The SEC is warning against a new twist on an old crypto scheme


The US stock market regulator is warning investors about the latest twist on crypto fundraising. In an investor alert published Tuesday (Jan. 14), the Securities and Exchange Commission urged investors to “use caution” before buying digital tokens offered to the public through online exchanges. This alternative fundraising model is known as an initial exchange offering, or “IEO.”

As opposed to initial coin offerings (ICOs)—the fundraising strategy, popularized in 2017, wherein buyers swapped bitcoin and ether for digital tokens issued directly by startups—IEOs are administered by both startups and exchanges. (It’s kind of like hosting a fundraiser through Kickstarter as opposed to a personal bake sale.)

In theory, through IEOs, exchanges are acting as something of a gatekeeper, vetting new projects before they seek money from the investing public. But because startups often pay exchanges for the privilege of listing their tokens (and because exchanges typically earn money by charging commissions on trades), IEOs aren’t much safer than their ICO predecessors. There’s a clear conflict of interest, and many of these platforms could be operating illegally by selling unregistered securities to US-based investors.

We at Private Key warned our readers about this phenomenon in May 2019, declaring, “Initial exchange offerings are crypto’s next fundraising fiasco.” Since then, popular exchanges like Coinbase and Binance have both explored the market, with the latter facilitating token sales through Binance Launchpad. In December, the platform reportedly helped the brokerage company TroyTrade raise $4 million. At present, 16 completed sales are listed on the Binance Launchpad site.

Those offerings are poised to follow the pattern of their ICO predecessors. In 2017 and 2018, hundreds of blockchain and crypto startups raised billions of dollars through ICOs while promising to upend almost every industry. From blockchain-based file storage to IoT , though, token trading mania has outpaced practical development. Over the last three years, few if any of these blockchain projects—public or private—have launched a legitimately useful product or interface for businesses or consumers.

That’s not to indict blockchain completely. “Blockchain-like” solutions in areas like food safety have been positive, but they are distinct from public, distributed cryptographic systems—in other words, actual blockchains. The public vs. private network debate has roiled many projects, including Libra, Facebook’s digital money project.

As somebody who has studied these platforms and their challenges for two and half years, I can safely say “blockchain for X” is baloney. And anybody who declares they’re using a blockchain probably doesn’t know much about blockchain, or about whatever “X” is.

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