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

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Law Working Paper Series
Paper number 2017-011
The ICO Gold Rush:
It’s a scam, it’s a bubble, it’s a
super challenge for regulators
Dirk Zetzsche, University of Luxembourg
Dirk.Zetzsche@uni.lu
Ross P. Buckley,
ross.buckley@unsw.edu.au
Douglas W. Arner
douglas.arner@hku.hk
Linus Föhr, University of Luxembourg
linus.foehr.001@student.uni.lu
02/07/2018

University of New South Wales Law Research Series
THE ICO GOLD RUSH: IT’S A SCAM, IT’S A
BUBBLE, IT’S A SUPER CHALLENGE FOR
REGULATORS
DIRK A. ZETZSCHE, ROSS P. BUCKLEY, DOUGLAS W.
ARNER AND LINUS FÖHR
UNSWLRS 83
UNSW Law
UNSW Sydney NSW 2052 Australia
E: unswlrs@unsw.edu.au
W: http://www.law.unsw.edu.au/research/faculty-publications
AustLII: http://www.austlii.edu.au/au/journals/UNSWLRS/
SSRN: http://www.ssrn.com/link/UNSW-LEG.html

EBI Working Paper Series
Dirk A. Zetzsche/Ross P. Buckley/
Douglas W. Arner/Linus Föhr
The ICO Gold Rush: It's a Scam, It's a Bubble,
It's a Super Challenge for Regulators
201
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no.
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The ICO Gold Rush: It’s a scam, it’s a bubble, it’s a super challenge for regulators
Dirk A. Zetzsche,* Ross P. Buckley**, Douglas W. Arner*** and Linus Föhr ****
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 2018. 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: Initial Coin Offerings, ICO, ETHER, BITCOIN, Blockchain, Securities
Regulation, Investment Law, Financial Law, SEC, FCA, ESMA, BaFin, ASIC.
JEL Codes: G23, G24, G28.
* Professor of Law, ADA Chair in Financial Law (Inclusive Finance), Faculty of Law, Economics and Finance,
University of Luxembourg, and Director, Centre for Business and Corporate Law, Heinrich-Heine-University,
Düsseldorf, Germany.
** King & Wood Mallesons Chair of International Financial Law, Scientia Professor, and Member, Centre for
Law, Markets and Regulation, UNSW Sydney.
*** Kerry Holdings Professor in Law and Co-Founder, Asian Institute of International Financial Law, Faculty of
Law, University of Hong Kong.
**** LL.B., research assistant at the ADA Chair in Financial Law (Inclusive Finance), Faculty of Law, Economics
and Finance, University of Luxembourg.
This paper benefitted from comments by, and discussions with, Janos Barberis, Iris Barsan, Jon Frost, Jean-Louis
Schiltz, Rolf Weber, Nasir Zubairi and a number of others.
The authors gratefully acknowledge the financial support of: the Luxembourg National Research Fund, project
“A new lane for Fintechs – SMART Regulation”, INTER/MOBILITY/16/11406511; the Australian Research
Council, project “Regulating a Revolution: A New Regulatory Model for Digital Finance”; and the research
assistance of Véréna Olivia Christine Bilo, Pamela Cela, Jessica Chapman, Tsany Ratna Dewi, Anoushka Murday,
Emilija Pashoska, Miko Yeboah-Smith, and Wilson Zhang. All responsibility is the authors’.

1
Table of Contents
I. Introduction ............................................................................................................................ 2
II. A Taxonomy of Initial Coin Offerings (ICOs) ...................................................................... 6
1. Common characteristics ................................................................................................. 6
2. Token or coin characteristics .......................................................................................... 7
3. Consideration ................................................................................................................. 9
4. Issuing entities and backers .......................................................................................... 10
5. Legal information and applicable law .......................................................................... 11
6. Geographical breakdown ............................................................................................. 11
Clearly, based on the analysis in the preceding sections, ICOs raise an increasing range of
issues. In this section, we consider a number of the most significant, including information
asymmetries, irrational behavior, lack of legal recourse, and potential systemic risks. ...... 15
1. Information asymmetry ................................................................................................ 15
2. Capital misallocation .................................................................................................... 15
3. Weak legal protections ................................................................................................. 16
4. Systemic risk ................................................................................................................. 17
IV. Appropriateness of Existing Legal Frameworks ............................................................... 20
1. Legally relevant conduct ............................................................................................... 20
2. General consumer protection legislation ...................................................................... 20
3. Financial law and regulation ........................................................................................ 22
4. Crowdfunding legislation ............................................................................................. 27
V. Designing an Appropriate Policy and Regulatory Response ............................................... 30
1. Outright ban ................................................................................................................. 30
2. From doing nothing to private ordering: Reducing information asymmetry ............... 32
3. Regulatory warnings .................................................................................................... 33
4. Enforcing existing laws through concerted action ........................................................ 35
5. Widening the scope of financial law? ............................................................................ 37
VI. Conclusion ......................................................................................................................... 38

2
I. Introduction
In the past 20 months more than 3,000 Initial Coin Offerings (ICOs1) have raised significant
funds. While estimates of volume start at 3 billion USD2 we provide data in this paper
indicating that the global contributions to ICOs have passed the 75 billion USD mark3 and
that ICOs have become a truly global phenomenon. Moreover, the growth rate is accelerating
(at least through end June 2018 and a possible collapse of the bitcoin bubble), with more
funds raised in the past six months than in all previous (3.5) years.4 The first expected mega
ICO took place in 2018: Telegram raised over 1.7 billion USD;5 and the first less than
expected mega-ICO also occurred, with EOS unexpectedly raising 4.1 billion USD.
ICOs initially began as a mechanism among the blockchain community to attract financial
support for new ideas and initially involved small amounts of money and small numbers of
investors. However, as amounts raised have increased, so has interest in using ICO structures
to raise money for ever broader purposes and among ever broader groups of investors, with
issuances in 2017 forming one of the largest portions of early stage fundraising globally.
Recent high-profile examples have included celebrity promoters such as Paris Hilton
(LydianCoin), ‘Ghostface Killah’ from the Wu Tang Clan (Cream Capital), Jamie Foxx
(Cobinhood) and Floyd Mayweather Jr. (Stox). The United States Securities and Exchange
Commission (‘SEC’) has taken the initiative to warn investors of celebrity advertisement as it
may be part of paid promotions and thus does not replace conducting research on the
intended investment.6 In addition, while early structures sought largely to avoid legal and
regulatory considerations, in recent months, there has been an increasing involvement of
major legal and advisory firms in the area, including banks involved in traditional capital
raising and asset management.
1 On the legal perspective of ICOs, see Iris M. Barsan, Legal Challenges of Initial Coin Offerings, 3 REVUE
TRIMESTRIELLE DE DROIT FINANCIER 54 (2017); Jonathan Rohr & Aaron Wright, Blockchain-Based Token
Sales, Initial Coin Offerings, and the Democratization of Public Capital Markets (Cardozo Legal Studies
Research Paper No. 527, Oct. 4, 2017), https://ssrn.com/abstract=3048104.
2 Cf. Olga Kharif, Only One in 10 Tokens Is in Use Following Initial Coin Offerings, BLOOMBERG (Oct. 23,
2017), https://www.bloomberg.com/news/articles/2017-10-23/only-one-in-10-tokens-is-in-use-following-initial-
coin-offerings.
3 Infra, at II.6. and III.4.
4 Whereas total ICO volume was 26 million USD in 2014 and 14 million USD in 2015, it rose to 222 million
USD in 2016 and reached 1,266 million USD in the first six months of 2017. Cf. #TOKEN MANIA,
AUTONOMOUS NEXT, https://next.autonomous.com/download-token-mania/ (last visited 31 October
2017). Our data suggest, that the total ICO volume in the second half of 2017 by far exceeds the sum of all
previous ICOs together. Cf. infra, at III.4.
5 Cf. Camila Russo & Ilya Khrennikov, Big Investors Circle Telegram’s ICO While Veteran Crypto Insiders
Pass, Bloomberg (Feb. 3, 2018), https://www.bloomberg.com/news/articles/2018-02-02/big-investors-circle-
telegram-offering-as-crypto-insiders-pass.
6 See Press Release, SEC, Statement on Potentially Unlawful Promotion of Initial Coin Offerings and Other
Investments by Celebrities and Others (Nov. 1, 2017), https://www.sec.gov/news/public-statement/statement-
potentially-unlawful-promotion-icos.

3
Prominent examples demonstrate that ICOs are not without flaws: some ICOs have been
unmasked as scams and Ponzi schemes,7 while others, including one of the larger to date,8
have seen governance concerns come to the fore and financial regulators making inquiries.
7 Cf. Press Release, U.S. Securities and Exchange Commission (‘SEC’), SEC Exposes Two Initial Coin
Offerings Purportedly Backed by Real Estate and Diamonds (Sep. 29, 2017), https://www.sec.gov/news/press-
release/2017-185-0 (stating that the SEC “today charged a businessman and two companies with defrauding
investors in a pair of so-called initial coin offerings (ICOs) purportedly backed by investments in real estate and
diamonds. The SEC alleges that [an individual] and his companies have been selling unregistered securities, and
the digital tokens or coins being peddled don't really exist. According to the SEC's complaint, investors in
REcoin Group Foundation and DRC World (also known as Diamond Reserve Club) have been told they can
expect sizeable returns from the companies' operations when neither has any real operations. The individual
allegedly touted REcoin as "The First Ever Cryptocurrency Backed by Real Estate.” Alleged misstatements to
REcoin investors included that the company had a "team of lawyers, professionals, brokers, and
accountants" that would invest REcoin's ICO proceeds into real estate when in fact none had been hired or even
consulted. Zaslavskiy and REcoin allegedly misrepresented they had raised between $2 million and $4 million
from investors when the actual amount is approximately $300,000.” Cf. Press Release, U.S. SEC, SEC
Emergency Action Halts ICO Scam (Dec. 4, 2017), https://www.sec.gov/news/press-release/2017-219; Cf. In
the Matter of Munchee Inc., Securities Act of 1933 Release No. 10445 (Dec. 11, 2017),
https://www.sec.gov/litigation/admin/2017/33-10445.pdf. Cf. Swiss regulator FINMA: Press Release, FINMA,
FINMA closes down coin providers and issues warning about fake cryptocurrencies (Sep. 19, 2017),
https://www.finma.ch/en/news/2017/09/20170919-mm-coin-anbieter/ (stating that “FINMA has closed down the
unauthorised providers of the fake cryptocurrency ‘E-Coin’. For over a year since 2016, the QUID PRO QUO
Association had been issuing so-called ‘E-Coins’, a fake cryptocurrency developed by the association itself.
Working together with DIGITAL TRADING AG and Marcelco Group AG, the association gave interested
parties access to an online platform on which E-Coins could be traded and transferred. Via this platform, these
three legal entities accepted funds amounting to at least four million Swiss francs from several hundred users
and operated virtual accounts for them in both legal tender and E-Coins. This activity is similar to the deposit-
taking business of a bank and is illegal unless the company in question holds the relevant financial market
licence. … Unlike real cryptocurrencies, which are stored on distributed networks and use blockchain
technology, E-Coins were completely under the providers' control and stored locally on its servers. The
providers had suggested that E-Coins would be 80% backed by tangible assets, but the actual percentage was
significantly lower. Moreover, substantial tranches of E-Coins were issued without sufficient asset backing,
leading to a progressive dilution of the E-Coin system to the detriment of investors.” Amelia Tomasicchio, Top
5 Cryptocurrency Scams, BITCOIN CHASER (June 2, 2017), http://bitcoinchaser.com/top-5-cryptocurrency-scams
lists 5 scams with a total damage well north of USD 50 million.
8 Regarding the Tezos ICO (where USD 232 million was collected while the founders had initially envisioned a
gross income of only USD 10 million), the Swiss news website Finews reports that the founders of Tezos (a
U.S.-based couple and U.S. enterprise Dynamic Ledger Solutions) employed a Swiss foundation for launching
its ICO in order to establish a new cryptocurrency “Tezzie”. According to that report, the U.S. couple claims
USD 20 million in commissions from the Swiss foundation. Further, key people of the foundation are said to
demand bonuses and commissions out of the Tezos ICO. At the same time the news website reports that it is
unclear a) whether Tezos investors will receive a return for their consideration, and b) where the funds collected
in the ICO and denominated in BTC and ETH are safekept. See Tezos-ICO: Streit um Millionen im
“Cryptovalley”, FINEWS (Oct. 19, 2017), https://www.finews.ch/news/finanzplatz/29281-tezos-ico-streit-um-
millionen. On the same ICO, another website reports violation of FINRA regulations regarding disclosure rules
on compensation of key staff as well as on business development, and that the Tezos project has difficulties
finding skilled staff, see Blockchain-Projekt Tezos: Größter ICO droht zu scheitern, DEUTSCHE WIRTSCHAFTS
NACHRICHTEN (Oct. 21, 2017), https://deutsche-wirtschafts-nachrichten.de/2017/10/20/blockchain-projekt-
tezos-bricht-ueberraschend-zusammen/. Parts of the news were also reported on the websites of Fortune and
CoinDesk. As of November 15 2017, two class actions were filed against the Tezos founders, the Tezos
Foundation and Dynamic Ledger Solutions – the Delaware-based company that holds Tezos’ intellectual
property – alleging that the founders deceptively sold unregistered securities in violation of both federal and
state law when they raised $232 million in an initial coin offering (ICO) in July. See Stan Higgins, $232 Million:
Tezos Blockchain Project Finishes Record-Setting Token Sale, COINDESK (July 13, 2017),
https://www.coindesk.com/232-million-tezos-blockchain-record-setting-token-sale/; Aaron Stanley, Tezos
Founders Hit With Second Class Action Suit, COINDESK (Nov. 15, 2017), https://www.coindesk.com/tezos-
founders-hit-second-class-action-suit/.

