A Short History of Tokens
It’s been over 10 years since Bitcoin first introduced blockchain technology to the world. In that time, the list of potential use cases for distributed ledgers has expanded rapidly, from digital currencies, to supply chains, to identity management. At their core, however, many of these uses cases take a similar structure: they enable users to hold and transfer digital assets on a peer-to-peer basis. Put simply, we can now trade and track digital assets without needing a central trusted authority to manage the process.
This evolution of the space naturally led to the invention of “tokens” – digital assets on a blockchain that are ownable and transferable between individuals. Tokens are split into two main categories: those that represent a natively digital asset, and those that represent an underlying real-world asset. Leveraging this new paradigm, hundreds of thousands of different tokens have already been created on Ethereum alone, with a combined market cap of over $15 billion at the time of writing.
One of the most promising applications of tokens is the representation of real-world securities on-chain, which allows traditionally illiquid assets like commercial real estate to be fractionalized and transferred peer-to-peer. This process, known as “tokenization”, has gained significant mindshare from both legacy institutions and new start-ups, due to its potential to alleviate many existing pain points within the capital markets.
While blockchain can make it easier to transfer ownership in a technical sense, security tokens are still subject to the same laws and regulations as traditional securities. Ensuring security tokens are compliant with regulation is therefore critical to any potential tokenization, and has been a barrier to adoption to date. As seen in the chart below, regulatory uncertainty is widely considered the largest barrier to blockchain adoption.
Numerous projects have emerged in the blockchain space, each designing a protocol that attempts to simplify and standardize how security tokens are regulated, traded, and managed. Looking at Ethereum alone, projects that have published standards tackling this problem include Securitize, Harbor, Polymath, and more. However ultimately, without modifications to how these protocols are currently designed, investors and exchanges will continue to experience significant friction when buying and selling tokenized securities. Why is this? Interoperability.
Interoperability is Crucial
Interoperability is one of the most significant benefits of tokenization. It allows an entire ecosystem of capital markets applications and products to integrate with one another because they share common software standards. However to enable interoperability at the application and product level, it needs to begin at the lowest level with the tokens themselves. In the security token space, interoperability is essential for two key parties: exchanges and investors.
As an exchange, you want to be able to authorize investors for the purchase of any security token that they are eligible to buy – no matter the company that created the token. This means not having a bespoke integration with each security token, but a simple and generic integration that is uniform across all security tokens.
As an investor, you want the onboarding process to be as simple and frictionless as possible. Currently when an investor wants to purchase shares from multiple places, they have to provide their personal information time and time again in a process called Know Your Customer “KYC”. Blockchain has the potential to transform this process by storing this information immutably on-chain, where it can then be referenced by all security tokens. This would mean not having to repetitively provide the same personal information every time you wish to purchase a new token, instead only supplementary or updated information would be required after the initial registration. However, this process will only be possible if interoperability between security tokens is designed into the standards that govern the system.
Three of Ethereum’s leading security token protocols were published by Securitize, Harbor, and Polymath. All three of these protocols are built upon Ethereum’s ERC-20 token standard, which they then extend to enforce compliance into the trading of the security token. This is achieved by querying a second contract on the legality of each trade at the time that it happens.
Whilst named differently in the protocols, the use of a second contract is consistent throughout all three, achieving the same result: preventing non-compliant trades. This second ‘Regulator’ contract is kept up to date with users’ KYC and accreditation information by off-chain services that are authorized to do so – for example an exchange, or the token’s issuer.
Although these three components may seem like everything you need to regulate a security token (and in the simplest form, they are), it is how the components are programmed that really determines interoperability. Sadly, the protocols lack interoperability in two key areas, which will continue to cause friction and slow adoption of this technology:
- How do authorized parties update on-chain information about users?
Harbor declares in their whitepaper that they will be the only party authorized to update user information on-chain for the time being. The centralization of this role means that exchanges would not update any data referenced by the Regulator. They therefore will not be able to approve new recipients of the token, preventing tokens from being easily traded outside of the Harbor platform.
