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Initial Coin Offerings or ICOs, as they are better called, raised about $14 billion in 2017 and 2018. ICOs laid the foundation for a new model of fundraising on the blockchain network. They promised to revolutionize the way investments were made to decentralized cryptocurrency projects, slowly bringing an end to the reliance of project developers on traditional forces such as venture capitalists and investment banks. However, since then, it has all been a tale of the rise and fall of ICOs.
There were a few governmental and regulatory checks on ICOs, which never allowed them to run above board. The restrictions placed on some of these past ICOs meant that they could never take off. That’s why in 2019, we are seeing a lesser number of projects raising money through ICOs. However, this doesn’t necessarily mean that the road for ICOs has hit a dead end. They are evolving, which is best manifested through the emergence of initial exchange offerings (IEOs) and security token offerings (STOs).
What is an ICO?
ICO stands for initial coin offering and is a method through which funds are raised in a project in exchange for a token, cryptocurrency, or another digital asset. Both the project’s native blockchain or a third-party chain supporting tokens can host these assets. The ICO is similar to an initial public offering or IPO in some ways. In an IPO, the company arranges funds by selling its stock shares in the market. IPOs are heavily regulated and happen only if the company has an established source of revenues. However, unlike heavily guarded IPOs, which are highly regulated, developers use ICOs to arrange investments for projects that are still in their infancy- even before their product becomes functional.
The limited regulatory scrutiny that ICOs received initially attracted both legitimate projects that sought to raise funds, as well as unsavory projects which are reported to have siphoned off with nearly $3.1 of investments. The undue attention they received from scammers wrote the script for the rise and fall of ICOs.
Reasons for ICO’s Decline
The meteoric rise of ICOs in late 2017 and early 2018 quickly waned away as the euphoria began to diminish. ICOs raised $6.2 billion in 2017 and another $7.8 billion in 2018. Ever since, the interest in ICOs has been dwindling. Such has been the effect of this mistrust that ICOs raised merely $346 million in the first half of 2019.
A part of this decline was that the technology failed to live up to the hype created around it. In 2017, ICOs promised everything from prediction markets on the blockchain to decentralized file sharing. They also raised large sums of money to build this infrastructure. Two years down the line and only a few of these projects have launched, and an even smaller number of them have achieved large-scale adoption. Also, the limited regulation around ICOs discouraged many from investing in them. Research has shown that a majority of projects in initial coin offering listing were fraudulent.
However, two new forms of ICOs have emerged lately, namely initial exchange offerings (IEOs) and security token offerings (STOs). Their popularity has increased significantly ever since the interest in ICOs began to wane. Let’s see how they solve some of the problems that the ICO was grappling with.
Initial Exchange Offerings (IEOs)
The main difference between ICO and IEO is that IEO is hosted on a specific crypto exchange where the users of the exchange can directly invest in the project and buy tokens after they are launched. Between January to May 2019, IEOs raised over $1.4 billion in investments. The growing popularity of IEOs has led to a renewed interest in token offerings. For instance, the BitTorrent IEO achieved its hard cap of $7.2 million worth of tokens in just 15 minutes after the IEO launch. The credibility of the IEO Listing plays a critical role in fostering trust in IEOs.
Security Token Offerings (STOs)
An STO is a fundraising mechanism in which a digital token represents a form of an investment contract, such as a bond, stock, or real estate contract. Unlike the ICOs, many of which were exempted from the U.S. securities laws, STOs consciously raise funds for tokenized securities. It means that they must comply with U.S. securities laws if they wish to accept U.S. offers. Due to this regulatory criterion, STOs have lagged behind both ICOs and IEOs in raising funds over the past year. However, various records show that while funds raised by STOs are increasing with each quarter, fundraising through ICO is declining.
Both IEOs and STOs have managed to address some of the inherent problems within the initial coin offering model. However, some issues remain, which can be fixed through ICOs. If the perpetual story of the rise and fall of ICOs can somehow be plugged, we can expect better fundraising mechanisms than today in the coming days.