4
There has been a wide range of initial regulatory responses: from an outright ban of ICOs in
the case of China9 and South Korea, to warning notices by European,10 US11 and other
regulators reinforced by statements that securities laws could well apply and registration be
necessary,12 to more supportive approaches in other jurisdictions, with Singapore and to a
lesser extent Switzerland leading the way.13
9 Cf. Lulu Yilun Chen & Justina Lee, Bitcoin Tumbles as PBOC Declares Initial Coin Offerings Illegal,
BLOOMBERG (Sep. 4, 2017), https://www.bloomberg.com/news/articles/2017-09-04/china-central-bank-says-
initial-coin-offerings-are-illegal. For further details, see infra (IV.1.).
10 Cf. Press Release, ESMA, ESMA highlights ICO risks for investors and firms (Nov. 13, 2017),
https://www.esma.europa.eu/press-news/esma-news/esma-highlights-ico-risks-investors-and-firms (stating that
“ESMA is concerned that firms involved in ICOs may conduct their activities without complying with relevant
applicable EU legislation.”) The national regulators coordinated by ESMA issued similar warning notices, see
e.g. Consumer Warning: The Risks of Initial Coin Offerings, BAFIN (Nov. 9, 2017),
https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Meldung/2017/meldung_171109_ICOs_en.html;jses
sionid=DD4E85311A67636E46E56D0C5E78E3D3.2_cid381; Consumer Warning about the Risks of Initial
Coin Offerings (‘ICOs’), FINANCIAL CONDUCT AUTHORITY (‘FCA’) (Sep. 12, 2017),
https://www.fca.org.uk/news/statements/initial-coin-offerings; AFM waarschuwt voor grote risico’s bij Initial
Coin Offerings, AFM (NL) (Nov. 13, 2017), https://www.afm.nl/nl-nl/nieuws/2017/nov/risico-ico. Swiss
regulator FINMA has assembled a warning list with entities involved in suspicious activity in the ICO field.
See Press Release, FINMA, FINMA Closes Down Coin Providers and Issues Warning about Fake
Cryptocurrencies (Sep. 19, 2017), https://www.finma.ch/en/news/2017/09/20170919-mm-coin-anbieter/.
11 Cf. Public Statement, SEC, Statement on Potentially Unlawful Promotion of Initial Coin Offerings and Other
Investments by Celebrities and Others (Nov. 1, 2017), https://www.sec.gov/news/public-statement/statement-
potentially-unlawful-promotion-icos (demanding compliance with US disclosure rules).
12 Cf. Investor Bulletin: Initial Coin Offerings, SEC (July 25, 2017), https://www.sec.gov/oiea/investor-alerts-
and-bulletins/ib_coinofferings. The same message was conveyed by Canadian securities regulators on 24
August 2017, see CSA Staff Notice 46-307: Cryptocurrency Offerings, ONTARIO SECURITIES COMMISSION (Aug.
24, 2017), http://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20170824_cryptocurrency-offerings.htm; Media
Release, Monetary Authority of Singapore, MAS Clarifies Regulatory Position on the Offer of Digital Tokens in
Singapore (Aug. 1, 2017), http://www.mas.gov.sg/News-and-Publications/Media-Releases/2017/MAS-clarifies-
regulatory-position-on-the-offer-of-digital-tokens-in-Singapore.aspx; SEC Thailand’s Viewpoint on ICO,
SECURITIES AND EXCHANGE COMMISSION THAILAND (Sep. 14, 2017),
http://www.sec.or.th/EN/Pages/FinTech/ICO.aspx.
13 For instance, the Swiss government is seeking to foster Fintech innovation in relation to blockchain
technology, in particular, while preserving AML and KYC requirements. The Swiss government is exploring the
creation of a new regulated entity called a “crypto-bank”. Moreover, digital currencies are not considered
securities (and thus subject to Swiss securities regulation) but assets. Nevertheless, FINMA has clarified that
AML/CTF, banking and securities trading as well as collective investment rules could apply. Cf. FINMA
Guidance 04/2017: Regulatory Treatment of Initial Coin Offerings, FINMA (Sep. 29, 2017),
https://www.finma.ch/en/~/media/finma/dokumente/dokumentencenter/myfinma/4dokumentation/finma-
aufsichtsmitteilungen/20170929-finma-aufsichtsmitteilung-04-2017.pdf?la=en. Singapore’s regulator MAS
does not consider digital currencies as regulated funding sources or payment instruments, but as assets; in turn,
while the MAS regulates KYC and AML requirements it does not regulate virtual currency intermediaries nor
the proper functioning of virtual currency transactions. At the same time, on 1 August 2017, MAS clarified that
“if a token is structured in the form of a security, the ICO must comply with existing securities laws aimed at
safeguarding investors’ interest. So the requirements of having to register a prospectus, obtain intermediary or
exchange operator licences, will apply. These intermediaries must also comply with existing rules on anti-
money laundering and countering terrorism financing. … MAS does not and cannot regulate all products that
people put their money in thinking that they will appreciate in value. But recognizing that the risks of investing
in virtual currencies are significant, MAS and the Commercial Affairs Department have published an advisory
alerting consumers to these risks, and are working together to raise public awareness of potential scams.” See
Saktiandi Supaat, Reply to Parliamentary Question on the Prevalence Use of Cryptocurrency in Singapore and
Measures to Regulate Cryptocurrency and Initial Coin Offerings: Notice Paper 869 of 2017, MAS (for
Parliament Sitting on Oct. 2, 2017), http://www.mas.gov.sg/News-and-Publications/Parliamentary-
Replies/2017/Prevalence-use-of-cryptocurrency-in-Singapore.aspx. French regulator AMF announced a two-

5
This paper draws on a rapidly growing database of documentation for over 1000 ICOs. The
documents typically are those made available during the launch of the ICO and were gathered
from thirty websites functioning as ICO repositories.14 As such, while we cite proportions of
ICOs in our sample throughout this paper, these proportions should not be taken as being
anything more than very broadly indicative, given that the total universe of ICOs numbers
above 3,000 to date, and our sample doesn’t pretend to be representative, but our latest results
can be classified as significant since they are based on 1/3 of the total ICOs out there.
From this foundation, we provide a basic taxonomy for ICOs and analyze which legal
frameworks might apply to which types of ICOs. In Parts III and IV we highlight some key
risks for the financial system and for ICO participants. In Part V we consider possible
responses of regulators and supervisors. Part VI concludes.
pronged approach consisting of a new regulatory position on ICOs on which the AMF consulted with market
participants from October to December 2017, on the one hand, and a new program dubbed "UNICORN", on the
other hand, which is “aimed at providing a mechanism for ICO organizers in France to carry out their plans
under the agency's guidance.” Cf. Press Release, Autorité des Marchés Financiers, L’AMF lance une
consultation sur les Initial Coin Offerings et initie son programme UNICORN (Oct. 26, 2017), http://www.amf-
france.org/Actualites/Communiques-de-presse/AMF/annee-
2017?docId=workspace%3A%2F%2FSpacesStore%2F5097c770-e3f7-40bb-81ce-db2c95e7bdae.
14 Websites from which ICO documentation has been drawn include, among others TokenData
(https://www.tokendata.io), ICO Rating (https://icorating.com), ICO-Drops (https://icodrops.com),
CoinSchedule (https://www.coinschedule.com), ICO HotList (https://www.icohotlist.com), ICO Alert
(https://www.icoalert.com), CryptoSlate (https://cryptoslate.com), ICO Bench (https://icobench.com), EtherScan
(https://etherscan.io), CoinFi (https://www.coinfi.com), TrackICO (https://www.trackico.io),
TokenMarket(https://tokenmarket.net), ICO Report (http://icoreport.pro), ICO Countdown
(http://www.icocountdown.com), ICO stats (https://icostats.com), SmithAndCrown
(https://www.smithandcrown.com), CoinMarketCap (https://coinmarketcap.com), ICO-Tracker
(https://icotracker.net), CryptoPotato (https://cryptopotato.com), Top ICO list (https://topicolist.com), ICO list
(https://www.ico-list.com), ICO Panic (https://icopanic.com), CoinGecko (https://www.coingecko.com),
WorldCoinIndex (https://www.worldcoinindex.com), ICO index (https://icoindex.com), ICO daily
(https://icodaily.net), ICO Map (https://www.ico-map.io), CoinRating (https://coinrating.co), CoinDesk
(https://www.coindesk.com), ICO quest (https://icoquest.com). Note that our database is far from complete and
is unlikely to ever be complete, given the quantity of ICOs currently taking place. The database merely
functions as evidence of the variety of ICOs and of the legal concerns we seek to address herein.

6
II. A Taxonomy of Initial Coin Offerings (ICOs)
1. Common characteristics
ICOs are currently taking so many different forms that the task of definition is no simple
matter. However, the structure (following its name) is based on the offer of digital tokens or
coins utilizing blockchain technology.15 As with the tokens that represent the
cryptocurrencies16 Bitcoin17 and Ether18, in an ICO the initiators establish a blockchain and
15 Cf. on the legal and governance aspects of Blockchain only from the regulator’s perspective IOSCO,
RESEARCH REPORT ON FINANCIAL TECHNOLOGIES (FINTECH) ch 5 (Feb. 2017),
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD554.pdf; ESMA, REPORT: THE DISTRIBUTED LEDGER
TECHNOLOGY APPLIED TO SECURITIES MARKETS (Feb. 7, 2017); Op-ed: Blockchain, ASIC (Oct. 26, 2015),
http://asic.gov.au/about-asic/media-centre/asic-responds/op-ed-blockchain/. From the academic perspective, see
Lawrence J. Trautman, Is Disruptive Blockchain Technology the Future of Financial Services?, 69 CONSUMER
FIN. L.Q. REP. 232 (2016); Carla L. Reyes, Moving Beyond Bitcoin to an Endogenous Theory of Decentralized
Ledger Technology Regulation: An Initial Proposal, 61 VILL. L. REV. 191 (2016); Wessel Reijers, Fiachra
O'Brolcháin & Paul Haynes, Governance in Blockchain Technologies & Social Contract Theories, 1 LEDGER
134 (2016); Trevor I. Kiviat, Beyond Bitcoin: Issues in Regulation Blockchain Transactions, 65 DUKE L.J. 569
(2015-16); Lewis Rinaudo Cohen & David Contreiras Tyler, Blockchain's Three Capital Markets Innovations
Explained, INT’L FIN. L. REV. (2016); from the French literature: Primavera De Filippi & Michel Reymon, La
Blockchain: comment réguler sans autorité, in NITOT, T. (DIR.) & CERCY N., NUMÉRIQUE: REPRENDRE LE
CONTRÔLE 83 et seq. (2016); Pierre-Marie Lore, blockchain: évolution ou révolution pour les contrats en
France? (2016) (M.B.A. thesis, Institute Léonard de Vinci), available at http://www.ilv.fr/les-blockchains-sont-
elles-des-technologies-adaptees-pour-gerer-les-contrats/ (analysing vulnerabilities from a contractual
perspective).
16 See Edward D. Baker, Trustless Property Systems and Anarchy: How Trustless Transfer Technology Will
Shape the Future of Property Exchange, 45 SW.L. REV. 351 (2015-16); V. Gerard Comizio, Virtual Currencies:
Growing Regulatory Framework and Challenges in the Emerging FinTech Ecosystem, 21 N.C. BANKING INST.
131 (2017); Matthew P. Ponsford, A Comparative Analysis of Bitcoin and Other Decentralised Virtual
Currencies: Legal Regulation in the People’s Republic of China, Canada, and the United States, 9 HONG KONG
J.L. STUD. 29 (2015); from Spain: Mª Nieves Pacheco Jiménez, Criptodivisas: Del Bitcoin Al Mufg. El
Potencial De La Technología Blockchain, 19 REVISTA CESCO DE DERECHO DE CONSUMO 6 (2016).
17 Cf. See Catherine Martin Christopher, The Bridging Model: Exploring the Roles of Trust and Enforcement in
Banking, Bitcoin, and the Blockchain, 17 NEV. L.J. 139, 140–155 (2016); Primavera De Filippi, Bitcoin: A
Regulatory Nightmare to a Libertarian Dream, 3 INTERNET POL’Y REV. 1, 10 (2014); Joshua J. Doguet, The
Nature of the Form: Legal and Regulatory Issues Surrounding the Bitcoin Digital Currency System, 73 LA. L.
REV. 1119 (2012–2013); Reuben Grinberg, Bitcoin: An Innovative Alternative Digital Currency, 4 HASTINGS
SCI. & L.J. 159, 171 (2012); Nikolei M. Kaplanov, NerdyMoney: Bitcoin, the Private Digital Currency, and the
Case Against Its Regulation, 25 LOY. CONSUMER L. REV. 111 (2012–2013); John O. McGinnis & Kyle W.
Roche, Bitcoin: Order without Law in the Digital Age (March 7, 2017) (Unpublished L. Res. Paper); Edward V.
Murphy, M. Maureen Murphy & Michael V. Seitzinger, Bitcoin: Questions, Answers, and Analysis of Legal
Issues, CONG. RES. SERV. (Oct. 13, 2015), https://fas.org/sgp/crs/misc/R43339.pdf; Nicholas A. Plassaras,
Regulating Digital Currencies: Bringing Bitcoin within the Reach of the IMF, 14 CHI. J. INT’L. L. 377 (2013);
Misha Tsukerman, The Block Is Hot: A Survey of the State of Bitcoin Regulation and Suggestions fort he Future,
30 BERKELEY TECH L.J. 1127 (2015); Peter Twomey, Halting a Shift in the Paradigm: The Need for Bitcoin
Regulation, 16 TRINITY C.L. REV. 67 (2013); from Germany: Nico Kuhlmann, Bitcoins – Funktionsweise und
rechtliche Einordnung der digitalen Währung, COMPUTER & RECHT 691 (2014); Benjamin Beck & Dominik
König, Bitcoins als Gegenstand von sekundären Leistungspflichten, 215 ARCHIV FÜR DIE CIVILITISCHE PRAXIS
655 (2015); DANIEL KERSCHER, BITCOIN – FUNKTIONSWEISE, CHANCEN UND RISIKEN DER DIGITALEN
WÄHRUNG 120 (2013); Gerald Spindler & Martin Bille, Rechtsprobleme von Bitcoins als virtuelle Währung,
WERTPAPIERMITTEILUNGEN 1357 (2014); Franziska Boehm & Paulina Pesch,, Bitcoins: Rechtliche
Herausforderungen einer virtuellen Währung – Eine erste juristische Einordnung, MMR 75 (2014).
18 Ether is the cryptocurrency used in the context of Ethereum, one of the most widely used blockchain systems.
Ether has also become infamous as currency used for funding the Decentralized Autonomous Organization
(DAO), see Charlie Shier et al., Understanding a Revolutionary and Flawed Grand Experiment in Blockchain:
The DAO Attack (Aug. 7, 2017) (Unpublished manuscript), https://ssrn.com/abstract=3014782; Mark Fenwick,