Securitize have already implemented a system whereby multiple parties can be authorized, meaning investors can register their compliance information in multiple places and are not required to go through Securitize themselves. The on-chain data is then updated directly by the authorized party, and can be viewed by all of Securitize’s tokens. Furthermore, to prevent investors from having to provide information multiple times, Securitize have designed an API to allow authorized parties to access the private information about investors that is stored off-chain, enabling them to easily determine whether an individual is compliant or if more information is needed.
Polymath has a native digital utility token called POLY that is required throughout their platform to perform various tasks, including to get an authorized party to update your on-chain data. In order for an individual to KYC themselves, they first must purchase POLY tokens, which does not have a liquid fiat to POLY market. Instead the individual must purchase another cryptocurrency such as Ethereum’s “ether” (ETH) using fiat, and then exchange this for POLY. The tokens can then be used on Polymath’s KYC marketplace to make a bid to a KYC provider. If the KYC provider approves the offer, they are paid in POLY tokens to perform the KYC check for the individual. This process is clearly a significant onboarding friction to the Polymath platform, and makes the process more complex than necessary.
- How this information about users is then stored and accessed on-chain?
From looking at the whitepaper and smart contracts on GitHub, it is technically possible for many of Harbor’s tokens to all share one common Regulator contract, and share one common source of user data, however this is unlikely due to the differences in regulation between different tokens. The lack of live Harbor’s tokens on Ethereum has not clarified whether it is their intention for this to be the case, or whether each token will be deployed with its own Regulator.
Securitize’s protocol is designed such that their Regulator contract queries a third smart contract which stores user information. This enables each token to have unique regulations encoded in their own individual Regulator, whilst still sharing a common source of user data in the third contract, meaning when a user KYCs for one Securitize token their information is stored ready for them to buy future tokens
It’s not explicitly stated in their whitepaper whether Polymath has a central source of compliance data stored on-chain that each Regulator then interacts with, or if tokens have their own local source of information. However, based on Polymath’s sample contracts, it appears that each token uses a local source of information, which is not shared between different tokens. While this may have advantages, this setup risks data redundancy and inconsistencies.
Take the following example: Bob has expressed interest in two Polymath security tokens, ABC and DEF, and has been approved as an investor for each of them. This information is sent to the Regulator contract for each of the tokens. A month later, Bob tries to purchase further DEF tokens but it is found that he is no longer accredited. This information is sent to DEF’s Regulator to update Bob’s investor status to be non-accredited. Now, on-chain, there is conflicting information: ABC thinks that Bob is a verified investor, however DEF disagrees. It is easy to see that having a central source of information would prevent such discrepancies from occurring.
Interoperability of the Protocols
As discussed previously, there are two main parties involved in the issuance and exchange of security tokens to whom interoperability will matter greatly: exchanges and investors. Both of these parties desire a smooth experience when interacting with different security tokens. So, if using the protocols as-is, let’s take a look at how exchanges and users will be affected.
As an exchange, integrating these protocols for purposes of transfer is easy: all of the tokens utilize the ERC-20 token standard, providing a uniform interface to invoke transfers, approvals and balance checks. However further integration with the compliance aspect of every protocol becomes far more complex. You’ll remember it’s not currently possible for a trusted party to become authorized on Harbor’s protocol – they will instead have to direct users to Harbor to KYC themselves. To then integrate with Securitize’s protocol, the trusted party must be authorized by Securitize, which will then allow them to access investor KYC data through the off-chain API, and to update on-chain information stored in the on-chain data store.
To integrate with Polymath’s protocol is likely the most complex. The trusted party must register themselves as a KYC provider on Polymath’s KYC marketplace and set themselves up to receive bids in POLY tokens in return for providing KYC services. In providing KYC services to investors the trusted party must then organize a way to ensure that the duplicative on-chain data stored about a user in each security’s Regulator④ does not become inconsistent.
