Understanding Initial Coin Offerings: Technology, Benefits, Risks, and Regulations

Introduction

Organizations have raised over $1.8 billion through ICOs since January 2017. As organizations continue to raise tens, sometimes hundreds, of millions of dollars in each token sale, it grows increasingly important for industry leaders, lawyers, policymakers, and academics to understand both the ICO regulatory landscape and the economic and technological attributes of the cryptocurrency and ICO space. Even companies that are not directly involved in the blockchain space should be conscious of how ICOs and tokenization could be leveraged in multiple industries.

Overview

The Stellar Development Foundation (SDF) and the Luxembourg House of Financial Technology (LHoFT) have coauthored and published a 40-page white paper on initial coin offerings (ICO). The paper presents in-depth research and analysis in four areas: (1) the technical elements of ICOs, (2) the use-cases, benefits, and risks of ICOs, (3) recommended and forecasted regulatory actions, and (4) global regulatory developments. The paper combines both a regulator’s perspective (per LHoFT) and a technical and economic perspective (per SDF).

The purpose of this paper is to educate industry leaders, lawyers, policymakers, academics, and the general public on the characteristics, use-cases, and regulatory concerns of ICOs.

Key Takeaways

The Technical Elements of ICOs

• The paper provides a walkthrough of the ICO lifecycle and highlights technical attributes such as choice of issuance platform, token sale models, hard and soft caps, mining, and token owner distribution.

The Benefits, and Risks of ICOs

• There are multiple categories of tokens, each of which features different economic characteristics and regulatory implications.
• ICOs galvanize open source project development, drive global financial inclusion, and reduce the costs of fundraising. The ICO model also generates built-in customer bases and positive network efforts for decentralized applications.
• However, ICOs may feature a variety of risks, including risks to consumers and investors, market risks, and regulatory compliance risks. The paper features a table of ICO best practices that may help to alleviate some of these risks.

Recommended and Forecasted Regulatory Actions

• There are multiple legal and regulatory risks to ICOs. Regulators should not be hasty in imposing stringent regulations and should consider policies that maximize flexibility as the blockchain and distributed ledger industry matures and develops.
• The authors propose the adoption of specific measures and approaches, such as regulatory sandboxes, self-regulatory organizations, and crossborder financial technology cooperation agreements, that would help policymakers achieve regulatory goals without undue impediment to innovation.
• Blockchain and distributed ledger organizations should create a open line of dialogue with policymakers to promote mutual education and understanding.

Global Regulatory Developments

• The paper contains a survey of cryptocurrency treatment across the globe, including statements on ICOs from the U.S. Securities and Exchange Commission, Canadian Securities Administrators, Monetary Authority of Singapore, People’s Bank of China, Hong Kong Securities and Futures Commission, South Korea Financial Supervisory Commission, the Israeli Securities Authority, and the U.K. Financial Conduct Authority.

About the Authors

The Stellar Development Foundation (SDF) is a non-profit organization that develops distributed ledger financial technology to enable individuals, banks, and payment systems to move money quickly, cheaply, and reliably. SDF views initial coin offerings as a promising technological mechanism that has the potential to expand global financial access and inclusion. SDF’s open-source technology is used to facilitate regulatory-compliant initial coin offerings.

The Luxembourg House of Financial Technology Foundation (LHoFT) is a public-private sector initiative that drives technological innovation for Luxembourg's Financial Services industry. Luxembourg is universally recognized as a leading financial center and one of the preeminent centers for digital financial services. The LHoFT promotes and incubates innovative financial technologies, including blockchain and distributed ledger applications.

Download the White Paper!