7
grant tokens (a.k.a. ‘coins’) to participants in it.19 To date, most ICOs have been internet-
based and open to the public, though with varying levels of direction in terms of potential
participants, and ranging from small to large invested amounts.
In most cases the ICO occurs early in the business or project.20 While the ‘initial’ in ICO
indicates a first offer of tokens or coins, in some cases the offer is the second or third offer of
the token, and merely the first to the public. 21.69% of of our sample reveal that tokens had
been previously offered in a presale to a private investor group prior to the ICO. The actual
number of pre-offerings is likely to be higher given the poor quality and content of
documentation and the current absence of standards.21 The large number of presales (without
adequate disclosure or safeguards such as lock-up periods) gives rise to concerns in itself
since it facilitates ‘pump-and-dump schemes’ in offerings.
2. Token or coin characteristics
The tokens, often called ‘coins’, that are offered typically exhibit the characteristics of a
digital voucher and grant the participants a right of some kind. The particular right
represented by the token varies. A token may represent a license to use a software program
(usage token), a membership in a community (community token) or a financial asset. Among
financial tokens some represent a cryptocurrency (hereafter referred to as a ‘currency
token’)22 while others promise participation in a cash flow generated by some underlying
asset – hereafter referred to as an ‘equity token’.23 Among the equity tokens, some ICOs
promise participation of token holders in some asset pool in a non-segregated manner, while
in other cases the token allows participation in one single asset, separable from the other
assets. Figure 1 shows our suggested taxonomy based on what the token represents.
Figure 1: ICO Taxonomy by Token Reference
Wulf A. Kaal & Erik P.M. Vermeulen, Legal Education in the Blockchain Revolution (March 22, 2017)
(Unpublished Legal Stud. Res. Paper No. 17-05, U. St. Thomas) 31 et seq.
19 We are not using formal financial terms such as promoters, investors and the like, as the legal status of ICOs
remains problematic and undecided.
20 Stellar Development Foundation & Luxembourg House of Financial Technology, Understanding Initial Coin
Offerings: Technology, Benefits, Risks, and Regulations, STELLAR 23 (Sep. 2017),
https://www.stellar.org/blog/understanding-initial-coin-offerings/.
21 Lex Sokolin, global director of Fintech strategy at Autonomous NEXT, estimates that 80% of ICOs are doing
presales. Cf. Olga Kharif, Hedge Funds Flip ICOs, Leaving Other Investors Holding the Bag, BLOOMBERG (Oct.
3, 2017), https://www.bloomberg.com/news/articles/2017-10-03/hedge-funds-flip-icos-leaving-other-investors-
holding-the-bag (last visited Nov. 13, 2017).
22 For example, one token represents one newly offered cryptocurrency SANDCOIN.
23 The payment and equity characteristics can take several forms, for instance the token value can be modified
by an additional component, similar to a derivative; for instance, the pay out or delivery of the reference value
can be deferred (like in a forward contract) or conditioned on certain circumstances (for instance, that a certain
reference index moves up or down, similar to derivatives).

8
Figure 2 further shows the distribution of ICOs for consideration based on our random
sample of hand-collected ICOs.
Figure 2: ICOs for Consideration by Reference Value

9
Effectively, ICOs to date have paralleled the universe of crowdfunding techniques, from
donation or charity-based structures to rewards to equity and debt,24 but with the token
providing the evidence or right imparted via the process. In particular, while ICOs are often
characterized as ‘utility’ or ‘currency’ tokens, the reality of the particular transaction must be
looked at carefully to deduce exactly what is going on, with the variety typically ranging
from funding of early stage research (similar to charitable crowdfunding via GoFundMe and
the like), to prepurchase of specific products, often blockchain based (similar to rewards
crowdfunding via Kickstarter), to investment structures of various forms (similar to equity or
debt crowdfunding).
3. Consideration
While the ICOs in our database have only been issued in return for consideration,
consideration is not a prerequisite for ICOs. It is possible to grant tokens for the sole purpose
of gathering a group of participants interested in blockchain technology for later use, for
instance for social media or marketing purposes. Given we are particularly interested in the
financial law dimensions of ICOs, however, we focus in this paper on ICOs for consideration.
The consideration can be any type of valuable asset. In many cases, ICOs are issued for
cryptocurrency, for instance, consideration paid in ether. While this suggests tech savviness
and seems to appeal to the expected participant constituency, the value of consideration in
this case depends on the market value of the cryptocurrencies which currently fluctuate
significantly. We have also seen a number of ICOs where the consideration is to be paid in
cash (typically USD).
The total issue amount available for subscription in currency value (hereafter ‘ICO volume‘)
has varied from the equivalent of a few thousand USD25 to more than 500 million USD.26
Figure 3: Distribution of ICOs by Market Cap.
24 See on crowdfunding methodology, Research Report on Financial Technologies (Fintech), IOSCO 10 et seq.
(Feb. 2017), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD554.pdf; Opinion: Investment Based
Crowdfunding, ESMA 6 (Dec. 18, 2014), https://www.esma.europa.eu/sites/default/files/library/2015/11/2014-
1378_opinion_on_investment-based_crowdfunding.pdf; Crowdfunding in the EU Capital Markets Union,
EUROPEAN COMMISSION 8, SWD 154 final (2016), http://ec.europa.eu/finance/general-
policy/docs/crowdfunding/160428-crowdfunding-study_en.pdf.
25 Cf. the Synereo ICO from 2015, collecting USD 100,000, for the creation not just of a social network but a
social layer that any protocol can use and upon which many distributed applications can be built; and the
Orocrypt ICO from 2017, collecting USD 100,000, where tokens represent precious metals valued in ETH.
26 Cf. the ICOs by Niobium (Austria), Darico (Switzerland), Asteroid (Hong Kong) and Reales (Estonia).

10
Figure 3 shows the distribution of ICO volumes in our database (in million USD). Most ICOs
(41%) aim to collect between 10 to 100 million USD, followed by a large number having no
data regarding volume (28.2%). Larger ICOs offering volumes between 10 and 100 billion
USD (0.2%), 1 and 10 billion USD (0.9%) and 100 million and 1 billion USD (9.7%) are
quite common. Smaller ICOs with a volume offered between 10 000 and 100 000 USD
comprise 0.4% of our sample, while only 1.6% of the ICOs in our sample aim at the
collection of between 100 000 and 1 million USD. At the same time, 18.1% of the ICOs
asked for 1-10 million USD.
While actual subscriptions may be much lower (see infra, at III.4.) our data show that ICOs
aim at the collection of serious money – very frequently and successfully.
4. Issuing entities and backers
In addition to a website and often a YouTube video, ICOs typically involve documentation
called a ‘white paper’. A ‘white paper’ is defined in Wikipedia27 as:
an authoritative report or guide that informs readers concisely about a complex issue and
presents the issuing body’s philosophy on the matter. It is meant to help readers understand an
issue, solve a problem, or make a decision.
The UK and Australian governments, as well as the Hong Kong Monetary Authority
(‘HKMA’) and many other governments and government related organizations, often issue
white papers on issues, and the Wikipedia definition captures the purpose of such documents
very well. The white papers that typically accompany an ICO are different beasts altogether,
and bear no relation at all to the sort of prospectuses that typically accompany an offering of
securities. Rather, ICO white papers tend to be a simple description of the project and the
structure in which tokens will be used to support it. The origins of ICO white papers can be
traced back to the 2009 White Paper for Bitcoin published under the name of Satoshi
Nakamoto,28 in which the technical features of bitcoin were outlined.
27 White Paper, WIKIPEDIA, https://en.wikipedia.org/wiki/White_paper (last visited Nov. 10, 2017).
28 Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, BITCOIN, https://bitcoin.org/bitcoin.pdf
(last visited Dec. 14, 2017).

11
White papers for ICOs typically reveal very little about the issuing entities and their backers.
These white papers often fail to give a physical, postal or other contact address. In 20.47% of
the cases in our sample, the ICO documentation failed to convey any information at all about
the issuing entity. Where the issuing entity was mentioned, 32.9% mentioned the country of
origin and provided a postal address. That means, in total, of all ICOs in our sample so far
more than 67.1% of the issuers did not disclose valid postal contact details.
5. Legal information and applicable law
Given that ICOs are not subject to specific regulatory requirements and are frequently
structured to avoid existing legal and regulatory requirements, not surprisingly, the content of
white papers is utterly inconsistent. The only consistent factor tends to be a technical
description of the underlying technology for which funding is sought, as well as some
description of the potential use and benefits of said technology.
Almost all ICOs rely on legislative loopholes or, more accurately, what the issuing entity
hopes (or prays) is a loophole or grey area. Only 32.70% of the ICOs in our sample mention
the law applicable to the ICO. In 40.91% of the cases the white paper excluded investors
from certain countries from participation. In 82.69% of the cases there is no information at all
as to the regulatory status of the ICO.
This cavalier disregard of the need to inform a participant as to where precisely their funds
are going, and what rights are being given in return for these funds, only makes sense when
one appreciates the particular mindset of many issuers of ICOs, a mindset facilitated by
(optimistically) the innocence of the stereotypical crypto-geek about legal or other
requirements or (less optimistically) the greed of participants who are literally prepared to
give money to entities on the basis of such extraordinarily scant information purely for the
hope of short-term speculative gains. This mindset is perhaps best described as anarcho-
capitalism. It is the idea that the world would work really well without government or
regulation. As financial contributions to an ICO can be made in cryptocurrency, and benefits
returned to participants in the same or other digital ways, many issuers of ICOs seem to
believe that these instruments exist beyond the jurisdiction of national laws and courts. We
do not accept this belief – courts are loath to cede jurisdiction – and we have analyzed and
dismissed it in the context of blockchain and other distributed ledger systems in previous
work.29 Yet whether this belief is genuinely held or merely opportunistic, what matters is that
issuers are acting upon it, and participants are going along for the ride, at least until major
losses are incurred.
6. Geographical breakdown
We could not identify the issuing entity’s or promoter’s origin in roughly 22.02% of the ICO
whitepapers. The remainder demonstrates that ICOs are a global phenomenon, with the
EU/EEA being the origin of 22.19%, the rest of Europe (including Switzerland and Russia)
12.44%, the Asia-Pacific (including Singapore and Australia) 18.81% and North-America
(U.S., Canada) 14.03% of the ICOs, of which 32 (or 3.18% of our sample) are from the U.S.
Various Caribbean and Indian-Pacific islands comprise the origin of another 3.56% of the
ICOs. The remaining 6.07% is spread across the Middle East, Africa, Central and South
America.
29 Dirk Zetzsche, Ross P. Buckley & Douglas W. Arner, The Distributed Liability of Distributed Ledgers: Legal
Risks of Blockchain, U. ILL. L. REV. (forthcoming 2018), available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3018214.

12
If these numbers reflect the global ICO distribution30 two things are remarkable. On the one
hand, given the size of the U.S. capital markets and the U.S. economy, the number for North-
America is remarkably low; while we will go into details later, this low number could be due
to strictly enforced U.S. financial laws. On the other hand, we find a relatively high number
of ICO whitepapers (3.56%) that name various islands not known to have strict financial
laws, or at least not to have strict enforcement of financial laws.
30 Due to the lack of a global repository, selection bias could give an incorrect impression. Note that our sample
can be skewed due to the selection of ICOs by the providers of the wegpages from which our dataset was
assembled.

13
Figure 4: Geographical breakdown (by numbers of ICOs).
The geographical distribution of our sample becomes more transparent when looking at the
top 10 ICO jurisdictions in our dataset, first by ICO market capitalization (with currency
values of June 2018 applied), second by ICO volume (planned and raised goal), and third by
numbers. The list of the top 10 jurisdictions confirms the view that ICOs are
disproportionately distributed when compared to both the size of capital markets and the size
of the respective economies.
Figure 5: Top 10 ICO jurisdictions (by ICO market cap, at June 2018).