Not only do the protocols have different interfaces that the trusted party must integrate with, each protocol also has a different way to provide error reporting to the exchange. When building an interface it is important to be able to translate any errors that occur into something that is understandable by users. For example, if a user cannot purchase a token this could be for a wide variety of reasons: the security may have a holding period that has not yet been satisfied, or may restrict the maximum number of permissible holders. To be able to communicate these messages to users, the exchange would have to integrate with a different method of error reporting for each protocol.
The different methods by which onboarding of investors is currently designed in the protocols means that investors will likely have to provide personal information many times to different platforms and in different ways. This is caused by the fact that Harbor have not authorized any other parties, and Polymath require investors to bid for KYC processes using POLY tokens. The friction caused by the enforcement of these compliance methods may render investors unwilling or unable to purchase securities they would otherwise purchase.
The scale of this protocol-induced friction on investors may be somewhat alleviated by the manner in which exchanges go about integrating each of the protocols. For example, if an investor chooses to KYC on an exchange to purchase a Polymath token, that exchange, if authorized, could choose to update Securitize’s data storage at the same time. This would mean the investor’s information is on-chain in case it is needed in the future. However, if no changes are made to the current protocol designs, then the process of registering and purchasing securities will remain daunting.
The solution to this problem need not be complex. In fact, it is possible to introduce certain solutions without changing any tokens that are already live on Ethereum. An ideal solution that results in minimal friction for both exchanges and investors, and that prevents data inconsistencies caused by having many different sources of compliance data would closely resemble Securitize’s centralized on-chain data store; however, any such a set-up must then be adopted on an industry-wide scale.
By having a central source of information on-chain, the risks of data inconsistencies is removed, and investors are able to purchase different securities through just one compliance verification. This central contract would carry out the verification that the transfer was compliant for all security tokens, and the transfer would continue or revert. The off-chain API that is accessible to all authorized exchanges means that investor compliance information can be communicated to exchanges and reduces the number of times investors must be asked to provide data. These aspects together also massively reduce the amount of integration work required by exchanges.
The introduction of a new system like this clearly causes some complications, and a number of issues would still have to be ironed out. For example in the design of how each exchange becomes authorized: who makes the decision that an exchange should be trusted? Time has to be taken to design a system that allows a consensus to be reached.
The tokenization of securities is still an area that is early in development and adoption, which is in-part due to the complexities of regulatory compliance. While the publication of protocols simplifies the compliance with many of these regulations by enabling them to be enforced in the execution of every transfer, there is still a long way to go before this is a seamless process. Until we have an agreement between protocols on how investor information is stored and updated both on-chain and off-chain, there will remain significant friction throughout the registration and investment processes for all parties involved.
Sufficient Decentralization and Security Tokens – Thought Leaders
By Derek Edward Schloss, Director of Strategy, Security Token Academy
*Author’s Note: The following is not legal advice, but an exploration and possible interpretation of the currently regulatory landscape for blockchain-based fundraising.
As it relates to the explosive blockchain industry, perhaps no theme has been dissected more than that of industry regulation.
On one hand, a number of projects have questioned whether digital assets can thrive in the U.S. without forward-thinking regulation. On the other hand, insiders argue that our regulators are doing their best to follow the laws enacted through the legislative process — really, it’s up to our lawmakers to draw the final boundaries.
The truth is likely somewhere in between.
In the midst of these arguments, the SEC has increased the volume of its “guidance by enforcement” actions, targeting bad-faith fundraisers and ICOs that have consciously ignored the presence of federal securities laws over the last few years. In 2018, the SEC doled out over a dozen enforcement actions involving digital assets and initial coin offerings. And although this year’s numbers aren’t yet available, several high-profile cases are shining light on the regulatory opacity many have criticized.
Of note, the SEC made headlines last quarter when it reached a $24 million settlement with Block.one, the firm behind the EOS blockchain. Block.one had previously sold tokens to fund the development of the EOS network, raising over $4 billion between 2017 and 2018. The SEC argued that a purchaser in the ICO would have had a reasonable expectation of future profit based on Block.one’s efforts, including its development of EOS software and promotion of the EOS blockchain, satisfying the presence of an investment contract under the Howey Test and U.S. federal securities laws. As a result of the offering’s status as a security, the SEC found that Block.one violated securities laws by not filing a registration statement for its initial offering, or qualifying for an exemption from registration.
