Initial Exchange Offerings: The Next Evolution in Cryptocurrencies

Abstract

As the initial coin offering (ICO) market waned in 2018, a new format for crowdfunding arose: initial exchange offerings (IEOs). Although the downturn of the ICO market undoubtedly contributed to the development of IEOs, this is also part of the natural evolution of raising capital through cryptocurrencies. Scams, regulatory issues, manipulation, and random speculation have all been associated with ICOs. Conversely, IEOs put the good name and reputation of a cryptocurrency exchange behind the token offering, providing a level of fairness, integrity, and safety not always offered through the ICO market. We demonstrate that the additional level of due diligence conducted in an IEO increases token fundraising success.

TOPICS: Currency, exchanges/markets/clearinghouses, risk management

Key Findings

• ▪ Initial exchange offerings (IEOs) allow companies to raise capital by selling utility tokens on an exchange. Because the cryptocurrency exchange performs due diligence on the offering to protect its customers and its reputation, IEOs are less risky investments than initial coin offerings (ICOs).

• ▪ Utility tokens are one type of cryptocurrency that usually provides the holder preferential access to the sponsoring firm’s services and does not represent ownership in the sponsoring firm raising funds and are not considered securities. Nevertheless, utility tokens sold on a cryptocurrency exchange (IEOs) provide several advantages to both firms seeking to raise funds and their investors relative to those that are not (ICOs).

• ▪ Empirical results demonstrate that firms offering utility tokens are more successful in raising money if they do so through IEOs, rather than using an ICO approach. Results indicate that whether or not firms sell tokens on a cryptocurrency exchange is more important than traditional ICO success factors.