14
In terms of market capitalization, ICOs launched in the U.S., Singapore, China, United
Kingdom and Switzerland make up the top 5, with Hong Kong, Germany, Estonia, South
Korea and BVI rounding out the top 10.
Figure 6: Top 10 ICO jurisdictions (by number).
In terms of number of ICOs, we find only some of the key financial market jurisdictions in
terms of volume. ICOs originating in the U.S. (124, roughly 12.34% of our dataset) are
ranked first, ahead of Singapore (92), the U.K. (76), Switzerland (51), Hong Kong (39),
Estonia (35), Russia (30), Gibraltar (29), France (22) and Canada (18).
Our data suggest a degree of ICO market concentration in certain jurisdictions. Further,
while the concentration is noticeable, it is not excessively high, with 226 ICOs being
launched from outside the top 10 jurisdictions, in addition to those of an unidentifiable origin.
(Note that we could not identify the origin of 222 ICOs, or 22.02% of the dataset, from the
white papers in our sample; while this itself is remarkable and a reason for major concern
which we will address, it also diminishes the strength of the data presented herein).
While it is too early to draw any firm conclusions, the disproportionate distribution of ICOs
among a small number of jurisdictions could be interpreted as evidence of an uneven legal
playing field, or regulatory arbitrage. To the same extent, however, it could be evidence of
some locations’ professional ecosystems nurturing ICOs, in the same way that IPOs (‘initial
public offerings’) often cluster around a small number of jurisdictions (a list in fact very
similar to that for ICOs, centered on the world’s major financial centers). Given that the
offering of financial products tends to be subject to registration or licensing requirements

15
around the world, we focus on the legal environment in which ICOs are sold in the next
sections.
III. ICO Risks and Policy Considerations
Clearly, based on the analysis in the preceding sections, ICOs raise an increasing range of
issues. In this section, we consider a number of the most significant, including information
asymmetries, irrational behavior, lack of legal recourse, and potential systemic risks.
1. Information asymmetry
The informational situation with most ICOs is uncertain at best. In 20.46% of our sample the
white papers provide merely technical information about the product or process to be
developed. In 31.04% of the cases the white papers do not provide any information at all
about the initiators or backers. In 24.71% of the cases the white papers do not offer any
description of the project’s financial circumstances, i.e. nothing about how the capital
collected is to be used and in what stages, etc. In 96.95% of the cases the white paper is silent
on whether the funding to be provided by participants will be pooled or remain segregated.
(We speculate that pooling is widespread, given the lack of the sophisticated governance
structures necessary for asset segregation.) Shockingly from the standpoint of investment
decision-making, information on how the initiators plan to further develop the technology
that is to be funded is also usually lacking. And the information asymmetry persists after the
ICO: we could find information on actual subscriptions (i.e. on how much money participants
invested in the project) in only 55.03% of our sample.
In most ICOs in our sample, potential participants are given so little financial information
that their decision to fund the ICO cannot be based on a rational calculus. This is not always
the case: some ICOs are professionally documented by lawyers clearly schooled in the
customs of the securities markets. However, mostly, the information provided is utterly
inadequate, and consists, typically, of a description of technology that the initiator wishes to
develop and often little else; and even this is not verified in any way. In no cases in our
sample did an external auditor certify the ‘facts’ presented in the white paper.
This is all remarkably different from IPOs. In our view, the only similarity between IPOs and
ICOs is the similarity between the acronyms for each, which could in fact help to mislead
investors.
2. Capital misallocation
At the time of writing, it seems that ICO initiators are relying on the sort of classic market
frenzy that typifies a bubble. While not all ICOs meet their funding target – in our sample
18% have not reached the required minimum subscription amount31 – apparently,
oversubscription is particularly common among the larger, more prominent ICOs.32 Another
31 18.70% of the ICOs in our sample have failed to reach the set minimum subscription, while 8.25% of all ICOs
in our sample managed to meet their subscription goals. For 68.15% of our sample, we lack reliable information
on the subscription status.
32 Cf. Eric Risley, Steve Payne & John Ascher-Roberts, Most ICOs Fail: A Tale of Two Worlds, ARCHITECT
PARTNERS (Sep. 26, 2017), http://architectpartners.com/ecosystem_thoughts/most-icos-fail-a-tale-of-two-
worlds/ (arguing that of a database comprising over 100 ICOs at least 46 ICOs met their funding objective and
raised 1.6 billion USD, or 36 million USD each since June 2017, while 51 ICOs did not reach their funding
goals). For instance, the world largest-to-date ICO Tezos collected 20 times the 10 million USD the founders
had initially envisioned 9 months prior to the ICO, see Marc Hochstein, Tezos Founders on ICO Controversy:
“This Will Blow Over”, COINDESK (Oct. 25, 2017), https://www.coindesk.com/tezos-founders-ico-controversy-

16
indicator for investor sentiment is the fact that less than 10% of the tokens acquired by
investors can be put to use; the rest are merely available for trading, indicating purely
speculative instruments.33
But even where trading is expected it is far from certain that ICO participants can trade their
tokens. Transfer issues related to tokens cause very difficult legal issues in the countries
where the tokens were created; issues that are for the most part overlooked by greedy
investors. For instance, in Switzerland – one of the leading crypto jurisdictions – the transfer
usually requires an assignment which is to be provided in written form. The digital alternative
– signature by way of a digital signature – is too complicated and cumbersome in practice, as
most ICO participants from around the world lack a digital signature as specified in Swiss
law. Prior to transfer, new solutions to these challenges must be ‘invented’ and occasion
delay and legal uncertainty.
This observable overexcitement is a well-known indicator of the sort of irrational market
behavior seen many times before.34 These bubble characteristics will not only harm
individuals who lose money, but also lead to a misallocation of capital and in fact potentially
jeopardize the benefits of using blockchain based crowdfunding mechanisms more generally.
Rather than channeling money to the most productive use, as markets should do, there are
many signs that many ICOs are channeling money to recipients for their own personal use, in
a range of frauds and scams.35
3. Weak legal protections
In only 32.70% of our cases do the white papers contain any information on the applicable
law. In 54.76% of cases the white papers do not provide the name of the initiator nor any
background information on them (such as the address). In 42.35% of cases the name given as
the author of the white paper is different from the ICO’s issuer / initiator. Without the basic
information as to who stands behind the ICO, the impact of private law liability as a
correcting factor is severely limited. This is regardless of the law which applies – any legal
will-blow/. NOTE that Eric Risley’s assertion reported herein is not confirmed by our dataset; we lack, however,
a sufficient amount of detailed data on subscriptions to make an informed guess. See infra III.4. Further, ICO
caps seem to move from time to time, rendering a clear statement on subscriptions difficult.
33 Cf. Olga Kharif, Only One in 10 Tokens Is in Use Following Initial Coin Offerings, BLOOMBERG (Oct. 23,
2017), https://www.bloomberg.com/news/articles/2017-10-23/only-one-in-10-tokens-is-in-use-following-initial-
coin-offerings (citing data gathered by Token Report analyzing the use of 226 coin sales).
34 For the classic treatments, see CHARLES P. KINDLEBURGER, MANIAS, PANICS AND CRASHES: A HISTORY OF
FINANCIAL CRISES (1996); Hyman Minsky, The Financial Stability Hypothesis (Working Paper No. 74, Levy
Economics Institute) (1992); C.M. REINHART & K.S. ROGOFF, THIS TIME IS DIFFERENT: EIGHT CENTURIES OF
FINANCIAL FOLLY (2011).
35 Cf. Press Release, SEC, SEC Exposes Two Initial Coin Offerings Purportedly Backed by Real Estate and
Diamonds (Sep. 29, 2017), https://www.sec.gov/news/press-release/2017-185-0 (stating that the SEC “today
charged a businessman and two companies with defrauding investors in a pair of so-called initial coin offerings
(ICOs) purportedly backed by investments in real estate and diamonds. The SEC alleges that [an individual] and
his companies have been selling unregistered securities, and the digital tokens or coins being peddled don't
really exist. According to the SEC's complaint, investors in REcoin Group Foundation and DRC World (also
known as Diamond Reserve Club) have been told they can expect sizeable returns from the
companies' operations when neither has any real operations. [The individual allegedly touted REcoin as ‘The
First Ever Cryptocurrency Backed by Real Estate.’ Alleged misstatements to REcoin investors included that the
company had a ‘team of lawyers, professionals, brokers, and accountants’ that would invest REcoin's ICO
proceeds into real estate when in fact none had been hired or even consulted. Zaslavskiy and REcoin allegedly
misrepresented they had raised between $2 million and $4 million from investors when the actual amount is
approximately $300,000.”

17
action must rest on knowledge of who has collected the consideration. If the parties to a
transaction cannot be established with certainty, the law’s arms are tied.
4. Systemic risk
With an estimated market capitalization varying from several billion to several hundred
billion USD depending on the date of calculation, the ICO market may seem to be too small
to justify regulatory action based on systemic risk concerns.
Given that cryptocurrency volume is certainly in the hundreds of billions (the overall market
volume of cryptocurrencies is estimated to be in the 200 billion USD range36) and ICOs are a
growing component of this, there is a clear issue of potential concern, as the numbers of
individual investors have grown virally. Further, in our small random sample, in the 553
ICOs (of our 1005 ICOs) in which we have been able to calculate the consideration collected
(i.e. the actual subscriptions), the average value collected is 28.87 million USD (based on
ETH and BTC market values at the first day of offering37). In those 553 ICOs for which we
possess the data, participants have ‘invested’ more than 15.5 billion USD. Note that our
sample does include some of the prominent and larger ones (including Eos, Tezos and
Telegram); those very large ICOs influence the average to the positive.
If, as reported, there are (at least) more than 3000 ICOs worldwide, based on these numbers
we would ‘estimate’ (or, more accurately, guess) an overall ICO volume (i.e. total
consideration collected) that is much higher than previously estimated and exceeds 70
billion USD at the time of writing in June 2018.
Further, even if an estimate of only a few billion USD is correct (which we doubt, since our
database includes ICOs with subscriptions of roughly 16 billion USD, see above, drawing on
publicly available information), the growth would be remarkable. For instance, in September
2017 alone 37 ICOs collected at least USD 850 million, leading to a third quarter volume of
1.32 billion USD.38 And a specialized website reported for a single week of October 2017 the
opening of 24 ICOs.39 Our database lists 80 ICOs as having started in November 2017, 66
ICOs in December 2017, 101 ICOs in January 2018, 52 in February 2018, 80 in March 2018,
115 in April 2018 and 136 in May 2018, with an additional 81 in June 2018. This leads us to
believe that the bubble is building faster, and the risk of overpriced ICOs is much greater than
other overoptimistically priced asset classes. These numbers are all remarkable and underline
how fast FinTech markets can develop.
36 Jemima Kelly, Cryptocurrencies' Market Cap Hits Record $200 Billion as Bitcoin Soars, REUTERS (Nov. 3,
2017), http://www.reuters.com/article/us-global-markets-cryptocurrencies/cryptocurrencies-market-cap-hits-
record-200-billion-as-bitcoin-soars-idUSKBN1D31I6.
37 Many ICOs demand subscriptions to be paid in ETH, and in a handful of cases in BTC. To the same as ETH
or BTC fluctuate in value, so does the volume. For methodological reasons we have taken the currency market
value at the first day of offering since this is the date at which the issuer is able to determine the volume
necessary for the issuer’s project. Further, since in most months of our sample ETH and BTC had risen the
number we give here is most likely too low.
38 Kharif, supra note 30.
39 Seline Jung, Token Report: 2 Fintech ICOs & 2 Hard Forks, MEDIUM (Oct. 10, 2017),
https://medium.com/tokenreport/token-report-2-fintech-icos-2-hard-forks-9cba9827565d.

18
Other FinTech examples demonstrate how fast a business can move from being too-small-to-
care, to too-big-to-ignore, to too-big-to-fail.40 For instance, the bitcoin bubble built up much
faster than any other previous case (see figure 7).
Figure 7: Major bubbles since 1990 vs. Bitcoin: Percentage Change41
Money market funds offer an interesting contrast. Three of the largest players in this sector
(Vanguard, Fidelity and Schwab) were established in 1975, 1946 and 1971 respectively. Yet,
in 2014, Alibaba started to offer a new, fully online fund to its existing customer base. Within
nine months, Yu’E Bao was the world’s fourth largest money market mutual fund in the
world (USD 90 billion), on par with old players such as Vanguard and Fidelity,42 and today it
is the world’s largest money market fund at roughly USD 225 billion.43
While the traditional banking sector has been reluctant to invest in ICOs, we see some
alternative investment funds focusing on ICOs to provide to a wider range of investors
exposure to the current, bubble-induced profits. However, the role venture capitalists are to
play in this area is still unclear. Traditionally, venture capitalists offer investors access to
shares in burgeoning new companies which are not yet being publicly traded. However, ICOs
40 The concept of a progression from “too-small-to-care” to “too-big-to-fail” was initially developed by Douglas
W. Arner & Jànos Barberis, Regulating FinTech Innovation: A Balancing Act Seminar, Asian Institute of
International Financial Law (Apr. 1, 2015), http://www.law.hku.hk/aiifl/regulating-fintech-innovation-a-
balancing-act-1-april-1230130-pm/; and was developed further in Douglas W. Arner, Jànos Barberis & Ross P.
Buckley, The Evolution of FinTech: A New Post-Crisis Paradigm?, 47 GEORGETOWN JOURNAL OF
INTERNATIONAL LAW 1271 (2016).
41 Julie Verhage, Bitcoin’s Epic Rise Leaves Late 1990s Tech Bubble in the Dust, BLOOMBERG (Aug. 30, 2017),
https://www.bloomberg.com/news/articles/2017-08-29/bitcoin-s-epic-rise-leaves-late-1990s-tech-bubble-in-the-
dust.
42 Bill Powell, Alibaba: The $200 Billion ‘Open Sesame’, NEWS WEEK (Sep. 8, 2014),
http://www.newsweek.com/2014/09/19/alibaba-200-billion-open-sesame-268937.htm.
43 Cf. Tjun Tang, Yue Zhang & David He, The Rise of Digital Finance in China – New Drivers, New Game,
New Strategy, THE BOSTON CONSULTING GROUP 4 (2014),
http://www.bcg.com.cn/en/files/publications/reports_pdf/BCG_The_Rise_of_Digital_Finance_in_China_Oct_2
014.pdf; Shaohui Tian, Alibaba’s Yu’e Bao Becomes Largest Money Market Fund Globally, XINHUA NET (April
28, 2017), http://news.xinhuanet.com/english/2017-04/28/c_136243985.htm.