While the $24 million settlement might appear significant, many in the blockchain community were quick to note that the amount represented less than 1% of the total capital raised during Block.one’s year-long ICO. Further, Block.one announced that the negotiated settlement resolved all ongoing matters between Block.one and the SEC, leading some to question whether the EOS token, which currently trades on exchanges and is used to power the EOS blockchain, no longer falls within the crosshairs of federal securities laws.
One day after the Block.one settlement was announced, the SEC settled with Nebulous over an unregistered token offering that took place in 2014. As part of the settlement, Nebulous did not have to register its Siacoin utility token as a security. Like the EOS token, the Siacoin token currently powers a blockchain network that’s fairly well used by a number of distributed parties (323 hosts in 43 different countries).
Two weeks later, messaging giant Telegram Inc. was sued by the SEC to enjoin the firm from flooding the U.S. capital markets with billions of Grams tokens previously sold to accredited investors. Telegram had raised $1.7 billion selling Gram tokens to over 170 accredited investors under a SAFT framework (Simple Agreement for Future Tokens). Like the intended utility of the EOS and Siacoin tokens, Grams tokens were intended to eventually power the TON network.
Read together, what exactly do these three cases tell us? It’s difficult to decipher. Certainly, we know that Block.one and Nebulous originally offered investment contracts to investors — those events were unquestionably illegal offers of unregistered securities. But reading between the lines, it’s also possible to argue that both project’s utility tokens (EOS tokens and Siacoin tokens) are not securities today, though both trade freely on cryptoasset exchanges.
Telegram’s case is more straightforward — its offering of (future) Grams tokens to investors was also deemed to be an investment contract security by the SEC, but unlike the EOS token, for example, Grams tokens appear to remain securities in the eyes of the regulatory body. As a result, the SEC successfully enjoined Telegram from flooding the U.S. capital markets with Grams tokens.
So how are Grams tokens still securities after their initial sale, while the analysis for EOS and Siacoin tokens more murky? In its emergency action against Telegram, the SEC found that because initial purchasers expected to “reap enormous profits” once the Grams market launched, there still existed an expectation of profit reliant on the future actions of Telegram, Inc. As a result, the SEC articulated that Grams tokens remained investment contract securities, as the prongs of the Howey Test remain satisfied.
As it relates to the EOS token, recall that the SEC’s Framework for “Investment Contract” Analysis of Digital Assets published in 2019 stated that digital assets previously sold as investment contract securities could be “reevaluated at the time of later offers or sales”. In these situations, if there exists no more “reliance on the effort of others”, nor a “reasonable expectation of profit” as it relates to the investment contract security, then it’s possible the prongs of Howey will not be satisfied, and the investment contract analysis will fail. In these select circumstances, future sales of the digital asset would not be classified as sales of a security.
With this framework in mind, if we attempt to chart a through-line across the three recent SEC actions, one possible (but certainly not definitive) conclusion is that the SEC views the EOS and Sia networks to be sufficiently decentralized as the networks exist today. What factors might play into that analysis? As the SEC’s William Hinman stated in June 2018, and as later codified in the SEC’s Framework in 2019, “if the network on which the token…is sufficiently decentralized — where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts — the assets may not represent an investment contract.” Applying this analysis, it’s plausible that the EOS token could have successfully transitioned from an investment contract at the point of their initial sale into something more akin to a commodity today.
Alternatively, as it relates to Telegram’s TON blockchain, it’s easier to conclude that the SEC believes there still exists a reasonable expectation of profit (held by token holders) enabled by the ongoing role of an active participant (here, Telegram Inc.). As a result, the TON blockchain does not yet meet the minimum threshold for sufficient decentralization. And, without a sufficiently decentralized network, Grams tokens must remain investment contract securities — the form they originally took during the initial offering to investors. There has been no transition under those facts.
