Abstract
Compared to initial public offerings (IPOs) that are sales of company ownerships, and loans that are sales of debt claims, initial coin offerings (ICOs) are sales of promises of cryptocurrency appreciation. However, regulatory uncertainties continue to prohibit successful widespread adoption. This paper examines ICOs with varying levels of success, including Mastercoin (now Omni) and Kin, as well as fraudulent ICOs, like REcoin and OneCoin. The discussion of the benefits and flaws within the ICO market examines regulatory challenges concerning risks transferred to investors through information asymmetry, while questioning the ability of regulations to enhance investor protection mechanisms without undermining the fundamental value of cryptocurrencies and ICOs as a viable funding structure.
Highlights
Following the initial emergence of cryptocurrencies, supported by blockchain technology combining “peer-to-peer file sharing with public key cryptography” (Swan, 2015, p. vii), some businesses have begun to create their own cryptocurrencies as an alternative financing mechanism to raise capital
Operating under the assumption that in the near future, the expanded use of cryptocurrencies would inevitably lead to a scenario in which improved regulations would have to be implemented, this paper argues that a paradox exists as the values of Initial Coin Offerings (ICOs) fundamentally conflict with contemporary regulatory methods
If investors welcome regulations that can reduce their risks in the cryptocurrency market (Ngo, 2017), an important consideration is if the implementation of these factors is truly probable, without undermining the fundamental values of cryptocurrencies and ICOs
Summary
Following the initial emergence of cryptocurrencies, supported by blockchain technology combining “peer-to-peer file sharing with public key cryptography” (Swan, 2015, p. vii), some businesses have begun to create their own cryptocurrencies as an alternative financing mechanism to raise capital. The SEC responded by identifying that ICOs and cryptocurrencies fell under their area of jurisdiction as they were considered securities They decided to meet with the Bitcoin Foundation, an organization that assists in educating people about virtual currencies, in order to learn more about the legal, technological, and regulatory implications from a pro-cryptocurrency perspective. It can be noted that Montrealbased social impact fintech firm Impak Finance was recently permitted to execute an ICO by the aforementioned OSC, raising over $1M in financial capital in what was advertised as the “America’s 1st legal cryptocurrency crowdsale” (Impak, 2017) In this case, the key factor leading to this perceived policy divergence was Impak Finance’s agreement to various conditions such as ongoing information, delivery to investors, know-your-client protections, anti-terrorism and anti-money laundering policies, and a maximum independent investor limit. Even though Kik was a successful ICO, various detractors lamented that more regulation should be in place to protect investors who would, in essence, be involved in a highly speculative investment (Shubber, 2017), thereby validating the Canadian regulatory perspective to some extent
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