19
have the potential to be more accessible to the public in their somewhat democratic nature,
and it is these desirable entrepreneurial companies who are moving towards raising funds
using them.44 If the market for ICOs begins to settle, and be conducted properly, ICOs could
certainly eat the breakfast of many venture capitalists as well as their lunch.
Yet, or perhaps because of this risk, venture capitalists are becoming increasingly active in
the pre-ICO stage. Investors can become involved by buying rights to acquire tokens through
newly developed contractual agreements, for example Simple Agreements for Future Tokens
(‘SAFTs’), or by making equity deals “guaranteeing investors … tokens if the startup ever
decides to hold an ICO in the future.”45 This is a role quite different from simply purchasing
a stake in a startup, and potentially waiting a number of years for a return.
While the ICO environment is new and some investors and venture capital firms remain
skeptical, there are indications that mimicking some aspects of the traditional venture deal
structure when dealing with ICOs is possible. Matt Huang of U.S. venture capital firm
Sequoia Capital, for example, has told Bloomberg that the firm prefers tokens to be dealt over
time, in a similar way to equity deal vesting periods. In his words, “[j]ust because it’s novel
doesn’t mean we have to reinvent everything from scratch.”46 Even if ICOs are not able to
replicate all services offered by venture capital firms, for example advice and other
assistance,47 they have the potential to replace at least the existing early stage funding
mechanisms for startups. Some analysts have already suggested that funding raised by
startups through ICOs has surpassed early stage venture capital funding.48
In 2017, startups raised over 3.6 billion USD through ICOs,49 while 52.6 billion USD was
raised overall from venture capitalists.50 This gap is likely deceptively large. At this early
stage, figures in isolation carry little meaning, and what matters more is the rate at which
these numbers are increasing.51 Similarly, it has been reported that 110 crypto hedge funds52
were active in the ICO / cryptocurrency markets since 2011, with 84 of them established in
2017, managing assets of 2.2 billion USD; and the first crypto fund-of-fund was established
44 Danny Crichton, Do Good Companies ICO?, TECHCRUNCH (Dec. 16, 2017),
https://techcrunch.com/2017/12/16/do-good-companies-ico/.
45 Joshua Brustein, Bitcoin Is Challenging the Entire Concept of Venture Capital, BLOOMBERG (Dec. 19, 2017),
https://www.bloomberg.com/news/articles/2017-12-18/bitcoin-is-challenging-the-entire-concept-of-venture-
capital.
46 Id.
47 Martin Arnold, Venture Capital Investors Urged to Wake Up to ICOs, FINANCIAL TIMES (Oct. 3, 2017),
https://www.ft.com/content/68c795ca-a680-11e7-ab55-27219df83c97.
48 See in relation to internet companies, Arjun Kharpal, Initial Coin Offerings Have Raised $1.2 Billion and Now
Surpass Early Stage VC Funding, CNBC (Aug. 9, 2017), https://www.cnbc.com/2017/08/09/initial-coin-
offerings-surpass-early-stage-venture-capital-funding.html.
49 Cryptocurrency ICO States 2017, COINSCHEDULE, https://www.coinschedule.com/stats.html (last visited Dec.
21, 2017).
50 PRICEWATERHOUSECOOPERS & CB INSIGHTS, VENTURE CAPITAL FUNDING REPORT Q3 2017 (2017).
51 See the various graphs and statistics compiled by Funderbeam in relation to total ICO funding, total rounds,
and round sizes over time: FUNDERBEAM, INITIAL COIN OFFERINGS FUNDING REPORT (2017). For example,
between 2016 and 2017, total funding through ICOs rose from 228 million USD to 2.6 billion USD.
52 See on crypto hedge funds: Edmund Mokhtarian & Alexander Lindgren, Rise of the Crypto Hedge Fund:
Operational Issues and Best Practices for Institutional Cryptocurrency Trading, STANFORD J.L. BUS. & FIN.
(forthcoming 2018), available at https://ssrn.com/abstract=3055979.

20
in October 2017.53 While the involvement of professional investors could promote market
maturity, it also strengthens the link to the established banking sector and thus enhances
systemic risk.
Given the potential risks raised, we turn to a consideration of the existing legal frameworks
potentially operative in the context of ICOs and whether they are sufficient to address the
increasing range of risks arising.
IV. Appropriateness of Existing Legal Frameworks
Given the variety of ICOs, a one-size-fits-all legal analysis of ICOs is simply impossible.
Any legal assessment must consider the particularities of the individual offerings. We begin
by considering the forms of potentially legally relevant conduct, and then analyze the
potential usefulness of the traditional private law framework, particularly contract law. From
this we consider general frameworks of consumer protection, as these potentially apply
across all forms of ICO, and then turn to specific frameworks that may also apply in the
context of financial law and regulation, including those applicable to crowdfunding.
1. Legally relevant conduct
While some ICOs take the form of donations (and thus look similar to charitable
crowdfunding), most ICOs promise some direct benefit in return for consideration. However,
often the benefit is not of a financial nature. In some cases the token can be used similarly to
a license or a gift card (and thus look similar to rewards-based crowdfunding), and it can
grant any set of rights the initiator chooses to offer.
Depending upon how the promise is expressed, and upon the structure of the ICO and
governing jurisdiction, a contract or partnership (or possibly even a trust) relationship may
possibly arise.54 The important point is that issuing the commitment to the public and
accepting the consideration on this basis is legally relevant conduct. The people who make
those promises are bound by their commitments; and breach will result in liability. This may
seem like stating the obvious, but we do so because a significant part of the tech community
appears to believe that blockchain-based conduct falls outside the scope of the law – a
proposition we have disproved elsewhere.55
2. General consumer protection legislation
Once qualified as legally relevant action, in most jurisdictions contracts with the public come
along with specific legislation to ensure protection of consumers. For instance, in the U.S.,
the Federal Trade Commission (FTC) is tasked with preventing “unfair or deceptive acts or
practices in or affecting commerce,” alongside administering a number of more specific
consumer protection laws.56 Such unfair or deceptive acts extend to acts of foreign commerce
which cause or are likely to cause reasonably foreseeable injury in the U.S..57 The FTC is
53 Cf. Jemima Kelly & Maiy Keidan, Bitcoin ‘Boom’ Failing to Attract Big Name Investors, INDEPENDENT (Oct.
23, 2017), http://www.independent.co.uk/news/business/news/bitcoin-investers-crypto-currencies-hedge-funds-
a8014666.html (citing data from technology research house autonomous.next).
54 Cf. Dirk Zetzsche, Ross P. Buckley & Douglas W. Arner, The Distributed Liability of Distributed Ledgers:
Legal Risks of Blockchain, UNIVERSITY OF ILLINOIS LAW REVIEW (forthcoming 2018).
55 Id.
56 Federal Trade Commission Act, 15 U.S.C. §45(a)(1) (2006).
57 Id. §45(a)(4)(A).

21
empowered to commence proceedings against persons or corporations who engage in unfair
or deceptive conduct, and potential remedies include restitution for victims.58 In Germany, if
no more specific legislation applies, German legislation confers private law prospectus
liability as a special case of culpa in contrahendo,59 while French law subjects any
intermediary in goods to rules of promotional communication which come close to
prospectus regulation and include a statement “by an independent expert with sound repute
and experience that certifies the existence of the goods on which rights are proposed and
advises on the liquidity of the rights acquired”;60 further, statutory liability and intermediary
regulation applies in this case.61 In Australia, the Australian Securities and Investments
Commission has announced that when the Corporations Act 2001 (Cth) does not apply to an
ICO, the offering will still be subject to Australian consumer laws,62 which include
prohibitions against misleading and deceptive, and unconscionable, conduct towards
investors.63 Australian ICOs are likewise governed by general laws against fraud.64 Similar
consumer safeguards exist across the EU and EEA due to European harmonized consumer
protection legislation.65 For instance, in the UK the Consumer Rights Act 2015, the Consumer
Protection Act 1987, and the Misrepresentation Act 1967 are all likely to apply.66 The same
is true for the equivalent consumer protection laws in the rest of Europe. In the U.S. a wide
range of laws impact on different aspects both inside and outside the financial context.
Further, if ICO participants are consumers, private international law will limit the discretion
with which ICO backers can determine the applicable law. Under most private international
law regimes, contracts between commercial entities and consumers are subject to the
consumer protection laws in force in the consumer’s country of residence, or at least the
rights granted in that jurisdiction are upheld.67
58 Id. §45(b).
59 See the leading case: German Supreme Court (BGH), 24 April 1978 - II ZR 172/76, BGHZ 71, 284; for
details, see Volker Emmerich, in MÜNCHENER KOMMENTAR ZUM BÜRGERLICHEN GESETZBUCH ¶135 et seq. (7th
ed., 2016).
60 Cf. Barsan, supra note 1, at 61.
61 Cf. id.
62 Initial Coin Offerings, AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION (Sep. 28, 2017),
http://asic.gov.au/regulatory-resources/digital-transformation/initial-coin-offerings/.
63 Competition and Consumer Act 2010 (Cth) ss 18, 20, 21, 22.
64 Denham Sadler, ASIC Set to Move on ICOs, INNOVATIONAUS (Sep. 8, 2017),
http://www.innovationaus.com/2017/09/ASIC-set-to-move-on-ICOs.
65 The European consumer protection framework rests on the European Directive on Consumer Rights
(2011/83/EU) and is supplemented by specific conduct- or product-related legislation. The European consumer
protection framework assumes the perspective that the asymmetry of information, where the commercial actor
knows more about the product or service than the consumer, is open to abuse, and seeks to add a notion of
fairness and good faith into the contracting between commercial actors and consumers. This is particularly true
for technical products and services. Under that framework, depending on the details, ICOs could qualify as
contracts for services or goods. If the contract is qualified as financial services specific financial service
legislation applies (infra note 68).
66 Consumer Rights Act 2015, the Consumer Protection Act 1987, and the Misrepresentation Act 1967.
67 In Australia, see ACCC v Valve Corporation [2016] FCA 196; and Sharon Christensen, Comparative Analysis
of Overseas Consumer Policy Frameworks: Part 4, CONSUMER LAW,
http://consumerlaw.gov.au/files/2016/05/ACL_Comparative-analysis-overseas-consumer-policy-
frameworks_Part4-1.pdf . For the EU, the ‘Rome I Regulation’ (Regulation (EC) No 593/2008 of the European
Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations) harmonizes
private international law all over the EU. On consumer rights, see Art. 6(1), (2) and Recital 25 of Rome I

22
Some may argue in some civil law jurisdictions that the acceptance of money in return for a
promise is not a commercial activity; relying, again, on the fact that the ICO is being issued
by a non-commercial entity (such as an association / club, foundation or trust). However, the
fact a trust, foundation or association is acting is no bar to it acting in trade or commerce.
Any ongoing project with a profit expectation – either direct or indirect – will suffice to
establish a commercial activity.
Thus, as a common denominator, since ICOs are offers to the public (i.e. consumers) by some
commercial enterprise, where consideration is required in order to participate, the general
consumer protection legislation of the relevant jurisdiction will apply.
In some cases, however, some specific legislation could apply and displace the general
consumer legislation. While this is not the case in all countries to the same extent, two fields
of law are particular noteworthy in displacing consumer legislation. First, if ICO participation
results in a membership in a company or partnership, company or partnership law could
apply, in some cases, in lieu of consumer protection law.68 Whether this is the case depends
on the private law qualification of the blockchain participation which we explored
elsewhere.69 Secondly, the other important instance of specialized legislation being
applicable is financial law, and so we take a brief look at the scope of some important types
of financial regulation below.
3. Financial law and regulation
Financial law could assist if it applies. Based on our taxonomy, we argue that financial law
could apply to some currency tokens (those that are not pure rewards structures) and most if
not all equity tokens. While far from aiming at completeness,70 this section simply
demonstrates that depending on the structuring of the ICO, financial law can apply and where
it can, it usually will and should.
Currency tokens are characterized by the fact that one token reflects a right in another
currency, either crypto or otherwise. For instance, 1 Token could reflect the value of 1 USD,
1 EUR or 1 ETH. The ICO merely translates a currency into bits and bytes. Although the
white papers in our sample are vague, some 44.69% of ICOs appear to meet our Currency
Token test. This however disguises a very wide range of different structures, ranging from
mere bitcoin replications to payment systems to cryptocurrency ecosystems to a range of
(“Consumers should be protected by such rules of the country of their habitual residence that cannot be
derogated from by agreement, provided that the consumer contract has been concluded as a result of the
professional pursuing his commercial or professional activities in that particular country. The same protection
should be guaranteed if the professional, while not pursuing his commercial or professional activities in the
country where the consumer has his habitual residence, directs his activities by any means to that country or to
several countries, including that country, and the contract is concluded as a result of such activities.”); for
instance, in the UK, pursuant to ss 31 and 47 of the Consumer Rights Act 2015, the Act applies to all contracts
for the supply of goods or services (including digital content) to a UK consumer and these provisions cannot be
contracted out of. For an analysis of the private international law dimension of ICOs, see Barsan, supra note 1.
68 See Art. 3(3) lit. d and Recital 9 of the European Directive on Consumer Rights (2011/83/EU) (“The
regulatory aspects to be harmonized should only concern contracts concluded between traders and consumers.
Therefore, this Directive should not affect national law in the area of contracts relating to employment, contracts
relating to succession rights, contracts relating to family law and contracts relating to the incorporation and
organization of companies or partnership agreements”).
69 Cf. Zetzsche, Buckley & Arner, Distributed Liability, supra note 51.
70 In addition to the laws discussed herein in most countries anti-money laundering / CTF rules are likely to
apply. Further e-money and money transmitter regulation could apply, for a detailed analysis see the articles
cited in supra note 1.