Other takeaways? When looking at these three SEC actions together, one could argue that securities laws will always apply to investment contract sales of pre-launched network tokens, regardless of the offering’s form as a SAFT or direct token sale. This fact notwithstanding, the SEC could also be acknowledging the concept of “transitional” securities as a token’s underlying network decentralizes over time.
It’s also possible that these cases can be broadly interpreted as a win for security tokens as an initial fundraising mechanism. If pre-network digital assets must always be offered as investment contracts under federal securities laws, then the token being sold should be placed inside a security token wrapper, and the project’s fundraisers must file a registration statement for the securities offering, or qualify for an exemption from registration. In addition, if a network token aims to transition into a commodity-like digital asset sometime in the future — much like Ether, EOS, or Siacoin tokens — then the token must be imbued with security token transfer restrictions until that event occurs, so that all parties remain in compliance. Security token protocols offer issuers this type of transitional regulatory compliance.
Finally, it’s possible the next wave of digital asset regulation in the U.S. will be more fluid, more accessible, and more open than any of our current legacy constructs. A reading of these cases demonstrates that our U.S. regulators may be evolving their historically rigid interpretations of securities laws to meet this transformative technology head on.
What’s certain is that many questions still remain. For example, while we may have a better conceptual understanding of when sufficient decentralization is satisfied at the network level (Ethereum, EOS, Sia), and when it certainly is not satisfied (Telegram’s TON Blockchain), we still don’t know the exact point at which decentralization is reached during a network’s lifecycle, and as a result, when that network’s underlying token has officially transitioned out of security status.
Maybe that’s for our legislators to decide.
But whether you believe the SEC’s actions represent a loud warning for the industry, or a sign that our regulators are willing to play ball and speak the same language as the digital asset world, it’s undeniable that the increasing clarity provided will ensure the industry’s evolution — in one direction or another.
The Howey Test: The Fine Line Between a Security Token and a Utility Token – Thought Leaders
The Securities and Exchange Commission’s recent barrage of crypto-related firms and investments with enforcement actions tells a story that has long been a mystery to many. Two of these prominent cases made headlines in June. The first, a case against a social media platform, Kik, and Kin foundation – the foundation governing the operations of the Kin ecosystem. The second was against Longfin Corp, a fintech company that “offers commodity trading, alternate risk transfer, and carry trade financing services.”.
While many expect more of such crackdowns, the back and forth between the SEC and these companies have somewhat opened fresh controversies surrounding the viability of the regulatory framework governing digital securities and tokens. In light of this, it is important to examine the arguments from both sides of the divide to fully acknowledge the critical nature of the situation and its implications on America’s investment landscape. But first, let’s explore the actions/inactions of Kik and Longfin that might have forced the SEC to sue them.
SEC vs Longfin
In April 2018, the SEC froze the trading profits generated from the sales of Longfin’s stock, which the regulator accused of selling unregistered shares after acquiring Zidduu.com (a crypto trading company). In June 2019, SEC filed fraud action against the same company and its CEO, Venkata S. Meenavalli. The released complaint claimed that Meenavali had “conducted a fraudulent public offering of Longfin shares” by misleading investors on the financial standing and mode of operation of its company’s crypto-related business.
SEC vs Kik
On June 4, 2019, the SEC officially took legal action against Kik Interactive Inc. for conducting an illegal $100 million securities offering of digital tokens back in 2017. If you will recall, Kik was one of the many companies that capitalized on 2017’s ICO boom to raise money for its blockchain ecosystem. SEC asserted that Kik’s fundraising campaign was illegal because the company sold $55 million worth of tokens to US investors without registering the offers or sales.
Secondly, the complaint alleged that at the time of the fundraising campaign, none of the products and services that Kik had implied would drive the demand for Kin tokens did not exist. Also, the watchdog claimed that the revenue-sharing clause that featured in the Kin offering campaign established that the Kin token is a security. This is true since the campaign failed the Howey test as it promised profits “predominantly from the effort of others” to build an ecosystem and drive the value of the token.
