Should ICOs be banned?

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THE REGULATORS’ ICO DILEMMA
By Pradeep Vancheeswaran
30-Sep-2017
Contents
Initial Coin Offering – Current state of affairs.........................................................................................2
Are the Regulators’ worries justified? ....................................................................................................3
ICOs are like IPOs at a Seed Capital Stage...............................................................................................3
What can the Regulators Do?.................................................................................................................4
Conclusion...............................................................................................................................................5
Disclaimer:
The views expressed in this document are those of the author and does not in any way represent those
of the Organisation he works for.

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Initial Coin Offering – Current state of affairs
Between 2014 and now the amount raised by about 177 Blockchain initiatives through Initial Coin
Offerings (ICOs) as an alternate fund raising mechanism is $1782.19mn1
. What a whopping amount
this is and, of course, a good reason for the Regulators around the world to be caught in a dilemma
with regards to the ICO phenomenon. Starting with China banning the ICOs, the Regulators around
the world have been busy on this topic with South Korea banning ICOs as late as 29th
of Sep, 20172
.
The Crypto Currency markets have also been extremely busy and volatile starting with Jamie Dimon
calling Bitcoin a fraud3
following which the Bitcoin price plummeted to below £3000 only to surge back
again to over $4300 (as on 30th
Sep 2017) in a matter of three to four weeks. The ICOs and the Crypto
Currency markets are closely related as one knows and hence this is worthy of mention.
The ICO data is staggering and reveals that top 10 ICOs so far alone have raised $960mn. Interesting
still is that the amount raised in 2017 contributes to 83% of the funds raised through ICOs.
Top 10 ICOs and the funds raised
# Name Open Date Close Date Asset ICO Size
($m)
1 Tezos 07/01/2017 7/13/2017 XTZ 232
2 Bancor 06/12/2017 06/12/2017 BNT 153
3 The DAO 4/30/2016 05/01/2016 DAO 152
4 Status 6/17/2017 6/21/2017 SNT 95
5 TenX 6/24/2017 6/24/2017 PAY 83.11
6 PressOne 07/12/2017 7/15/2017 PRS 82
7 MobileGo 4/25/2017 5/25/2017 MOBILEGO 53.07
8 SONM 6/15/2017 7/15/2017 SNM 42
9 Basic Attention Token 5/31/2017 5/31/2017 BAT 35
10 Civic 6/21/2017 6/22/2017 CVC 33
Sub Total 960.18
ICO Fund Raising by year
Year $mn % Growth % Y-o-Y
2014 30.43 1.71%
2015 8.61 0.48% -72%
2016 256.41 14.39% 2878%
2017 1486.74 83.42% 480%
Total 1782.19
So, a surging phenomenon and clearly a problem at hand for the regulators to address.
1
https://www.coindesk.com/download-coindesk-ico-data/
2
https://www.theverge.com/2017/9/29/16384718/south-korea-ban-initial-coin-offerings-bitcoin-
cryptocurrency-icos
3
https://www.ft.com/content/b1ee6c14-2cd0-3ad5-a9db-c8e82d993987

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Are the regulators right in being worried? - Clearly Yes. Is banning the ICOs the best course of action?
– Probably not.
Are the Regulators’ worries justified?
People are pumping money, let me be clear – serious amounts of money, as $1.7bn is huge by any
standards – into Blockchain ventures. Let us examine the $232mn raised by Tezos in a bit more detail.
What is Tezos? According to their website, it is a new “decentralised blockchain that governs itself by
establishing a true digital commonwealth”. In comparison to Ethereum which is conceptually a Smart
Contracts Platform, Tezos is a Smart Contracts platform with built in governance and formal
verification. Its Cryptocurrency is XTZ and its governance system is aimed to allow a smooth evolution
of the Blockchain without having to hard fork (to split the Blockchain into versions). Does creation of
this require a $232mn funding? Do all the investors of Tezos understand how this Blockchain is going
to evolve? - I am not sure.
To be clear, I am not challenging the ability of Tezos to disrupt the future in this technology space,
which it potentially could. But the fact is, there are 177 Blockchain ventures which have raised tons of
money based on concept papers i.e., without a proven business track record or backed by numbers/
revenues. So, when these ventures are crowd funded, and in truck loads, there is every reason for the
Regulators to be worried.
ICOs are like IPOs at a Seed Capital Stage
In terms of process, ICOs draw a rough parallel to IPOs backed by Fiat Currency. However, the essential
differences being the STAGE of funding and the lack of visibility on subsequent liquidity of tokens that
are the equivalent of stocks in an IPO. In my view, ICOs are crowd sourcing for seed capital (and not
even venture capital). If it were a new venture to go for initial public offering in fiat currency at a Seed
Capital stage, would an IPO be as attractive to these investors? The Prospectus for an IPO generally
mandates publishing the financials for the business seeking funding and also call out the risks involved.
So at least one would know the financials of these ventures going for IPOs. ICOs, on the other hand,
are purely based on concept papers. These are documents that state the intent of what the platforms
are ‘planned’ to do and the timelines around that. The documents are technically heavy and I can
challenge that many crowd investors can really understand the nitty-gritties of what is involved.