23
investment structures. Across this spectrum, a range of different financial regulatory
frameworks may come into play.
Around the globe, regulators have implemented rules for payment services. Some regulators
have held that those rules could apply to cryptocurrencies. While we do not argue that each
issue of currency tokens is subject to existing financial legislation, at least when an ICO
seeking to establish a new cryptocurrency standard is structured ‘open-ended’ (either
formally or de facto), for instance by accepting at the same time the token in return for fiat
money, and fiat money in return for the token, legislation applicable to cryptocurrency
exchanges applies. This could be the legislation applicable to derivative exchanges (in the
U.S.71) or payment services (in Luxembourg and Japan72).
An Equity Token represents the right to share in a cash-flow other than a currency that is to
be generated by an underlying business or investment; in some cases the white paper ‘grants’
voting rights or other means to influence the project development in the future. Although
most white papers again are vague, 14.02% of ICOs in our sample provide sufficient
information to indicate an Equity Token has been issued.73 Regulators around the world have
started to treat those tokens as ‘securities’. TSEC has held regarding the DAO74 that its ICO
would meet the criteria of the Howey test75 and the DAO token therefore may well be a
71 In 2014, the U.S. Commodity Futures Trading Commission (CFTC) declared virtual currencies to be a
“commodity” subject to oversight under its authority under the Commodity Exchange Act (CEA), see
Testimony of CFTC Chairman Timothy Massad before the U.S. Senate Committee on Agriculture, Nutrition
and Forestry (Dec. 10, 2014), available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-6
(last accessed Feb 12, 2018). Based on this clarification, the CFTC has taken various enforcement actions, for
instance against unregistered Bitcoin futures exchanges (BitFinex), see In re BXFNA Inc. d/b/a Bitfinex, Dkt.
No. 16-19 (CFTC June 2, 2016), available at
http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfbfxnaorder060216.p
df (last accessed Feb 12, 2018) and a virtual currency Ponzi scheme: On September 21, 2017, the CFTC filed a
complaint in federal court in the Southern District of New York against
Nicholas Gelfman and Gelfman Blueprint, Inc., see
http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfgelfmancomplaint09
212017.pdf (last accessed Feb 12, 2018). For details, see CFTC Backgrounder on Oversight of and Approach to
Virtual Currency Futures Markets, Jan. 4, 2018, available at
http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/backgrounder_virtualcurrency01.pdf (last
accessed Feb 12, 2018).
72 Japan has recognized Bitcoin as an official means of payment. In turn, legislation on payment providers
applies. In its position of 14 February 2014, Luxembourg’s CSSF has announced that it deems the issue of
virtual currencies (i.e. tokens with currency characteristic) outside the scope of financial regulation; however, as
soon as business exchanges virtual currencies (i.e. tokens with currency characteristics) against fiat currency, the
exchange is subject to regulation as a payment service provider under the EU Payments Services Directive or
the Electronic Money Institution Directive.
73 Notable examples include Taas (Token-as-a-service) selling membership tokens in a closed-end crypto-asset
fund where the token will entitle holders to 50 percent of the fund’s profits, and payouts rely on a profit-sharing
Ethereum smart contract. Another example includes Overstock/tZERO, where the ICO “will raise the money
through a private placement for accredited investors, and the token will trade on the company’s own platform.
Most notably, it will pay holders a percentage of tZERO’s eventual profits, distributed quarterly. In other words,
a regular old stock dividend.” See Matt Levine, This ICO Looks an Awful Lot Like a Share Offering,
BLOOMBERG (Oct. 27, 2017), https://www.bloomberg.com/view/articles/2017-10-27/this-ico-looks-an-awful-
lot-like-a-share-offering.
74 See supra note 12.
75 Cf. SEC v. Howey Co., 328 U.S. 293 (1946). According to Howey, what matters for the qualification of an
investment contract (which is a precondition for a security under the U.S. securities regulation) is whether “the
scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of
others.” I.e. a token is an investment contract if token holders invest and expect to make a profit from the
entrepreneurial and managerial efforts of others. This condition is met where token holders is granted the

24
security. More recently, the SEC has been actively stating that ICOs which have the
characteristics of securities will be treated as such.
A recent, important development in this area in the U.S. relates to the ICO of the MUN token
by restaurant review app Munchee. According to data compiled by CoinSchedule, its offering
began on October 31, 2017, and ended in under two months on December 8, 2017, after the
SEC ordered its closure.76 There were no allegations of misleading conduct under consumer
protection law (a ground that could have been pursued);77 rather, the SEC relied upon
Munchee having offered securities without complying with securities law, specifically,
without filing a registration statement containing the required disclosure.78 This was despite
the white paper issued by Munchee containing a lengthy legal disclaimer, including that
“[t]his White Paper does not constitute the offering of a security.”79
Munchee’s MUN token could be looked at in two ways. On the one hand, it could be seen as
a ‘utility token’, that could be used once the product came into existence, in a similar way to
a pre-ordered product or typical rewards-based crowdfunding through Kickstarter. On the
other hand, consumers were purchasing tokens to fund the creation of a product, and on its
success, those tokens could increase in value. To determine on which side of the coin the
MUN token fell, the SEC referred to a number of Facebook promotional posts by Munchee,
promising customers would “most likely get a return” and could “watch[] their value increase
over time”.80 The SEC’s analysis gives some clarity to the distinction:
Even if MUN tokens had a practical use at the time of the offering, it would not preclude the
token from being a security. Determining whether a transaction involves a security does not
turn on labelling – such as characterizing an ICO as involving a “utility token” – but instead
requires an assessment of “the economic realities underlying a transaction”.81
To the authors’ knowledge, this is the first instance of an ICO being halted for reasons other
than fraud and misleading conduct in the U.S.
This view has been shared by other regulators including Singapore and Hong Kong,82 and is
gathering ground in Europe as well as in an increasing range of jurisdictions around the
participation in a future cash flow of a project or company. Note that participation rights are not a condition of
the Howey test.
76 Munchee Token (MUN), COINSCHEDULE, https://www.coinschedule.com/icos/e1507/munchee-ico.html (last
visited Dec. 21, 2017).
77 Matt Levine, SEC Halts a Real Initial Coin Offering, BLOOMBERG (Dec. 13, 2017),
https://www.bloomberg.com/view/articles/2017-12-12/sec-halts-a-real-initial-coin-offering.
78 In the Matter of Munchee Inc., Securities Act of 1933 Release No. 10445 (Dec. 11, 2017),
https://www.sec.gov/litigation/admin/2017/33-10445.pdf.
79 Sanjeev Verma, Nghi Bui & Chelsea Lam, Munchee Token: A Decentralized Blockchain Based Food
Review/Rating Social Media Platform (last updated Oct. 16, 2017), https://s3.amazonaws.com/munchee-
docs/Munchee+White+Paper+-+EN.pdf.
80 In the Matter of Munchee Inc., Securities Act of 1933 Release No. 10445, 6 (Dec. 11, 2017),
https://www.sec.gov/litigation/admin/2017/33-10445.pdf.
81 Id., at 8.
82 For instance, while not specifying details, the Singapore MAS has clarified in its 1 August 2017 statement
that securities regulation could apply to ICOs. See Media Release, MAS, MAS Clarifies Regulatory Position on
the Offer of Digital Tokens in Singapore (Aug. 1, 2017), http://www.mas.gov.sg/News-and-Publications/Media-
Releases/2017/MAS-clarifies-regulatory-position-on-the-offer-of-digital-tokens-in-Singapore.aspx. The same
holds true for the British FCA, see Media Release, Financial Conduct Authority, Consumer Warning about the
Risks of Initial Coin Offerings (Sep. 12, 2017), https://www.fca.org.uk/news/statements/initial-coin-offerings.

25
world.83 At the time of writing, discussions aimed at promoting consistency in approaches
among regulators are pending at the International Organization of Securities Commission
(IOSCO), the international securities regulators’ association. Usually, if a token is a security,
registration and prospectus requirements will apply to the issuer and ICO, ensuring a level of
investor protection.
There still remains the question of how the U.S. and other courts will treat these fine
distinctions, as Munchee did not dispute the SEC order. It is likely that such disputes will
need to arise and be resolved before we achieve greater clarification in this area.
Further rules could also apply to the intermediaries involved in issuing, promoting, trading,
clearing and/or settling the tokens. Beyond these, most jurisdictions also have rules applying
to securities exchanges and related infrastructure, such as clearing and settlement. As such, in
addition to the tokens themselves, the exchanges and/or clearing and settlement facilities
dealing with tokens are likely to be caught by related securities regulations addressing
exchanges, clearing and settlement. For that purpose besides the definition of ‘securities’, it
matters whether the investors’ consideration is put in one bucket from which the right or
entitlement granted to the token holder is purchased or whether the consideration remains
separate from the rights of other token holders. However, virtually all white papers in our
sample failed to address this issue, and we suspect segregation is highly unusual given the
sophistication and costs which segregation of client money requires.
If investor consideration is segregated, the legislation on individual portfolio management
needs to be considered. Here, in addition to portfolio management obligations, additional
criteria are often applied to limit the scope of financial supervision regarding discretionary
portfolio management. For instance, under the U.S. Investment Advisors Act an investment
adviser is any person that: (1) for compensation (2) is engaged in the business of (3)
providing advice, making recommendations, issuing reports, or furnishing analyses on
securities, either directly or through publications.84 The common lack of disclosure regarding
the involvement, commissions and fees of other entities in the ICO makes it difficult to assess
who (besides the issuer as registrant for the purposes of securities regulation) is covered by
U.S. investment law. The European MiFID (Markets in Financial Instruments Directive)
framework regulates portfolio management only if it pertains to financial instruments. For
instance, the German BaFin85 and the Finanzmarktaufsicht Liechtenstein86 state that (equity)
tokens can be financial instruments. Nevertheless, for some regulators doubts exist as to
whether equity tokens are financial instruments – though this appears to be increasingly a
minority view.
In some jurisdictions, the situation is different once assets are pooled. In this case, rules on
collective investment could apply. However, the definition and scope of collective
investment rules vary across jurisdictions. For instance, under the U.S. Investment Company
83 See from the French perspective, Barsan, supra note 1, at 63 (arguing that equity tokens are “other securities
equivalent to shares in companies, partnerships or other entities” under the MiFID framework). This view is
shared by the authors. On other regulators, see the following text.
84 Cf. the definition of “investment adviser” under Section 202(a)(11) of the Advisers Act.
85 See Virtuelle Währungen/Virtual Currency (VC), BAFIN,
https://www.bafin.de/DE/Aufsicht/FinTech/VirtualCurrency/virtual_currency_node.html, at
„Erlaubnispflichten“ (last visited Nov. 13, 2017) (subjecting all virtual currency trades to legislation applicable
to financial instruments; the same principles applies to tokens in general).
86 Cf. Faktenblatt “Initial Coin Offering”, FMA (Sep. 10, 2017), https://www.fma-li.li/files/fma/fma-
faktenblatt-ico.pdf (last visited Nov. 13, 2017).

26
Act an entity must register as an investment company if the entity: (1) invests in securities,
(2) issues membership interests that are securities and (3) cannot rely on an exclusion from
the definition of investment company, including that the entity does not make, nor propose to
make, a public offering of its securities, and must not have more than 100 members.87 While
most ICOs will meet the second and third criteria, only some ICOs will use the proceeds to
invest in securities (even applying the broad definition of the Howey test88). Under the
European Alternative Investment Management Framework – which to our knowledge applies
the broadest scope of collective investment legislation – the central concept that determines
the AIFMD’s scope is the alternative investment fund (AIF). The AIFMD uses the term
‘alternative’ in a somewhat misleading way to include all collective investment undertakings
that are not governed by the UCITS framework and “raise capital from a number of investors,
with a view to investing it in accordance with a defined investment policy for the benefit of
those investors.”89 While equity token ICOs are likely to meet those criteria, the
determination of whether there is discretionary third party fund management and a defined
investment policy must be assessed on a case-by-case basis for which detailed knowledge on
the handling of the ICO consideration and the structure of the issuer, sponsor and other
related parties is required. Unfortunately, very few white papers deliver those details. In light
of this uncertainty it is encouraging and helpful that Australian regulator ASIC has
announced that such equity token arrangements with a discretionary management structure
typically will be classified as Managed Investment Schemes and regulated under the
Corporations Act.90
Furthermore, if the value of the coin that is offered depends upon the value of something else,
the coin may fall within the definition of a derivative in some jurisdictions. In 2014, the U.S.
Commodity Futures Trading Commission (CFTC) declared virtual currencies to be a
‘commodity’ subject to oversight under the Commodity Exchange Act (CEA).91 Based on
this clarification, the CFTC has taken various enforcement actions, for instance against
unregistered Bitcoin futures exchanges92 and a virtual currency Ponzi scheme.93 In Australia,
87 See s. 3 of the Investment Company Act of 1940, 15 U.S.C. §§ 80a-3.
88 Cf. supra, n. 75.
89 Art. 4(1)(a) AIFMD; for details, see D. Zetzsche & C. Preiner, Scope of the AIFMD, in AIFMD 49 et seq, ch
3(D. Zetzsche ed., 2nd ed, 2015). For a criticism on the broad scope, see P. Athanassiou & T. Bullman, The EU’s
AIFM Directive and Its Impact: An Overview, in RESEARCH HANDBOOK ON HEDGE FUNDS, PRIVATE EQUITY
AND ALTERNATIVE INVESTMENTS 445 (P. Athanassiou ed., 2012) and D. Busch & L. van Setten, The Alternative
Investment Fund Managers Directive, in ALTERNATIVE INVESTMENT FUNDS IN EUROPE 8 et seq. (L. van Setten
& D. Busch eds., 2014).
90 In Australia, see Initial Coin Offerings, ASIC, http://asic.gov.au/regulatory-resources/digital-
transformation/initial-coin-offerings/ and What Is a Managed Investment Scheme?, ASIC, http://asic.gov.au/for-
finance-professionals/managed-investment-scheme-operators/starting-a-managed-investments-scheme/what-is-
a-managed-investment-scheme/.
91 Cf. Testimony of CFTC Chairman Timothy Massad before the U.S. Senate Committee on Agriculture,
Nutrition and Forestry (Dec. 10, 2014), available at
http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-6 (last accessed Feb 12, 2018).
92 Cf. In re BXFNA Inc. d/b/a Bitfinex, Dkt. No. 16-19 (CFTC June 2, 2016), available at
http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfbfxnaorder060216.p
df (last accessed Feb 12, 2018).
93 On September 21, 2017, the CFTC filed a complaint in federal court in the Southern District of New York
against Nicholas Gelfman and Gelfman Blueprint, Inc., see
http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfgelfmancomplaint09
212017.pdf (last accessed Feb 12, 2018).

