Along with demonstrating the incredible possibility and popularity of digital currencies, the cryptocurrency movement promulgated the "ICO" or "initial coin offering," a controversial crowdfunding mechanism that helped define the crypto boom.
Now, years after coming into vogue, the ICO is enduring significant regulatory scrutiny because of the ways that startups use it to crowdfund by issuing faux-equity as tokens, an idea that toed the legal line in many jurisdictions. Several countries have already taken action, with the United States leading the charge. The country's Securities and Exchange Commission surprised the sector with its "Risks, Rewards, and Responsibilities" doctrine, which forces companies deliberating an ICO to "consider" securities laws carefully before launching a project.
The effect of these regulations -- including the implementation of enhanced oversight, public communications, security precautions and corporate responsibility -- create unfavorable conditions for ICOs.
As a result, ICOs are more expensive and problematic than ever before. But by utilizing the blockchain's established operating framework, the industry's capital-rich entities are using these guidelines to create a new infrastructure for self regulation.
Since anticipating regulatory moves means fewer problems and costs for any project, self-regulation has long been a part of the blockchain world. But as the regulatory picture matures for cryptocurrencies, the burden of compliance is shifting from ICO founders to crypto exchanges, which facilitate the transactions that require oversight.
A Launchpad in More Ways Than One
Crypto exchanges played a critical role in the cryptocurrency phenomenon, and they have an underestimated presence and influence on the crypto market and the broader blockchain sector. For instance, Bitcoin was thrust into the mainstream consciousness because of its incredible price escalations, something that was initiated through crypto exchanges.
They represent the transactional sector of the crypto industry; therefore, crypto exchanges are the industry's most logical authorities. As a result, some of the sector's earliest regulations, like "Anti-Money Laundering" -- known colloquially as "AML -- and Know Your Customer -- known commonly as "KYC" standards, were enacted at crypto exchanges.
Like other facets of the crypto industry, self-regulation has always been important for exchanges, and the best of them implement strict rules on how funds and data are stored so that they can present their practices to law enforcement and can maintain compliance with newly defined regulations.
Now, that forward-thinking ethos is ushering in a new concept to rival or even eventually replace the existing ICO infrastructure.
The new concept is called an Initial Exchange Offering (IEO) and this latest approach equips exchanges to supervise and launch new blockchain projects themselves. Each IEO starts with a default compliant status due to the exchange's rigorous self-implemented standards and its ability to establish a more transparent relationship with regulators.
According to Harish D. Gupta, CEO of Polybird Exchange, one of these global exchanges for digital assets: "The IEO is an issuance mechanism in which an asset is directly listed on an exchange without having to go through private placement independently or through an intermediary. IEOs can include initial offerings, financing, compliance and origination, issuing new rounds of capital in a supervised manner."
IEOs Reinforce Compliant Blockchain Crowdfunding
One of the most prominent examples of how IEOs are already accelerating legitimate project launches is the Binance Launchpad, an IEO platform from the eponymous crypto exchange. Launchpad is a new platform for "transformative projects" that want to crowdfund by selling their tokens on Binance, the world's largest cryptocurrency exchange.
With the Binance Launchpad, the exchange handles investor KYC verification and other prominent functions before a token launch. The BitTorrent token (BTT) wrapped up its IEO successfully through Binance Launchpad, and traders from around the world signed up and registered via Binance to buy BTT, which will be used to seed movies and music on the popular BitTorrent platform.
IEOs could, in theory, help investors hold projects accountable for their promises, and exchanges could be the entities ensuring due diligence and enforcement. This new capital raising methodology could lower KYC and other project costs.
Since many blockchain-based startups are comprised of small teams with limited operating capital, an IEO offers a cost-effective way to deal with bureaucracy and red tape -- the chief complaint from a chorus of blockchain investors who find securities rules outdated and overly burdensome and expensive.
With an exchange's reach, IEOs also could gain influence and user-base growth, even as they offload the strict security requirements to a larger team equipped with more advanced tools than most startups possess.
Already this trend is beginning to gain traction.
Recently, Temco's TMCO token -- which blockchain industry media have held out as a leading supply chain token that incorporates smart contracts on Bitcoin's blockchain -- was issued as an IEO on cryptocurrency exchange Coinbene. Now that the blockchain community has responded to traditional financial industry needs with its own structures, projects are leaping at the chance to do an IEO, including Fetch.AI, a popular Binance Launchpad project. Module, BlueNote, and Shopin are also pursuing IEOs to raise capital while turning to crypto exchanges, which use their vast resources to play a more active role in the process.
ICOs helped set the crypto movement into motion, but IEOs represent an industry response to securities regulators reining them in.
The author holds stock in investment holding company, Leucadia, and is a partner in an emerging technology marketing firm, Notability Partners. He holds no positions in cryptocurrencies nor in any companies that invest in them.