• Theodoros Stylianou

The death of ICOs?

From ICOs and STOs to utility, security, stable, asset and payment tokens, the Blockchain and Cryptocurrency world has been in financial and technocratic turmoil. With diminishing value of most tokens, many ‘investors’ and stakeholders of this market have been detrimentally affected by the lack of regulation in this crypto-craze.

My recent paper “An Investigation into the Utility and Potential Regulation of Initial Coin Offerings and Smart Contracts in Selected Industries and Jurisdictions”, focuses on explaining and exploring blockchain technology. Identifying the issues that arise from its utility and assessing whether regulation is required for such issues. Being an area that has just begun to be researched and explored by academics and regulators, the research process used follows a hands-on investigation, including attending cryptocurrency meetups, following ISOC and ICANN groups focusing on these matters, and examining investor conferences around Europe.

Further on, the research employs similar practises adopted by regulators when assessing the potential regulation of emerging technologies (Bio-tech, Neuroscience) to analyse and evaluate what regulatory steps are required within this industry. Such practises include investigating the “technology regulation research” discipline established by Professor Koops and exploring any regulatory challenges that exist for regulators.

The study then takes into consideration five jurisdictions: USA, UK, France, Switzerland and Gibraltar, showcasing the steps regulators have taken and criticising the effectiveness of such steps by reflecting on the established regulatory challenges of this industry.

The main issue addressed in the paper is the lack existing regulation’s enforceability. The crypto space has become a digital wild west, an attribute that had steadily increased the value of several cryptocurrencies. Subsequently, the increasing value caused cryptocurrencies to seep into more mainstream media, causing a peak of interest by new and different stakeholders, causing further spikes in increasing value.

These caused the creation of ICOs to multiply from hundreds in 2016 to thousands in 2017. With investors becoming more and more involved with projects based on token sales. In some instances individuals transmitted thousands (if not hundreds of thousands) of dollars to projects for non-equitable stakes within such companies, or in the worst cases, unknown entities. This non-equitable stake, the token, when received, is followed with terms and conditions acknowledging to the receiver of the token that “x” number of tokens may never be worth anything. With projects announcing to their investors that the several million dollars raised during the ICO were spent within six months of development, it started to become apparent that regulation was required and in fact, might have been too late to protect investors and legitimate stakeholders of this space.

Financial authorities such as the SEC started to become much more aggressive in their measures against ICOs as more fraudulent activities became apparent in this space. With cease and desist orders being sent to any ICOs that had received monies from US Citizens, the ICO market was stifled and suspended in several regions of the world. These regulatory measures caused ICOs to implement further self-regulation for conducting Know Your Customer and Anti-money Laundering activities or simply avoid citizens of jurisdictions with aggressive financial authorities, something that has become apparent in the Asian Crypto Space.

In the paper I illustrate how Gibraltar was able to implement a system of compulsory licensing to ICOs to receive access on token exchanges and investors for legitimate project funding. Both incentivizing the ICOs to remain legitimate and allowing investors to remain in a more secure environment regarding their investments towards ICOs.

Still with the increasingly bad reputation of ICOs, many entrepreneurs within this space have jumped the ICO “ship”, denouncing it and rebranding themselves, in late 2018, as STOs – security tokenised offerings. This remains virtually identical to all previous the ICO practises that have been exercised, and changing the terminology does not confront the issues of this space.

Theodoros Stylianou, King’s College London, Dickson Poon School of Law

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