from ICOs have struggled to get their tokens listed on Exchanges, Binance, Bittrex, or OKEx will make sure IEO’s tokens are quickly tradable.
“From the company’s point of view, it is a great relief because the stock exchanges are taking the KYC and AML exams,” says Chris Miess, chairman of the Digital Asset Association Austria. And sees another advantage of the development if the Exchanges pre screen the projects with a proper due diligence, scams will be less.
Ethereum could lose importance
For IEOs, Bitcoin is typically required by Exchange users to buy the new tokens. This is an exciting change compared to ICOs, where mostly Ethereum was collected. As the exchanges spend the project’s tokens on investors, smart contracts like Ethereum are no longer necessary.
If Ethereum was the main means for startups in 2017 and 2018 to handle ICOs, the importance of ETH could be reduced if IEOs were to succeed. “Ether may lose relevance. Smart contracts are gone, which is actually a step backwards in terms of technology, “says Chris Miess of the Digital Asset Association Austria. Exchanges could bring in their own tokens such as the Binance Coin as a new middleman. The tokens that bring out Exchanges themselves could drain Ether out.
Exchanges earn a lot
For the Exchanges, which have access to hundreds of thousands of users, IEOs are a new source of revenue in the currently weak crypto market. You can request fees and a certain percentage of tokens from the projects that want to run IEOs on their platforms.
“For a small startup, this will not be an option in the beginning. You roughly need at least half a million dollars for an IEO to provide to the Exchange, “says Wimmer. Until now, mostly larger companies were behind the IEOs such as the block chain company TRON, the BitTorrent 2018 bought a whopping 140 million dollars.
It is also possible that stock exchanges develop into real IPO platforms namely, when STOs issue tokenised securities rather than just utility tokens whose value is often doubtful.
Centralization around the stock exchanges
If exchanges in the crypto area were already the big centers of power, their position could be further strengthened by IEOs. Which runs contrary to the decentralized basic idea of the Blockchain world.
“One downside is that funding is getting more and more centralized, the exchanges are getting even more power. Now the exchange decides who can get financing at all. The exchanges are becoming the new investment banks. This is contrary to the original crowdfunding idea of the ICOs,” says Chris Miess.
Also published on Medium.