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A rough parallel between an ICO and an IPO could be as below:
Key challenges for the Regulators:
1. Crowd funding is becoming a norm. ICOs are leading this disruption in a disproportionate
fashion
2. The risk of Fraud and “Fly-by-night” operators is very high. Investors should be equally aware
of this risk. Not all “concepts” on a “white paper” can succeed and if they do, they may fail to
create a sustainable model in the long run
Key challenges for the Investors:
1. Where is the liquidity for the tokens?
2. White papers are only concepts? Why this big bet then? – The herd mentality then kicks in
3. There is this promise of services of the platform when it is operational in return for redeeming
the tokens. Are these services relevant at all in the first place for every investor?
What can the Regulators Do?
While the ICO mania is exploding, it is only one means of crowd funding. There are many other ways
as we all know and to cite an example, I was enthused and offered to invest in Monzo Bank of which I
am a customer and it had only sent a message via its app asking me if I would pledge to invest in it.
Well, I haven’t even seen its financials but perceived that banking and financial services will evolve in
that fashion in the future and that it was promising for me to be a very successful venture. So, I am
blinded, like many crowd investors, and am equally betting big on perceived disruption! So, is it fair
for me to look up to the Regulators to protect me when things would fall apart? If so, what can I think
of the Regulators as preparing to undertake the task of protection?
1. Firstly, I can recommend the Regulators to mandate creating an Escrow account for the ICO
funds raised. The funding to the Escrow account should be a large part of the funds raised by
the ICOs. This is a fall back option for the Regulators to part reimburse the crowd investors

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when the venture they are investing in fails and will also act as an incentive for the promoters
to draw down from this Escrow periodically and incrementally by proving success of their
ventures. The draw down parameters can be defined by means of meeting a gate of
completing a milestone for development of a platform, generating a revenue stream,
achieving a defined profitability percentage or an ROI within a defined period of time. I know
it means a lot for the Regulators to set this up and make it operational. But it is better late
than never as crowd funding is going to be a norm of the future
2. Secondly, even at the risk of sounding bizzare, I won’t hesitate to point out an option to the
Regulators wherein they engage with Actuaries to determine an underwriting model for ICO
funds raised, by tapping into the failure patters of pumped in Seed and Venture capital in the
traditional Fiat Currency market and gradually adding the Blockchain Venture data points into
this as time goes by – This can be an opportunity for willing Insurance companies to rummage
through the Seed/Venture capital funding database and make a future business out of it!
3. Thirdly, the Regulators can enable the tokens to be traded as soon as the ICO closes.
Promoting exchanges like Overstock4
is a forward step in this direction and there is a lesson
to be learnt by the Regulators around the globe from this. Making token trading legal, opens
up liquidity for the investors and the zero sum game as in any stock exchange will punish or
reward investors who take the risk of such investments
4. Fourthly, while protecting the investors isn’t the only action, punitive action against “fly-by-
night” promoters cannot be forgotten. So, Regulators should invest in and mandate the very
proponents of Blockchain technology who raise funds through ICOs for their ventures, to
publish their personal identities such as their Passports and travel information on a Blockchain
so that their travel records are visible to the investors and the Government and they can’t go
into hiding into unknown lands making traceability a Secret Agency and a Media issue. This
transparency can then be used to extradite/deport them for due legal action and there will be
lessons learnt from such an initiative to other potential wrongdoers toying with the idea of
swindling funds
5. Fifthly, what enormously worries me, and this won’t be long before it starts (or has already
started and I am not aware of!), is a whole financial business around extending loans against
tokens. As is common, loan against stocks is a concept that one can apply on ICO Tokens. This
should certainly be watched out for and curtailed to prevent the otherwise multiplier effect it
could have
Conclusion
The regulators are dealing with a disruption in the fund raising mechanism. Therefore, the resolution
should also be disruptive. A disruptive solution is required to deal with a disruptive problem. I look
forward to views and feedbacks from those who have had the patience to read this until this point.
4
www.fortune.com/2017/09/27/ico-exchange

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About the Author:
Pradeep Vancheeswaran is a Sloan Fellow holding a Masters Degree in Leadership and Strategy from
London Business School. He is also a Cost Accountant certified by the Institute of Cost and Works
Accountants of India.