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Initial coin offerings (“ICOs”) 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 “whitepapers,” we provide a taxonomy of ICOs to increase understanding of their many forms, analyze the various regulatory challenges they pose, and suggest the steps regulators should consider in response. As our database shows, ICOs emerged very rapidly as a global phenomenon and the global ICO market is much larger than generally thought, with overall ICO subscriptions estimated to exceed $50 billion as of the year-end of 2018. The U.S. ICO market is significant, but the United States does not dominate this market by any means. This groundbreaking research demonstrates how many ICOs are offered on the basis of utterly inadequate disclosure of information— more than two thirds the ICO whitepapers are either silent on the issuing entity, initiators or backers, or they do not provide contact details. We also establish how an even greater share of ICOs do not elaborate on the applicable law, segregation or pooling of client funds, or 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 were certainly present across 2017 and 2018. Nonetheless, ICOs can also be seen as a response to the market failure of most financial systems to finance adequately the exceptionally innovative start-up enterprises. ICOs have the potential to provide a new, innovative, and potentially important vehicle for raising funds to support innovative ideas and ventures, and aspects of their underlying structure may well prove to have an important impact on fundraising systems and structures long into the future
