San Francisco-based cryptocurrency exchange Coinbase may be considering Initial Exchange Offerings (IEOs) to boost its revenue. The company’s head of institutional sales, Kayvon Pirestani, told audiences at online publication Coindesk’s Invest: Asia conference that IEOs presented a “really interesting opportunity” for Coinbase. “In a nutshell, Coinbase is carefully exploring not only the IEO space but also STOs (security token offerings). But I can’t make any formal announcements right now,” he said.
After the lull in ICO markets due to an SEC crackdown, IEOs have become a popular form of fundraising this year. Online publication The Block states that 12 cryptocurrency exchanges have launched their own platforms for IEOs and 39 projects have participated in this form of offering.
For Coinbase, IEOs could translate into a lucrative revenue opportunity beyond its trading business. It is North America’s biggest exchange by trading volume and boasts more users than brokerage firm Charles Schwab. It is regulated and already has a broker-dealer license.
Given these statistics and the wide-ranging scope of its businesses, Coinbase could charge a premium from issuers for access to its users. It is a playbook that has been successfully executed by Binance.
What are Initial Exchange Offerings?
IEOs are similar to initial coin offerings (ICOs) but are conducted through an exchange, instead of an ICO platform. In this type of offering, the cryptocurrency exchange vets the offering and makes sure it is compliant with existing regulation before marketing it to users on its platform.
The practice is mutually beneficial: Startups find a ready audience for their offerings and exchanges diversify their revenue sources. Many cryptocurrency exchanges have also used IEOs to boost the value of their native tokens by making them the sole mechanism to purchase coins in an offering.
IEOs were pioneered by Malta-based Binance, an exchange that is often considered among the biggest in the world. Users of the exchange can participate in offerings using its native BNB tokens.
As with most things crypto, concerns related to IEOs are mostly due to the absence of regulation. For example, according to some accounts, exchanges charge a percentage of advertised tokens as fees for promising projects. This sets them up for a conflict of interest in advertising the project or holding an offering for it on their platform. There’s also the security problem. An exchange hack will adversely affect customers involved in an IEO because it could mean potential loss of tokens without redressal from the exchange or its issuers.