27
the definition of a derivative in Section 761D of the Corporations Act is particularly
complex, and its nuances are beyond the scope of this paper, but in broad terms if the coin
derives its value from an ‘underlying instrument’ or ‘reference asset’ which could, among
other things, be a share, a share price index, a pair of currencies, a cryptocurrency, or a
commodity, the coin could well be a derivative and any business offering it would need to
hold an Australian financial services license.94
Finally, as one would expect, most regulators have stated that AML/CTF regulations apply to
ICOs, as well as exchanges and payment systems facilitating ICO trading, clearing and
settlement.95
4. Crowdfunding legislation
The crowdfunding rules that have been established in some jurisdictions could apply under
certain circumstances if the ICO initiators ask for consideration; and the application of such
rules tends to reduce the regulatory burden. Since crowdfunding legislation is not uniform
across markets, we can merely summarize the most common aspects.
There are two primary forms of crowdfunding legislation. The first type modifies existing
financial laws for small issuers and brokers of those issuers with a view to lightening the
regulatory burden. Under the second type, regulators provide thresholds for exemptions from
prospectus and other financial law requirements.96 For instance, the laws of the U.S.,97
Canada,98 Austria,99 and Germany100 limit exemptions from prospectus requirements for
crowdfunded projects based on the size of the offering – ranging from 250,000 to 5 million
USD/CAD/EUR – and the amount of money invested per retail investor – with limits ranging
from 1,000 to 10,000 in the respective currency per investor, depending on the country and
94 See id.
95 See, for instance, cf. FINMA Guidance 04/2017, supra note 11; Media Release, European Securities and
Markets Authority, ESMA Alerts Firms Involved in Initial Coin Offerings to the Need to Meet Relevant
Regulatory Requirements’ (Nov. 13, 2017), https://www.esma.europa.eu/sites/default/files/library/esma50-157-
828_ico_statement_firms.pdf; Media Release, MAS, MAS Clarifies Regulatory Position on the Offer of Digital
Tokens in Singapore (Aug. 1, 2017), http://www.mas.gov.sg/News-and-Publications/Media-
Releases/2017/MAS-clarifies-regulatory-position-on-the-offer-of-digital-tokens-in-Singapore.aspx.
96 For an overview of the available types of regulation, see Dirk Zetzsche & Christina Preiner, Cross-Border
Crowdfunding – Towards a Single Crowdfunding Market for Europe, EUROPEAN BUSINESS ORGANIZATION LAW
REVIEW (forthcoming 2018), available at https://ssrn.com/abstract=2991610.
97 See SEC, Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers (May 13, 2016),
https://www.sec.gov/info/smallbus/secg/rccomplianceguide-051316.htm#_ftn2 (“Title III of the Jumpstart Our
Business Startups (JOBS) Act of 2012 added Securities Act Section 4(a)(6) that provides an exemption from
registration for certain crowdfunding transactions. In 2015, the Commission adopted Regulation Crowdfunding
[17 CFR Parts 200, 227, 232, 239, 240, 249, 269, and 274] to implement the requirements of Title III.2). See on
regulation, cf. Sharon Yamen & Yoel Goldfeder, Equity Crowdfunding – A Wolf in Sheep’s Clothing: The
Implication of Crowdfunding Legislation under the JOBS Act, 11 INT’L L. & MGMT. REV. 41, 57 (2015).
98 Multilateral CSA Notice 45-316 Start-up Crowdfunding Registration and Prospectus Exemptions, FINANCIAL
AND CONSUMER AFFAIRS AUTHORITY (May 14, 2015), http://www.fcaa.gov.sk.ca/Default.aspx?DN=89773ab1-
5512-4c3d-b448-33502b14b6d0.
99 See §3 Bundesgesetz über alternative Finanzierungsformen (Alternativfinanzierungsgesetz – AltFG); see
Roman Rericha & Raphael Toman, Neuer Rechtsrahmen für Crowdfunding - Ausbruch aus dem
Regelungsdickicht des Kapitalmarkts?, Z.F.R. 218, 403 (2015).
100 See §2a Gesetz über Vermögensanlagen (Vermögensanlagengesetz - VermAnlG); see Lars Klöhn, Lars
Hornuf & Tobias Schilling, The Regulation of Crowdfunding in the German Small Investor Protection Act:
Content, Consequences, Critique, Suggestions, 13 EUR. COMP. L. 57 (2016).

28
the investors’ wealth. It is clear from our data presented in Table 2 (supra, at I.3.) that 95% of
the ICOs where the volume is disclosed exceed the first threshold. We lack the data to make a
qualified statement on the second threshold. But we doubt that ICOs in the absence of
institutional investments would reach the total volumes in the million range as reported with
capital injections capped at the 1,000/10,000 limit.
In addition to these, many jurisdictions also provide longstanding exemptions from or
relaxations of securities and companies law requirements relating to prospectuses and other
aspects of offerings to small numbers of investors (typically in the form of non-public
offerings or private companies) and/or to professional investors only. These are often used in
the crowdfunding context and specific crowdfunding legislation often also extends or
clarifies aspects of these sorts of offerings, with the result that many offerings (including
ICOs) are structured in order to fall within these frameworks, particularly in the context of
offerings open to U.S. investors.
Australia has taken a different approach to crowdfunding and ICOs. The Corporations
Amendment (Crowd-sourced Funding) Act 2017 (Cth) came into effect on 29 September
2017 and stipulates a new regime that requires companies engaging in crowdfunding to hold
an Australian financial services licence with an authorization to facilitate crowd-sourced
funding activities.101 However, the Australian Securities and Investments Commission has
reiterated that ICOs are different to crowd-sourced funding.102 In its information sheet, ASIC
clarifies that “crowdfunding using an ICO is not the same as the ‘crowd-sourced’ funding that
will be regulated by the Corporations Act from 29 September 2017.”103 ICOs are not covered
by the new regime. As a result, traditional exemptions from offering for private and/or
professional offers may still apply.
All in all, we conclude that financial law could apply and does apply to some of the ICOs in
our sample, in particular equity tokens and any others with an investment aspect. But in most
cases we lack the information necessary to establish whether the criteria for the application of
specific financial law are met; and in skilled hands, it is often easy to structure an ICO in
such a way that it lacks one characteristic necessary for financial law to apply.104 For
instance, if the reference value of the instrument is not financial in nature, Europe’s MiFID
will not apply. Further, in the context of definitions of securities while an increasing number
of jurisdictions follow the U.S. approach in having a functional test, a number of jurisdictions
continue to have ‘laundry list’ based definitions (i.e., securities are defined as stocks, bonds,
etc) and in these cases it is quite possible that equity tokens may fall outside the definition
and the resulting regulatory framework.
101 Crowd-Sourced Funding, AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION (last updated Sep. 21,
2017), http://asic.gov.au/regulatory-resources/financial-services/crowd-sourced-funding/.
102 Initial Coin Offerings (ICOs), MONEYSMART (last updated Nov. 10, 2017),
https://www.moneysmart.gov.au/investing/investment-warnings/initial-coin-offerings-icos.
103 Initial Coin Offerings, AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION (Sep. 28, 2017),
http://asic.gov.au/regulatory-resources/digital-transformation/initial-coin-offerings/.
104 Cf. on the SAFT framework from Cooley in the US: Juan Batiz, Benet Jesse Clayburgh & Marco Santori,
The SAFT Project: Toward a Compliant Token Sale Framework, COOLEY (Oct. 2, 2017),
https://www.cooley.com/~/media/cooley/pdf/reprints/saft-project-whitepaper.ashx; cf. on the Conceptual
Framework for Blockchain Crypto Property (“BCP”) from MME in Switzerland: MME, The New Property on
the Block, MME,
https://www.mme.ch/de/magazin/conceptual_framework_for_blockchain_crypto_property_bcp/.

29
In addition, financial law and regulation will arguably apply to many of the intermediaries
engaging in trading, clearing, custody and settlement of tokens which can be classified as
financial products. For those ICOs which take the form of charitable or rewards tokens, it is
likely that financial law will not apply unless it is expressly extended to do so. At the same
time, in any ICO for consideration, applicable contractual and consumer protection
frameworks will most certainly apply.

30
V. Designing an Appropriate Policy and Regulatory Response
From this analysis arises the question of whether or not these existing frameworks are
appropriate to address the risks inherent in a clearly highly hyped market and more broadly to
secure the longer-term benefits that these new structures offer for early stage financing for
blockchain-related and other projects.
In the preceding sections, we have clearly highlighted the large range of excesses and risks in
the context of ICOs to date. At the same time however it is worth noting that the combination
of blockchain and crowdfunding that lies at the heart of ICOs has important potential benefits
for early stage financings, which are a sector whose needs are rarely addressed adequately by
our current financial systems. In the context of blockchain (itself characterized as a
combination of distributed ledger technology, cryptography and smart contracts), the core
features which give it its tremendous potential to transform existing systems rest on security,
transparency and permanence. In the context of securities and financial markets more
generally, these features explain many of the attractions of this technology in terms of
redesigning existing financial infrastructure, for instance in the context of securities
settlement systems or trade finance. In the context of early stage financing, which often
suffers from lack of transparency and concerns over fraud and misbehavior, the combination
of security, transparency and permanence potentially allow for much greater reach (i.e.
‘democratization’ of finance), investor protection (through disclosure and transparency) and
confidence (through protecting investors with security of property interests). This
combination makes the structure potentially powerful in supporting financing for new and
innovative ideas, something that ICOs have most certainly done so far in the context of
blockchain projects (although, as we note above, a significant amount of this may have been
unfortunately misallocated on the basis of irrational investor herd behavior and/or diverted
through fraud and outright theft).
Regulatory responses thus require a careful and thorough consideration of policy options and
impact. We typically see a range of possible approaches to any financial innovation, from
prohibition to laissez-faire approaches and a spectrum of options in between. We now
analyze these.
1. Outright ban
One option is an outright ban of ICOs such as the one imposed by the Chinese and South
Korean regulators.
Following hard on the heels of the U.S. SEC’s warning against ‘pump and dump’ ICO
schemes,105 in September 2017, China and South Korea announced their outright bans on
ICOs.106 Seven Chinese government regulators, led by the People’s Bank of China, issued a
joint statement confirming ICOs as “unauthorised illegal fundraising activities”,107 and
explicitly treating them as financial fraud and pyramid schemes.108 The document defines an
105 Jeff John Roberts, SEC Warns Scammers Are Using ICOs to Pump and Dump, FORTUNE (Aug. 29, 2017),
http://fortune.com/2017/08/29/sec-blockchain-ico-scam/.
106 David Meyer, South Korea Follows China by Banning ICOs, FORTUNE (Sep. 29, 2017),
http://fortune.com/2017/09/29/south-korea-china-bitcoin-ethereum-icos-ban/.
107 Saheli Roy Choudhury, China Bans Companies from Raising Money through ICOs, Asks Local Regulators to
Inspect 60 Major Platforms, CNBC (Sep. 4, 2017), https://www.cnbc.com/2017/09/04/chinese-icos-china-bans-
fundraising-through-initial-coin-offerings-report-says.html.
108 David Meyer, China's Central Bank Is Banning Initial Coin Offerings, FORTUNE (Sep. 4, 2017),
http://fortune.com/2017/09/04/ico-china-central-bank-ban/.

31
ICO as any fundraising process whereby digital tokens are distributed to investors making
financial contributions in cryptocurrencies.109 Claiming that ICOs have caused severe
economic and financial disruption,110 China called for an immediate stop to current ICO
activities and for all completed offerings to arrange refunds.111 It likewise banned all ICO
platforms from facilitating new issuances and all financial and payment institutions from
dealing in ICOs.112 Sixty major local ICO platforms are currently under regulatory review.113
ICOs that continue to function will be ‘severely punished’, and contravening exchanges will
risk having their business registration revoked and their website shut down.114 In short, when
China decides to prohibit an activity, it certainly does so decisively, clearly and
comprehensively (although it is reported that private trading activity in cryptocurrencies
defies the ban115).
In September 2017, South Korea’s Financial Services Commission likewise announced its
imminent crackdown, explaining that ICOs appear to have directed market funds in a “non-
productive speculative direction”.116 Without defining ICOs, South Korea advised that the
ban will encompass all forms of cryptocurrency fundraising, irrespective of their terminology
and their underlying technology,117 and will also extend to the margin trading of
cryptocurrencies.118 ‘Stern penalties’ will be issued against any business or person that
breaches this prohibition.119
The Chinese and South Korean solutions have an initial appeal as they appear to provide
legal certainty at low regulatory cost. Upon reflection, however, an outright ban may be an
overly strict response. It overemphasizes the control of risk and underemphasizes the
importance of innovation, and the great difficulty, in many jurisdictions, that innovative
FinTech start-ups experience in securing funding. Moreover, the legal certainty may, in
practice, prove to be somewhat spurious. Given how many different forms ICOs currently
take, some may prove permissible unless definitions are drawn exceptionally broadly.
109 Wolfie Zhao, China's ICO Ban: A Full Translation of Regulator Remarks, COINDESK (Sep. 5, 2017),
https://www.coindesk.com/chinas-ico-ban-a-full-translation-of-regulator-remarks/.
110 Id.
111 Lulu Yilun Chen & Justina Lee, Bitcoin Tumbles as PBOC Declares Initial Coin Offerings Illegal,
BLOOMBERG (Sep. 4, 2017), https://www.bloomberg.com/news/articles/2017-09-04/china-central-bank-says-
initial-coin-offerings-are-illegal.
112 Zhao, supra note 99.
113 Choudhury, supra note 97.
114 Zhao, supra note 99.
115 Gabriel Wildau, Bitcoin Proves Hard to Kill in China, FINANCIAL TIMES (Nov. 8, 2017) (stating that “more
of the buying and selling of cryptocurrencies has gravitated towards the private over-the-counter market”).
116 Simon Sharwood, South Korea Bans Initial Coin Offerings, THE REGISTER (Sep. 29, 2017),
https://www.theregister.co.uk/2017/09/29/south_korea_bans_initial_coin_offerings/.
117 Jonathan Ponciano, South Korea Issues Ban on ICOs as Trading Volume Climbs at Nation's Exchanges,
FORBES (Sep. 29, 2017), https://www.forbes.com/sites/jonathanponciano/2017/09/29/south-korea-issues-ban-
on-icos-as-nations-exchanges-grow-trading-volume/#6ccd667b3531.
118 Yuji Nakamura & Sam Kim, Cryptocurrencies Drop as South Korea Bans ICOs, Margin Trading,
BLOOMBERG (Sep. 29, 2017), https://www.bloomberg.com/news/articles/2017-09-29/cryptocurrencies-drop-as-
south-korea-bans-icos-margin-trading.
119 Cynthia Kim, South Korea Bans Raising Money through Initial Coin Offerings, REUTERS (Sep. 29, 2017),
https://www.reuters.com/article/us-southkorea-bitcoin/south-korea-bans-raising-money-through-initial-coin-
offerings-idUSKCN1C408N.

