Let’s admit it, 2018 was a forgettable year for the cryptocurrency market. The price of Bitcoin plummeted from $17,000 to $3,000, while the collective market shaved over $700 billion off its market cap.
The only standout, if there was one from the dreaded crypto-winter, was the rise and fall of the Initial Coin Offering [ICOs] market.
As the calendar flipped from 2018 to 2019, the market decided to chuck the “C” and replace it with an “E” as Initial Exchange Offerings [IEO] became the new craze. IEOs became the go-to funding module not just because of the sheer growth of exchanges, but mainly due to the regulatory crackdown on ICOs, particularly in the US, coupled with the overvaluation of certain projects.
Longhash, the cryptocurrency analytics firm, detailed this regulatory debacle that led to the exodus of ICOs in their latest report. One of the main reasons for the ICO success of 2018 was the market’s head-start, relative to the Securities and Exchange Commission [SEC] which played “catch-up.”
The latest attack on coin offerings by the regulatory behemoth was early this month, when the SEC made clear its plan of suing Kik, the Canadian messaging application over an “unregistered token sale,” which was indeed the cherry on top of a melting ICO cake.
With the SEC announcing last year that all tokens released via ICO will be placed under the category of “securities” and hence will be subjected to the appropriate law, the market has been in decline.
Since securities offerings come directly under the jurisdiction of the SEC, the financial watchdog will confer if an ICO is operating as the same. However, a token sale project does not have to register with the SEC before its initiation. The line between “token sale” and “security offerings” is thin, and this line belongs to the SEC. Hence, a project’s opinion on its operation nature could differ from the regulatory, with the latter having the last laugh.
Robert W. Greene, a fellow at the Singapore University of Social Sciences and former member of the Chamber of Digital Commerce’s Token Alliance, told Longhash that the ICO market is migrating from the US to other more hospitable markets.
“The SEC’s regulatory posture has certainly driven projects seeking to conduct an open digital token offering to locate outside of the United States.”
He added that in the latter half of 2018, the open digital-token offering dollar volume from US registered ICO projects accounted for 2 percent, while in the previous year the figure was over 10 percent, a clear result of the SEC’s crackdown. Further, in Q1 of 2019, ICOs brought in $118 million, while in Q1 of 2018 token offerings roped in a whopping $6.9 billion.
Companies operating ICOs began to shun the US market altogether, citing this regulatory uncertainty. If these companies were to get into a regulatory tussle with the SEC, it would result in lawsuits, reputation damage and more. Hence, the easier option would be to take a ship to foreign markets.
BitTorrent, for instance, barred American residents from participating in their ICO which was sold out in 15 minutes.
The SEC’s bid to allow genuine ICOs to operate seamlessly resulted in it launching an ICO framework. However, the same was criticized as unclear and was even referred to as “perilous,” by SEC Commissioner Hester Peirce.
On the other end of the spectrum, ICOs are not the most reliable form of offerings, especially from the investor’s point of view. With scams, fraud, and overvaluation of token projects regularly dominating the news cycle, the SEC cannot leave the token-fundraising space completely alone either.
This line between necessary regulation to prevent the occurrence of scams, the dwindling of investor funds and the flexibility to raise money without a supervisor pressing down on every nuance of operation and deeming the sale a “security offering,” should be clearly defined by the SEC.
” While some projects may be able to leave the U.S. in favor of friendlier regulatory environments, the SEC’s stance might mean others will have to give up on their ICO plans altogether.”
IEOs might be the saving grace for budding crypto and blockchain startups that want to get ahead. However, this trend might be short-lived. Speaking directly to AMBCrypto, Bobby Ong, Co-founder of CoinGecko, one of the largest data aggregators in the space, attested to the push for exchange offerings in 2019. However, he claimed that given its similarities between the ICO market of 2018, IEOs could play an imitation game.