What is an Initial Exchange Offering (IEO)? | The Evolution of a Slowing ICO Market

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Speculation on initial coin offerings (ICOs) in South Korea seems to be on its last legs. The copious flow of funds into the coffers of cryptocurrency ventures from Korean retail investors and cryptocurrency funds has slowed to a trickle. Many people have lost faith in cryptocurrencies and some claim that the ICO, as a fundraising mechanism, is dead. While that may be possible, a new fundraising frenzy is afoot. Fundraisers and speculators alike have been buoyed by the IEO, or initial exchange offering.

The IEO is a mutation of the ICO. The initial exchange offering is based on the ICO, and for Korean retail investors, the IEO is a safer way to speculate as the offering is done through local exchanges that bear the reputational risk if there is any fraud.

Cryptocurrency Fundraising in South Korea Today

Recently, public participation in ICOs has drastically ebbed. Nowhere is this more visually noticeable than at cryptocurrency conferences in the Korean Republic. Attendance is down. General interest has waned. Although recent conferences, like BUIDL Seoul 2018 conference saw almost decent attendance, the buzz around cryptocurrency conferences has fizzled out in comparison to red-hot conferences, like Deconomy, that took place earlier in the year.

BUIDL Seoul 2018 Attendees
BUIDL Seoul 2018 Attendees (Photo taken at 10 AM)

From a distance, it is hard to gauge this downturn. Trading volume across top local cryptocurrency exchanges, like Upbit and Bithumb, has been steadily climbing all month. Most importantly, cryptocurrency-funded startups are still making frequent pilgrimages to Korea.

However, deeper digging will reveal that most other local exchanges, like Coinrail, are not so fortunate. Trading volumes are flat or declining. To make matters worse for incumbent exchanges, there have been a plethora of new cryptocurrency exchanges entering the market in Korea in 2018. The situation is similarly bleak for local ventures trying to raise capital via the initial coin offering fundraising mechanism.

In response to increasing exchange competition and decreasing speculator appetite for ICOs, cryptocurrency exchanges and cryptocurrency-funded ventures have begun to collaborate. Through the collaboration, these new ventures hope to improve their capacity to raise funds and exchanges hope to improve trading volumes and attract new customers.

What is an IEO?

The initial exchange offering is a fundraising event that is administered by a cryptocurrency exchange on behalf of a token issuer. A token issuer is typically a new venture that is creating a cryptocurrency as an asset class to raise much-needed capital. This token issuer usually pays the cryptocurrency exchange a listing fee and percentage of the tokens sold on the exchange through the IEO.

In return, the cryptocurrency exchange is not only obliged to sell the newly issued tokens but also list the token on the exchange after the fundraising event concludes. More importantly, the exchange is incentivized to actively market the tokens as it receives a percentage of the tokens sold in the offering. Thus, in an IEO, both the exchange and the token issuer engage in token marketing.

IEO Advantages

Given the reputational risk, cryptocurrency exchanges are strongly incentivized to vet the token issuer and the quality of their offering. As a consequence, IEO exchanges develop a fiduciary relationship with token buyers as they perform the due diligence that institutional investors traditionally heavily invest in. Given the prevalence of fraud in the ICO world, this is a huge benefit for token buyers that purchase IEOs from reputable cryptocurrency exchanges.

There are also advantages to exchanges that complete successful IEOs. This advantage is access to new and, potentially, exclusive markets depending on the negotiating power of the exchange.

In days gone by, when cryptocurrency exchanges were in their infancy, and as long as liquidity was not an issue, they could effectively compete on the user experience (UX) and user interface (UI). For example, the Upbit app, being easy to download and trial, snagged a huge portion of trading activity thanks to its sleek interface.

However, given the present number of exchanges in Korea offering outstanding experiences in web apps and on high-end mobile devices, liquidity and access to markets has become central to the competitive ambitions of fledgling exchanges.

IEO Disadvantages

Unfortunately, nothing is free. Token issuers must bear the cost of the benefits appreciated by the cryptocurrency exchange and token purchasers.

For example, the most successful IEO exchange in South Korea at this time charges token issuers a listing fee of at least 20 BTC. Additionally, the exchange collects 10% of the funds raised through the IEO conducted via its exchange.

Token issuers also bear the brunt of token marketing costs. These costs can easily exceed US $100K and must be bourne irrespective of the quality of the listing IEO exchange.


In order to ensure repeat success, the IEO exchange will have to be staffed by a multidisciplinary team of savvy engineers, technologists, computer scientists, and business strategists. These are perhaps the human resources most ideally suited to evaluate the technical and business aspects of new ventures. This is definitely a barrier to entry for exchange-building entrepreneurs looking to take advantage of the new fad. In the last month, certain fledgling IEO exchanges have run into financial difficulties exactly because they lacked staff possessing the capacity to select potentially successful IEOs.

Some institutional investors in Korea hold the view that the IEO is just only a temporary fad that is inflating token prices until legislation in support of authentic security token offerings (STOs) passes. Yet there are many Korean entrepreneurs that would beg to differ. They feel that there is an acute shortage of fundraising options for startups in the republic.

Indeed, many new ventures are willing to take their chances shelling out 20 BTC and plunking US $100K into an effective token marketing campaign. From their perspective, the potential return on investment is high. Even if the IEO is a temporary fad they would happily roll dice as many recent IEOs, like Temco‘s, have been able to garner millions of dollars in investment from retail investors.

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