The ICO Gold Rush: It's a Scam, It's a Bubble, It's a Super Challenge for Regulators

Abstract

Initial coin offerings typically use blockchain technology to offer tokens that confer various rights in return, most often, for cryptocurrency. They can be seen as a conjunction of crowdfunding and blockchain. Based on a database of over 1000 ICO white papers, we provide a taxonomy of ICOs to increase understanding of their many forms, analyze the various regulatory challenges they pose, and suggest the first steps regulators should consider in response. As our database shows, ICOs are a global phenomenon and the global ICO market is much larger than generally thought, with overall ICO subscriptions estimated to exceed 75 billion USD as at the end of June 2. The US ICO market is significant, but the US doesn’t dominate this market, by any means. Furthermore, many ICOs are offered on the basis of utterly inadequate disclosure of information; more than half the ICO white papers are either silent on the initiators or backers or do not provide contact details, and an even greater share do not elaborate on the applicable law, segregation or pooling of client funds, and the existence of an external auditor. Accordingly, the decision to invest in them often cannot be the outcome of a rational calculus. Hallmarks of a classic speculative bubble are present. At the same time, ICOs provide a new, innovative and potentially important vehicle for raising funds to support innovative ideas and ventures, with the potential for aspects of their underlying structure to have an important impact on fundraising systems and structures in future.

Keywords: FinTech, RegTech, Initial Coin Offerings, ICO, ETHER, BITCOIN, Blockchain, Securities Regulation, Investment Law, Financial Law, Securities and Exchange Commission, Financial Conduct Authority, ESMA, BaFin, CSSF, ASIC

JEL Classification: G23, G24, G28