Initial exchange offerings are crypto’s next fundraising fiasco

Exchanges face a conflict of interest when running startup fundraisers.
Exchanges face a conflict of interest when running startup fundraisers.
Image: Reuters/Goran Tomasevic
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Part of cryptocurrency’s appeal was its promise of a financial system that eliminated the brokers and other middlemen that created friction, and fees, in transactions. But the middleman has arrived in crypto—and blockchain development is worse for it.

Cryptocurrency exchanges have gradually co-opted initial coin offerings, a fundraising mechanism which gained in popularity during 2017. Through ICOs, entrepreneurs solicit investment to finance new blockchain startups. Investors swap bitcoin and ether in exchange for new digital tokens, which—they are told—will be useful on next-generation platforms. During 2017, hotshot crypto projects raised more than $6 billion through ICOs. Over the last two years, though, few projects have delivered on their promises. These included “decentralized file storage,” decentralized trading platforms, and a whole range of other decentralized dreams.

Despite the lack of tangible development, digital token mania hasn’t died off. In less regulated, international markets, speculation has just assumed a new form.

Initial exchange offerings (IEOs) are a convenient twist on ICOs. The difference? Rather than marketing and launching to the general public, crypto startups are partnering with exchanges to tap into the pockets of retail investors. No longer will prospective buyers need to navigate the tricky web and send funds directly to teams of developers. Now, backers can purchase digital tokens through a trusted platform.

But wait. That sounds an awful lot like an intermediary, the rent-seeking brokers that blockchain was expected to disrupt.

Binance, the exchange that pioneered IEOs, describes them as such: “In contrast to an Initial Coin Offering (ICO) where the project team themselves conduct the fundraising, an Initial Exchange Offering means that the fundraising will be conducted on a well-known exchange’s fundraising platform, such as Binance Launchpad, where users can purchase tokens with funds directly from their own exchange wallet.”

The exchange rightly notes that participating in ICOs is extremely risky—and it’s true that transacting through an established trading platform should reduce user error like sending funds to the wrong wallet address. However, IEOs create tremendously distorted incentives.

Crypto exchanges have long chosen winners and losers, by deciding which tokens are available for trading, but IEOs could make this problem even worse. Instead of paying exchanges for a listing after tokens have been distributed, startups are in bed with the exchanges from day one. This could allow Binance and other bourses to dictate the terms of token distribution (and of course, allot even larger reserves for themselves). Already, Binance has reportedly encouraged startups to launch tokens on its own network, Binance Chain.

Although IEOs have been limited to Asian crypto markets—other exchanges which have tried to host startup fundraisers include OKEx and KuCoin—they could threaten the dominance of ethereum, which has long been the default platform for crypto fundraising.

Regardless of the viability of IEOs or the yet-to-be-developed startups behind them, Binance’s fundraising strategy could augment the price of BNB, its own token. As speculative traders rush to buy and sell newly listed assets, they’re likely to use BNB as a base currency because of the 25% discount offered by Binance for traders using BNB. Over the last three months, BNB’s price has almost tripled, jumping from $10 to nearly $30. However, a Quartz analysis of the token indicated that its intrinsic value is less than a fraction of a penny.

At present, IEOs are unlikely to affect US-based crypto investors, in part because exchanges are limiting who can access these new token sales. At Consensus—a blockchain industry conference held in New York last week—Valerie Szczepanik, the US Securities and Exchange Commission’s senior advisor for digital assets and innovation, warned that platforms hosting IEOs could be breaking US securities laws. Whether their activity is legal depends on whether the platforms serve US investors, whether the assets they support are securities, and whether the business is registered appropriately (or exempt from registration).

Though IEO-launched tokens may appear more legitimate than others, there’s good reason to remain circumspect. Gains from short-term trading could be bountiful, but IEOs are simply ICOs 2.0. The market’s foundation is still very much a work in progress.



After shooting from $5,000 to $8,000 in under a month, bitcoin briefly pared some of its gains. As its price slipped 10%, bitcoin’s most ardent supporters urged others to remain strong. “BTFD,” they implored.

The rallying cry is an acronym for “buy the fucking dip” and it seems to inspire opportunistic buying. Indeed, traders believe they can time the market’s gyrations and profit from an expected rise. Perhaps revelatory though is that nobody seems to say “sell the peak,” at least not until it’s too late.

Please send news, tips, and dips to Today’s Private Key was written by Matthew De Silva, and edited by Oliver Staley. People need good lies. There are too many bad ones.