The Marriage of Technology, Markets and Sustainable (and) Social Finance: Insights from ICO Markets for a New Regulatory Framework

Abstract

It is generally agreed that gaps in sustainable and social finance should be met by increased marketization. However, there are significant challenges in galvanising the investment community used to conventional securities and other investment market instruments. Our article proposes using technological innovations in fund-raising, observed in the initial coin offerings (ICOs) market, to transform the asset class of sustainable and social finance in order to achieve greater marketization, creating an integrated form of social-commercial value for a variety of different investors, from conventional to crowdsourced marketplaces. Key to our proposal is the innovation of tokenisation introduced in ICOs. We argue that tokenisation holds transformative potential for restructuring investment opportunities, as assets need not be tied to the expectations and obligations of conventional financial value creation. Tokens can offer different classes of financial and non-financial rights and rewards. We propose that sustainable and social finance can be raised by corporate structures dedicated to sustainable or social purposes, as dual-class offerings. One class of tokens allows holders to commit to the sustainable or social ends and exercise governance rights as part of their investment. Such token-holders are also expected to be long-term investors and subject to lock-in periods, in order to support the ultimate fulfilment of the sustainable or social project. The other class of tokens would carry no governance rights but be immediately tradeable. This class of tokens likely attracts more transient investors but would provide an important source of finance for sustainable and social projects. The success of ICOs reflects the importance of market conditions and liquidity for this class of investors and we make some proposals as to how such markets can be made more robust by appropriate regulation.