New tokens thrive in crypto market but sales raise questions

New tokens thrive in crypto market but sales raise questions

Initial exchange offerings are big business: according to Inwara, IEO projects raised a cool $1.625 billion in the first half of 2019. H2 has continued that trend, with the leading exchange launchpads maintaining their aggressive IEO schedule – one a month in the case of Binance; 24/7 in the case of smaller platforms such as Latoken. Investor demand for initial exchange offerings also remains robust: the leading crypto Telegram channels, maintained by the likes of Coinidol, attest to this, as investors clamor to catch wind of pre-sale and seed rounds for projects that will eventually IEO on Binance or Huobi.

The emergence of IEOs – which sidestep banks and venture capital firms as a way to generate capital for new companies – is emblematic of a market which has long been trying to break free from regulation itself.

Their launch as well as Facebook’s plan to create its own digital currency, or token, have revived interest in a market that slumped last year amid intense regulatory focus. Already, Facebook is facing scrutiny from the U.S. Congress on the launch of the social networking company’s white paper on its digital currency Libra.

IEOs, which take place on exchanges, are a spin-off of initial coin offerings (ICOs), which grew in popularity in 2016 and raised nearly $30 billion (£23.6 billion) since their inception three years ago. ICOs, though, slowed sharply this year amid a regulatory crackdown on fraudulent and illegal offerings led by the U.S. Securities and Exchange Commission.

ECKEEPING AN EYE

Much like the last three years, the SEC has not changed its tune on digital currency offerings, no matter what they’re called.

At last month’s Consensus conference in New York, Valerie Szczepanik, SEC’s senior advisor for digital assets and innovation, said IEOs could be problematic in the United States if U.S. exchanges are acting as broker-dealers, but not registered as such.

Cryptocurrency exchanges need to follow the registration and licensing requirements for broker-dealers, alternative trading systems, or national securities exchanges. And if they’re not, they’re going to be in hot water, Szczepanik said.

There is already a precedent at the SEC if and when IEOs become regulated.

In September of last year, the SEC charged Michigan-based TokenLot, a self-described “ICO Superstore,” for acting as unregistered broker-dealers. TokenLot received orders from more than 6,100 retail investors and handled more than 200 different digital tokens, which the SEC found included securities, the SEC said.

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