A cryptocurrency can be defined as a digitized currency based on a decentralized network. The growing demand for cryptocurrencies and their widespread adoption by financial institutions and payment giants such as PayPal and Square reflect its undeniable rise. Generally, cryptocurrencies can be bought during their initial release in an Initial Coin Offering (ICO). However, his ICO fever in 2017 proved to be a dangerous environment for investors. In contrast, Initial Exchange Offerings (IEOs) offer a safer alternative for investors to purchase tokens with funds directly from exchange wallets during the fundraising phase.
What is an IEO?
An Initial Exchange Offering (IEO) is a way for startups to raise capital by selling utility tokens that grant preferred status to the company through a cryptocurrency exchange platform. In other words, cryptocurrency exchanges can help oversee token sales by ensuring the project’s vetting process is scrutinized. The IEO will help Binance Launchpad launch its BitTorrent token (BTT).
In January 2019 it started, and the first offering sold out within 15 minutes of its release, raising over $7.1 million in funding. The main reason IEOs have become popular is that they are easy to participate in. Instead of processing on-chain transactions across multiple blockchains and wallets, IEOs provide a solution for users to assess the reliability of a project and participate in fund exchanges all under one roof. At the same time, project developers have immediate access to the crypto exchange’s user base without having to pay millions of dollars to formulate and execute a marketing strategy. There are benefits.
Cryptocurrency background
Developed in 2008, Bitcoin was the first original cryptocurrency. It is a form of electronic currency that does not depend on traditional banks and permits users to transfer money directly from one computer to another worldwide. The popularity of Bitcoin has spurred the creation of over 2,000 cryptocurrencies. It has spurred the launch of an entire global industry around blockchain, the distributed ledger technology that powers it. All cryptocurrencies are also traded on online digital currency exchanges, many of which are available in mobile phone applications. People buy cryptocurrencies from these exchanges by simply signing up through their websites.
Bitcoin on Thursday traded at $9,400 on the BitStamp exchange. People are buying cryptocurrencies mainly for speculative purposes as the price has increased significantly over the past three years. Some developers can purchase certain currencies to gain access to specifically associated networks. Since 2008, the most significant financial names have entered the cryptocurrency space, from IBM to Goldman Sachs. Most recently, Facebook unveiled its cryptocurrency blueprint on Tuesday. However, cryptocurrencies have risks. Since they are virtual currencies, they can be hacked or destroyed forever if the online wallet key used to store them is lost. There is also no clear regulatory body overseeing the digital currency industry, so it takes work to get the money back once it is lost.
Exchanges accepting initial exchange offers
Binance is the first cryptocurrency exchange to adopt IEO by launching an IEO platform called Binance Launchpad. Following Binance, more and more cryptocurrency exchanges have launched their initial exchange offering platforms. The acceptance of the IEO is evidenced by BitTorrent’s massive success in raising millions of dollars in just minutes through the process. His second IEO, Fetch.Al set a record of 22 seconds and reached a hard cap of $6 million.
How will the initial exchange offering work?
Startups use IEOs to get corporate crowdfunding. These companies work directly with cryptocurrency trading platforms to raise funds and launch token sales to interested investors. A key highlight of the IEO is that the exchange platform conducts due diligence for mass evaluation before selling. The IEO process that evaluates these blockchain projects works like this:
Drafting a White Paper
The startup will draft a white paper explaining how the token will be funded and the underlying sources and payment platforms available for remittances and transactions using this new cryptocurrency. This white paper outlines precisely how the funding to support the cryptocurrency will be obtained and what the expected value will be when the cryptocurrency is released.
Project Submission
A company or project indicates its interest in registering with the selected platform for the IEO and selling tokens through it.
Vetting process
The crypto exchange platform will then perform due diligence to ensure that the project and token issuer can be trusted. This includes evaluating the project’s unique selling points, tokenomics, team background checks, and projected trajectories. This is to determine if loopholes, threats, or other issues exist within the project offer and is accomplished by examining company white papers, financial records, and other information available from public sources.
Contract Agreement
Suppose the cryptocurrency exchange platform approves the IEO. In that case, the project must pay the platform a percentage of utility tokens and a listing fee before the tokens can be sold. This will allow the IEO to be listed on exchanges within days of approval.
Security and Legality
The Exchange Commission (SEC) and U.S. Securities doesn’t generally regulate investments in IEOs because they do not provide a return on investment in the company. This will simplify selling and issuing his IEO tokens for companies looking for new cryptocurrency startup capital. However, regulations may vary by country or region.
Once all research is completed and the IEO project is approved, the platform will post a token sale notice and allow investors to purchase these utility tokens. Companies that issue IEOs post their tokens on their site to announce their availability. Investors interested in the project will have to go through the IEO platform Know Your Customer (KYC) and Anti-Money Laundering (AML) before fully accessing the project development. For companies interested in raising funds, his IEOs are usually preferred over ICOs. Understanding why will help make the best choices for investment activity.
What makes an excellent white paper?
A credible white paper requires some criteria, but generally, it is about educating potential investors on the project’s prospects. At a minimum, an excellent white paper should disclose the project architecture, the team behind the project, the project roadmap, facts, technical descriptions, and reliable diagrams and statistics. Overall, the whitepaper should inform potential investors of the project’s vision, mission, overall growth, and how the token will translate its value to its holders. BitDAO’s white paper is an excellent example because it delivers full project transparency.
IEO vs. ICO: Which is Better?