And so, SEC based its case on Kik’s failure to comply with the registration requirements under U.S. securities law and the omission of information that would have helped investors make informed decisions. It is worthwhile to note that Kik had released a strong response to SEC’s initial claim.
Although there was no clear framework to guide the conduct of ICOs or digital security offerings in 2017, that has not stopped SEC from litigating companies that had sold digital tokens years before regulators issued guidelines.
The Howey Test Controversy
From the details of the highlighted charges, it is clear that funding a business or company through fabrication or manipulation of information is, by the standard of current securities law, a punishable act. This is also true for investments that do not comply with existing required financial disclosures. However, as argued by David Weisberger (co-founder and CEO of CoinRoutes), the current financial disclosure requirements are not effective when it comes to giving investors insights on the viability of the investments.
In its true sense, existing securities laws only require the disclosure of information about the issuer and its finances. As such, Weisberger argues that there is no way investors would use such information to judge the prospect of digital tokens. Using Kik’s travail with the SEC as a case study, he explained that if Kik had followed due process and complied with registration requirements, it still wouldn’t have given investors a hint that the price of the token would today worth far less than what it had sold for in 2017.
Nevertheless, as SEC puts it in the complaints, before the commencement of the Kin promotional campaign, Kik was in dire need of funds, as its expenses had consistently trumped its revenue. If Kik had informed prospective investors about its financial predicament, many would have had a rethink. As such, there is no doubt that such information would have helped investors to make informed decisions.
Also, SEC’s released a clarification on the Howey test, which explains the factors that determine whether a digital asset is a security or not, showed that many of the tokens out there are securities. Perhaps, the most interesting piece of information in the 13-page document is the one that revealed that companies must have working products before embarking on fundraising campaigns.
Again, this clarification implicates Kik and many of the organizations issuing digital tokens, as it is common practice for startups and established companies to base their ICO campaign on fictional products.
To fully appreciate the controversy surrounding the “security” and “utility” conversation, one must take a look at the origin of the Howey test way back in 1946. Back then, a company, the Howey company, introduced an investment scheme that would allow investors to buy a fraction of its orange groves, with the hope of making returns on the profit made from selling the cultivated oranges.
Following the introduction of this scheme, the SEC, while claiming that the terms of the investment meant that it was security, moved to block the sale. What ensued next was a hard-fought legal battle that dragged to the supreme court. Eventually, the supreme court ruled in favor of the SEC. And so the definition of securities established in this case has since been the de facto framework for defining securities till this very moment.
No respite for digital (utility) token issuers
The commitment of the SEC to establish a standard and enforce securities laws on firms that had once found a way around regulatory structures will undoubtedly change the outlook of the digital asset markets. While some crypto firms have taken up the defensive stance to fight the imposition of these new directives, others are working closely with regulators to establish clear rules and to guarantee investors protection.
There is no doubt that the present regulation narrative is stifling the growth of the crypto sector in this part of the world, as established companies like Coinbase are yet to find their footings. It does not help that even after complying with the SEC’s regulations, companies have to deal with the various regulatory provisions of each state.
But it is also true that things would have deteriorated had regulators chosen to stay on the sideline. For one, the surge of scams that punctuated the ICO era of 2017 would have continued as investors had no means of ascertaining the legality of tokens. Only now some cases are becoming public, such as notorious ICOBox violating securities laws with its 2017 token sale and further activity promoting other initial coin offerings (ICOs) or an extortion case Nerayoff and Hlady. There are many more cases like this that are yet to become public. The SEC’s primary goal is to protect investors. And as argued by CEO and co-founder of Symbiont, Mark Smith, it is up to firms to look for ways to work with regulators to define the fine line between utility and security. This right here is the step forward, rather than the common practice of bypassing existing laws.
Nonetheless, if the SEC were to change its stance and introduce new securities laws, creating a subclass of tokens issued to investors to fund for-profit organizations will go a long way to help the watchdog update the 70 years old Howey test. In turn, the establishment of such an asset class will help the SEC to formulate an adequate framework to govern the exchanges and dealers that trade them.
