04.04.2018
By Rob Daly

OPINION: Exchanges Risk ICOs Passing Them By

The cryptocurrency market has appropriated the term “exchanges,” for its trading venues, but no self-regulatory organizations trade cryptocurrency or aid in initial coin offerings.

Only two designated contract markets, the CME and the CBOE Futures Exchange, trade bitcoin futures. And one swaps-execution facility, LedgerX, trades bitcoin options.

But where the equities exchange and alternative trading system operators and when do they plan on making their move into the ICO and secondary coin markets?

It should be soon if they want to establish a firm footprint in this space.

US Securities and Exchange Commission Chairman Jay Clayton ended the wild-and-woolly days of ICOs in the US when he testified that there had not been an ICO that the regulator had not deemed to be a security.

With that one statement, he put companies, organizations, and projects on notice that by adding a blockchain to their capital-raising models, it does not exempt them from their Regulation D, Regulation S, or Regulation Crowdfunding responsibilities for private securities.

The exchange operators are a natural fit to help define the nascent market. They already have experience shepherding private companies through capital raising. Integrating coins or tokens into the mix should not be a heavy lift for them.

Another reason for them to dive into the ICO space is that it would help offset the lost revenue from initial public offerings.

The number of IPOs in the US market bounced back last year with 160 initial offerings, which was 55 more than in 2016.

During the same two-year period, however, the market saw 207 ICOs, according to CoinDesk’s ICO Tracker.

It is doubtful that most of those ICOs, if any, would have become IPOs if the ICO option was off the table.

Now that the ICO backers know that they are dealing with unregistered securities, it expands their options to stay private longer than before, which translates to fewer IPOs.

Besides dealing with capital raising, exchange and ATS operators must be chomping at the bit to provide an electronic secondary market for the resulting coins and tokens.

By requiring any coin or token to adhere to listing requirements, a trading platform operator could alleviate some investor concerns. The resulting transaction and market data fees would not hurt the bottom line either.

If the exchanges do not step up and fill this need, others will. And since liquidity begets liquidity, there is a substantial first-mover advantage for whoever launches its offering first.

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