ICOs were the first method used by cryptocurrency companies to raise funds. According to Forbes, his first ICO was launched in 2013 by a company called Mastercoin. Ethereum raised above $18.3 million, following suit in 2014. The company’s blockchain project is based on what is known as the charitable foundation model, where investors make donations to support the project. As explained below, IEOs offer several key advantages over ICOs.
Compliance procedures
The cryptocurrency platforms comprehensively vet IEOs they sell for compliance with legal regulations and safety. rule out the possibility. This process can significantly improve investors’ confidence in the safety of their financial spending. In contrast, ICOs have received a different degree of scrutiny. They are therefore considered risky investments by most financial authorities.
Public offering approach
In an ICO, anyone can buy tokens. However, the IEO must be part of the platform that offers the IEO for investors to make these financial investments. This makes it less likely that unverified individuals will purchase the tokens. In contrast, ICOs require investors to “go it alone” to buy directly from the company issuing these tokens. Not only does this reduce the visibility of issuers, but it can also reduce investor protection.
Cost of the token sale
In exchange for the additional security provided by an IEO, an investor typically pays more for her IEO token than her ICO token of the same apparent value. Additionally, IEOs typically list their tokens on exchanges almost immediately. ICOs may take months to list these sales. Companies issuing IEOs usually pay higher prices for this privilege than those issuing ICOs.
Legal risk
For investors, ICOs typically carry much higher financial risks than IEOs. However, these investment opportunities may violate both initial public offerings’ specific regulatory or legal requirements. A few of the most typical legal risks of ICOs and IEOs comprise the following:
Smart contract legality established for cryptocurrencies
Comprehensive national legal standards do not govern ICOs and IEOs. The only federal regulation covering these types of transactions is electronic signatures in the International and Domestic Trade Act of 2000, which requires specific timing for electronic disclosures and forms. This lack of regulation can lead to legal issues if the smart contract provisions are inconsistent with local or state contract law. The issue of jurisdiction is one of the significant legal issues facing cryptocurrency issuers and investors.
Financial forgery and unauthorized access to intimate information
This is a serious legal issue affecting the ICO and its IEO. Bloomberg has released information about a security flaw affecting his Ethereum account that could have put $250 million at risk. Similarly, CoinDesk reported that in September 2021, it was the victim of a data breach in which Ledger compromised nearly 1 million email addresses and disclosed the personal information of more than 9,000 customers.
Money laundering
This can sometimes be carried out more efficiently using cryptocurrencies. In January 2021, the MIT Technology Review published a report showing that about $2.8 billion in bitcoin transactions were made in 2019 by criminal gangs. Most of these trades were made through over-the-counter brokers.
Prevent these illegal activities
Failure to report cryptocurrency transactions can lead to problems with tax authorities in various countries. Although the Internal Revenue Service does not allow cryptocurrencies to be used for payments to federal agencies, U.S. taxpayers must provide accurate information about their transactions when filing their tax returns. Determining the legal implications of investing in ICOs and IEOs helps avoid issues that can erode profits and lead to unwanted legal entanglements related to cryptocurrency investment activities.
How does an IEO differ from ICOs, STOs, and ITOs?
ICOs have been an elegant option among small businesses looking to raise funds for their blockchain projects. However, the extreme abuse of ICOs and fraud have discouraged companies from investing in ICOs. It is also the reason. ITO is the same as ICO. The only difference is that not all tokenized blockchain projects issue new coins. ITO is the preferred term for all projects that use the Ethereum blockchain to create tools that enable features such as revenue sharing and burn tokens. However, ICO is more commonly used than ITO, and the term ITO is rarely used in the industry today.
The fundamental difference between an IEO and ICO is the exclusivity of access, as anyone can participate in the public issue of his ICO. However, although only members of the exchange can participate in the IEO, it is easy to apply for membership. IEOs are safer to invest in than ICOs and are more secure as exchanges manage them. IEOs are more trustworthy than ICOs due to the exchange of secure memberships.
STOs (Security Token Offerings) is a complex way to raise capital. Still, unlike ICOs, STOs issue tokenized financial instruments such as shares and debt in the form of crypto tokens. However, STOs suit potential investors with large budgets and long-term investments. In contrast, IEOs are more costly but better suited to the needs of small businesses.
Why Blockchain Projects Like IEO?
The first exchange offering is usually far more profitable than her ICO for all parties involved. Project initiators can benefit from the marketing expertise and vetting provided by the IEO cryptocurrency exchange, which makes it much easier to reach potential investors and increases the chances of legitimate projects getting the funding they need. Most investors prefer to buy their IEO tokens over ICO tokens because a fair amount of research and testing is done before these products are released to the public. This reduces undue risk and makes investing in IEOs more attractive to investors. Cryptocurrency exchanges that offer IEOs often attract new traders and increase buzz for the platform, which can increase your company’s profitability and traffic.
Initial Exchange Offering (IEO) Limitations
While most crypto exchanges work hard to ensure their IEOs are thoroughly scrutinized, some platforms may cut corners to ensure a wide range of products for potential investors. As previously mentioned, IEOs are not subject to regulatory scrutiny. This means that without proper research on the part of the issuing platform, the tokens issued at the IEO may be worth less than those presented during the launch phase. Additionally, crypto projects must pay listing fees to crypto trading platforms. Therefore, exchanges may charge higher rates for their tokens to issuers and investors.
In contrast, ICOs can set their rates, allowing investors to pick up bargains at this stage of cryptocurrency issuance. Tokens purchased for IEOs are typically capped at $20,000. This is in contrast to the lack of restrictions imposed by the ICO.
