Regulatory and Market Challenges of Initial Coin Offerings

Regulatory and Market Challenges of Initial Coin Offerings

Pablo de Andrés, David Arroyo, Ricardo Correia, Alvaro Rezola

July 29 2019

Initial Coin Offerings (ICOs) are a way to finance early stage innovations and an ICO represents the first public offering of a crypto-asset. ICOs are supported by Blockchain protocols and are therefore characterized as being decentralized, disintermediated and unregulated. The unregulated nature results from the active desire of entrepreneurs to avoid regulation and from the passive role regulators assume. The laissez fair approach of regulators is explained by the perceived benefits that ICOs can generate such as allowing investors to mitigate credit rationing, access a broader base of potential investors, create self-employment, and democratize the access to profitable investment opportunities.

Although ICOs presented spectacular growth rates, in terms of issues and volumes issued during 2014-2018, they have also been vilified in the media often being presented as the wild west of financial markets. There is a consensus that the current situation is unsustainable given the problems that the ICO market presents.

Our paper, analyzes to what extent are these concerns justified, analyze how the ICO market is addressing its problems, and the extent to which the problems and solutions proposed are likely to shape the future of ICO markets.

Our analysis shows that ICO markets are ripe with scams, deceit, market manipulation, copycat projects, complexity of securities, etc. These problems are to a great extent due to a regulatory vacuum. Furthermore, we also observe that the ICO market is also a target for hacking attacks something that contradicts the perceived security of the Blockchain protocol. We find it very worrying that such a new, revolutionary market already displays the problems of traditional financial markets and that these problems were exactly the ones observed at the genesis of the 2007-2009 crisis.  

ICO market agents try to mitigate its problems in two complementary approaches. On one hand, there is a technological approach through the development of solutions in the design of smart contracts, in improving transparency and enhancing the protection of the IT systems overall. On the other hand, there is an effort to develop self-regulation and standards that addresses some of these problems. We also observe the entry of new firms such as exchanges and ratings agencies that mitigate the problem of asymmetries of information.  

Nonetheless, recent news show us that most of the problems persist, raising the prospects of a regulatory response. We feel that this may be the right time to regulate the ICO market, because the self-regulatory efforts developed have been unable to solve the market problems and, for the first time since they appeared, there is an important decrease in the number of ICOs and in the amounts raised. This contraction of the market has surely affected the attitude of ICO market agents towards regulation and we expect that many agents may welcome a stricter regulatory approach. 

Finally, and based on our results, we predict that in the near future, although the Blockchain protocol may still be characterized as disintermediated, decentralized, and unregulated, the same will not be true for the ICO markets.


Real name:
David Arroyo
Real name:
Ricardo Correia
Real name:
Alvaro Rezola