The ICO Gold Rush

Dirk A. Zetzsche is ADA Chair in Financial Law at the University of Luxembourg and Director of the Center for Business & Corporate Law at Heinrich Heine University in Duesseldorf; Ross Buckley is Scientia Professor and King & Wood Mallesons Chair of International Finance Law at the University of New South Wales; and Douglas Arner is Kerry Holdings Professor in Law at the University of Hong Kong. This post is based on a recent paper by Professor Zetzsche, Professor Buckley, Professor Arner, and Linus Föhr, Research Assistant at the University of Luxembourg.

Initial coin offerings (ICOs) typically use blockchain technology to offer tokens that confer some rights in return, most often, for cryptocurrency. They can be seen as effectively a conjunction of crowdfunding and blockchain.

In the past 18 months more than 1,000 ICOs have raised more than USD 3 billion. While these numbers do not indicate a global phenomenon, the growth rate is accelerating, with more raised in the latest six months than in the previous 3 years together.

This amazing growth provides us with the question of whether the growth of ICOs is due to an inherent competitive advantage of the ICO structure—or whether the growth signals over-excitement on the side of ICO participants, in short: a bubble?

In our new paper titled The ICO Gold Rush we seek to answer this question by analyzing the primary information documents (called “white papers”) issued by ICO sponsors. We provide a taxonomy of ICOs to facilitate thinking clearly about them, analyze the various regulatory challenges they pose, and suggest the first steps regulators should consider in responding to them.

Based on a rapidly growing database we show that at the moment, many ICOs are offered on the basis of utterly inadequate disclosure of information, and the decision to invest in them often cannot be the outcome of a rational calculus since ICO participants lack the information to make an informed decision. In fact, other than a similar sounding acronym ICOs and IPOs have little in common. Many of the hallmarks of a classic speculative bubble are present in many, but certainly not all, ICOs.

At the same time, ICOs provide a new and innovative structure for raising funds to support new and innovative ideas and ventures, with the potential for aspects of the underlying structures to have an important impact on fundraising systems and structures in future.

We conclude that radical steps like an outright ban risk throwing the baby out with the bathwater. We also do not deem new rules for ICOs necessary. Rather we identify as the core issue the lack of enforcement of existing legislation covering currency and equity tokens (which are effectively securities in most cases) which is due to the information asymmetry between ICO sponsors on the one side, and ICO participants and enforcement agencies on the other. A coordinated effort of regulators around the globe, aiming at information gathering and inquiries into the ICO business models, could help close the enforcement gap we identify, enhance investor protection and reduce the over-excitement that drives the current ICO market.

The complete paper is available here.

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