Interestingly enough, the US House of Representatives has taken the initiative to reintroduce a taxonomy act that would exclude digital tokens from the broad definition of securities. To achieve this, the legislators plan on amending the security acts of 1933 and 1934. Having said that, the implication of such a development, which will be treated in a separate article, would kick-start a domino effect.
— Constantin (@constkogan) October 10, 2019
SEC’s reinvigorated approach to digital tokens and security laws has not come as a surprise. The ICO abuse of 2017 was just an anomaly brought about by the change of guard in SEC’s leadership after the swearing-in of President Donald Trump. For this reason, digital token issuers must ensure that all their operations fall within the confines of the law, as there are no more free passes.
BREAKING: Harvard’s endowment invested $5M – $10M directly into Blockstack’s token sale.
This means that one of the leading university endowments is comfortable holding tokens directly.
THE VIRUS IS SPREADING 🔥
— Pomp 🌪 (@APompliano) April 11, 2019
P.S. IT’S OFFICIAL!.Ether is a commodity.
Binance IEOs Outperform Competing IEO Projects – Thought Leaders
Over the past 12-month IEOs (Initial Exchange Offerings) have replaced ICOs (Initial Coin Offerings) as the fund-raising method of choice for blockchain companies. There are undeniable advantages to IEOs compared to ICOs.
One of the biggest advantages is there’s a reduced risk of investment funds being siphoned from a hacked website. One example of this happening to an ICO is the Etherparty hack whereby hackers discreetly modified the Ethereum address displayed on the ICO website to reroute incoming investments to a Hacker’s Ethereum address.
The barrier to entry to launch an IEO is also significantly higher than an ICO, which is beneficial to investors. Trusted exchanges will (in theory) only list reputable projects after they perform extensive due diligence. Compare this to ICOs, many of which copy and paste existing whitepapers, create fake founder LinkedIn profiles, and then advertise to unsuspecting investors using Google Adwords.
In this sense, IEOs are a much better alternative to ICOs. Investors have a much easier time both accessing the fundraising opportunity as well as funding the investment. This is provided in a safe (but unregulated) environment as provided by the exchange. Different exchanges offer differing parameters for listing an IEO. For instance, we noticed much higher quality IEO listings with market leading exchange Binance, and Kucoin, versus some of the smaller exchanges such as LAToken and Yobit.
While IEOs provide financial benefits to both the host exchange and startups, the same cannot be stated for the financial benefits that are offered to investors. From crunching the numbers IEOs have to date performed poorly.
In researching this article we reviewed IEOs from all major exchanges. Over 50% of the IEOs on smaller exchanges were not listed on CoinMarketCap.
Nonetheless, there were some surprises. While the majority of IEOs performed poorly and provided negative returns on the majority of exchanges, Binance was the odd exchange which actually had a higher number of tokens outperform the market. This was especially true for IEOs launched in 2019.
Below we track the launch date of several IEOs on the Binance exchange, the amount raised, as well as the IEO sale price of each token and the current market value of each token. The reason we do not use market map is that this number is very misleading for investors, as the total market cap includes the entire value of a token project, versus the IEO tokens which were initially sold to investors.
These numbers are based on publicly available data and may not be 100% accurate.
|Company:||IEO Date:||Raise:||Initial Token USD:||Current Token USD:|
|Celer Network||March 2019||4M||0.0067||0.005940|
|Perlin||August 2019||6.7M||0.07743 USD||0.060321|
Unfortunately, other exchanges did not fare so well. Some exchanges performed so poorly with the IEOs that they offered, that we could not find the market value of the tokens listed anywhere.
In conclusion, what is currently more important than the actual project being listed, is where the project is listed. We anticipate that once regulated security tokens increase in popularity, that IEOs may be an enticing option to list these security tokens on regulated exchanges. This would be similar to how stock exchanges currently operate.
Disclaimer: While I have previously held BRD & BTT tokens, in September 2019, I did not hold any of the IEO tokens as profiled in this article.