32
In addition, historical experience with outright prohibitions on financial activities suggests
that these are usually ineffective and/or counterproductive. Perhaps the best examples arise in
the context of the UK’s 1720 Bubble Act (prohibiting the creation of new joint stock
companies) or the U.S. prohibition on onion futures.120 This debate has appeared more
recently in the context of OTC derivatives in the aftermath of the 2008 Global Financial
Crisis, with the result that some jurisdictions (namely the EU) have created prohibitions in
very limited areas (e.g. naked sovereign CDS).121
2. From doing nothing to private ordering: Reducing information asymmetry
The initial approach to ICOs (and cryptocurrencies as well) in most jurisdictions was to do
nothing. This could be seen as an attempt to avoid regulating too early. It could also be seen
potentially as avoidance of adapting to the challenges of new technology and financial
innovation.
Given the very rapid growth of the market documented in this paper, this approach no longer
seems appropriate, from the standpoints of either potential risks or of the future development
of the markets. Given that most white papers in our database lack almost all the information
required to assess which laws apply, we suggest the first step must be measures to reduce
information asymmetries and improve the quality of offerings in the market. This is essential
not only in addressing a core market failure but also in avoiding a potentially overzealous
regulatory response which would result in a market collapse and the potential discrediting of
the structure (cf. the South Sea Bubble and the Bubble Act of 1720 and their stifling impact
on the early development of the joint stock company).
Private ordering – market participants developing frameworks to police their own behavior
out of their own self-interest – is the classic response and the one we saw in the early
nineteenth century as self-regulatory stock exchanges emerged to police behavior in the
trading of joint stock company shares, based on the view that if investors felt their interests
were secure, they would be more likely to put their money into the market, which in terms
served the financial interests of the brokers and dealers who owned and controlled exchanges
and controlled the new offerings of stock and other securities to investors.
In this respect, a similar process is now taking place among ICO industry participants, with a
number of participants seeking to develop best practice guidance in order to improve the
quality of the market (and to head off potentially overzealous regulatory responses). As one
example, the SAFT Project is a new development in the U.S. which seeks to work towards
creating an international formal framework for token sales, and it has recently published its
own white paper. The white paper raises a number of legal concerns, most significantly that
most direct presales of tokens likely constitute ‘securities’ under U.S. law, and accordingly
most ICOs are likely to be in breach of U.S. securities law.122 While the white paper only
focuses on the implications of U.S. law at the time of writing, it calls for harmonization of
international standards, and expressly calls for the participation of lawyers, investors and
others to collaborate on the development of the framework.123 In an interview with
120 Douglas Arner, Development of the American Law of Corporations to 1832, 55 S.M.U. L. REV. 23, 23–57
(2002).
121 Douglas Arner, Adaptation and Resilience in Global Financial Regulation, 89 N. CAROLINA L. REV. 1579,
1579-1626 (2011).
122 Juan Batiz-Benet, Marco Santori & Jesse Clayburgh, The SAFT Project: Toward a Compliant Token Sale
Framework, THE SAFT PROJECT (Oct. 2, 2017), https://saftproject.com/static/SAFT-Project-Whitepaper.pdf.
123 The SAFT Project, THE SAFT PROJECT, https://saftproject.com/ (last visited Dec. 21, 2017).

33
CoinDesk, Marco Santori, one of the individuals behind the Project, said he sees the white
paper as “the start of a conversation”.124 And when parts of the industry themselves call for,
and develop tools for, standardization this raises questions as to when and to what extent
regulators should step in, if at all.
In the context of blockchain more generally, a further step is taking place in the ongoing
development of an ISO certification process. This process would provide for a level of
independent certification that an individual blockchain in the context of an ICO met expected
industry standards in terms of security and other core aspects.
It is an open question however whether private ordering will be sufficient, particularly in the
context of financial ICOs and – based on experience with the development of other financial
innovations – we would suggest that it may well not, and that a more direct regulatory
response from regulators and policy makers will be appropriate.
3. Regulatory warnings
A far less interventionist option than prohibition is simply for the relevant regulator – usually
the securities or financial conduct regulator – to issue warnings to the market. Many
regulators have already done so, some repeatedly, with respect to ICOs.
On 25 July 2017, the U.S. SEC issued a warning to investors about investing in ICOs.125 This
was followed by a series of warnings by other regulators, some in much greater specificity,
including by the Monetary Authority of Singapore on 10 August 2017,126 Hong Kong
Securities and Futures Commission on 5 September 2017,127 UK Financial Conduct
Authority on 12 September 2017,128 the Australian Securities and Investments Commission
(ASIC) on 28 September 2017,129 and the German regulator, BaFin, on 9 November 2017130,
and again on 15 November 2017.131 The EU’s ESMA also issued two warnings about ICOs,
targeted at consumers and firms respectively, each on 13 November 2017.132
124 Pete Rizzo, SAFT Arrives: ‘Simple’ Investor Agreement Aims to Remove ICO Complexities, W (Oct. 2, 2017),
https://www.coindesk.com/saft-arrives-simple-investor-agreement-aims-remove-ico-complexities/.
125 Investor Bulletin: Initial Coin Offerings, SEC (July 25, 2017), https://www.sec.gov/oiea/investor-alerts-and-
bulletins/ib_coinofferings.
126 Media Release, MAS, Consumer Advisory on Investment Schemes Involving Digital Tokens (Including
Virtual Currencies) (Aug. 10, 2017), http://www.mas.gov.sg/News-and-Publications/Media-
Releases/2017/Consumer-Advisory-on-Investment-Schemes-Involving-Digital-Tokens.aspx.
127 Statement on Initial Coin Offerings, SECURITIES AND FUTURES COMMISSION (Sep. 5, 2017),
http://www.sfc.hk/web/EN/news-and-announcements/policy-statements-and-announcements/statement-on-
initial-coin-offerings.html.
128 Media Release, Financial Conduct Authority, Consumer Warning about the Risks of Initial Coin Offerings
(Sep. 12, 2017), https://www.fca.org.uk/news/statements/initial-coin-offerings.
129 Information Sheet 225: Initial Coin Offerings, ASIC (Sep. 28, 2017), http://asic.gov.au/regulatory-
resources/digital-transformation/initial-coin-offerings/.
130 Consumer Warning: The Risks of Initial Coin Offerings, BAFIN FEDERAL FINANCIAL SUPERVISORY
AUTHORITY (Nov. 9, 2017),
https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Meldung/2017/meldung_171109_ICOs_en.html.
131 Initial Coin Offerings: High Risks for Consumers, BAFIN FEDERAL FINANCIAL SUPERVISORY AUTHORITY
(Nov. 15, 2017),
https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Fachartikel/2017/fa_bj_1711_ICO_en.html.
132 ESMA Alerts Investors to the High Risks of Initial Coin Offerings, ESMA (Nov. 13, 2017),
https://www.esma.europa.eu/sites/default/files/library/esma50-157-829_ico_statement_investors.pdf; ESMA

34
On 28 August 2017, the U.S. SEC issued an alert warning to investors about companies
touting their investments in ICOs as part of ‘pump-and-dump’ or other market manipulation
schemes to improperly influence their stock price.133 The SEC warned that trading
suspensions had been imposed on the stock of some issuers due to claims they had made
about their investments in ICOs, and that investors should exercise caution if current
information about a company’s stock is not available, or if it is a non-reporting company.134
Investors were warned to be wary of attempts to manipulate the market by spreading false
and misleading information and create a buying frenzy, and specifically warned about
companies that claim their ICO is ‘SEC-compliant’ without further explanation.135
Other warnings have emphasized the danger of ‘white papers’ provided by issuers being
incomplete, misleading, unaudited, or, in the words of BaFin, ‘objectively insufficient’. All
such warnings also indicate the high risk of fraud, particularly where the ICO is not
regulated, with BaFin describing this risk as ‘systemic’; the UK FCA giving the example of
issuers using funds raised in a different way to that which was promised in the marketing; and
ESMA noting that several ICOs have already been identified as being involved in fraudulent
activities. The Hong Kong SFC and ESMA have further warned that the risk of fraud is
increased by digital tokens being anonymously held. In addition, BaFin has warned that
verification of the provider’s identity and reputation is typically left to the consumer alone,
and there is no guarantee that any personal data provided will be protected to German
standards.
The central element to these warnings is that ICOs are largely unregulated in all the above
jurisdictions, and investors will have no recourse or protection if the ICO they invest in is
unregulated. A number of regulators, such as the U.S. SEC, Australia’s ASIC and Hong
Kong’s SFC, note that some ICOs have features that may see them classified as ‘securities’
and ‘regulated activities’ under securities law, which would then trigger registration or
authorization requirements.
Both BaFin and ESMA warn that ICOs are generally issued by businesses in their early
stages of development, and for this reason there is an inherently high risk of losing all one’s
invested capital. There may also be a lack of exit options, and no, or highly limited, ability to
trade the tokens in exchange for traditional currency. Unlike the other warnings, ESMA
specifically warns that distributed ledger technology is untested and may be flawed or subject
to hacking.
ESMA’s notice directed at firms alerts them of the importance of considering whether their
ICO activities constitute ‘regulated activities’. Where coins constitute ‘financial instruments’,
it is likely that the firm will be engaged in regulated activities such as the placement of
financial instruments. The warning gives a high-level summary of the EU laws which could
then potentially be applicable to ICOs, for example the requirement for the publication of a
prospectus, as opposed to a white paper, conduct of business rules, transparency and due
Alerts Firms Involved in Initial Coin Offerings to the Need to Meet Relevant Regulatory Requirements, ESMA
(Nov. 13, 2017), https://www.esma.europa.eu/sites/default/files/library/esma50-157-
828_ico_statement_firms.pdf.
133 Investor Alert: Public Companies Making ICO-Related Claims, SEC (Aug. 28, 2017),
https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_icorelatedclaims.
134 Id.
135 Id.

35
diligence requirements, authorisation rules and prohibitions on anti-money laundering and
terrorist financing.
Such warnings are a standard tool of regulators, and may well have had an effect in these
cases. For instance, it is reported that the proportion of ICOs per month that missed their
goals went up from only 7% in June 2017 to 66% in September 2017.136 This could be
attributed to the chain of regulatory warnings. The relevance of these data is subject to two
qualifications. First, it is important to understand the goals to which such data refer. Most
ICO whitepapers set minimum subscription goals; in our sample, only 1.5% of the ICOs have
not reached the required minimum subscription. This is a remarkable success rate and higher
than those of Initial Public Offerings (IPOs). Second, the warning may cease to be effective
when prices continue to rise. Our sample gives evidence of this fact since the failure rate of
more recent ICOs (offerings starting since October, 2017) is lower than that of the previous
period; if the warning was effective we would expect less ICOs to meet their minimum
targets. Further, our dataset reveals a large number of ICOs were initiated from November
2017 to January 2018 (see supra, at III.4.), although our data at present only extend to the end
of January 2018 and so do not capture the full impact of the bitcoin crash of January 2018
and its aftermath. In the same way a rising cryptocurrency market value adds to the appeal of
ICOs linked to cryptocurrencies (such as all currency tokens), we would strongly expect a
deflating cryptocurrency market value to reduce the appeal of ICOs to participants looking
for a quick return.
In summary, just as earlier warnings on cryptocurrencies have had very limited impact on the
Bitcoin hype-cycle long-term,137 we do not believe the ICO-related warnings will end the
gold rush in which ICO entrepreneurs seek their fortune. This is because regulators stating
that ICOs may well be unregulated encourages the very people likely to benefit from the rush
to promote further ICOs. Furthermore, the warnings to date have failed to address the
deficiencies we have identified around the promoters and issuers of ICOs often being
unidentifiable. This deficiency denies investors their practical private law legal rights.
Legally many ICOs operate in the dark. This is even worse than the 17th century tulip bubble
and similar events over the centuries – most of the victims then at least knew who had
deprived them of their assets.
Accordingly, given today’s incredibly rapid market development, prohibition appears an
unjustified and probably ineffective response, and the combination of warnings and private
ordering will probably also prove insufficient. So we move on to analyze the other options.
4. Enforcing existing laws through concerted action
The question then arises as to whether existing financial regulatory frameworks are sufficient
to address this new market. As we suggest in Part IV above, a wide range of financial
regulatory frameworks may apply in the context of ICOs.
In our framework, the key is to understand the nature of the individual ICO and its related
infrastructure: those with an investment element should fall within the scope of financial
regulatory frameworks, which in many cases will be sufficient to address problems which
136 Eric Risley, Steve Payne & John Ascher-Roberts, Most ICOs Fail: A Tale of Two Worlds, ARCHITECT
PARTNERS (Sep. 16, 2017), http://architectpartners.com/ecosystem_thoughts/most-icos-fail-a-tale-of-two-
worlds/.
137 On 13 September 2013 the European Banking Authority (EBA) issued a warning to consumers on “Virtual
Currencies” (VC) such as Bitcoin. Today BTC prices are higher than ever.

36
arise and to secure the viability of the structure once market participants become familiar
with the application of existing frameworks.
Once it is known who is behind the ICO and how the proceeds are to be used, it becomes
possible to enforce existing laws.
Generally speaking, we would suggest – following our analysis above – that ICOs falling
largely into donation or rewards categories should be left to general legal and consumer
protection frameworks, similar to donation and rewards crowdfunding in many jurisdictions.
This however – following our analysis in the preceding sections of this Part – should be
supplemented by private ordering, particularly in the context of industry (i.e. ISO)
certification for blockchains, including those involved in ICOs.
For equity and investment ICOs, these should fall into the scope of financial law and
regulation, with a particular focus on intermediaries and market infrastructure providers such
as exchanges.
In the absence of specific legislation to this effect, financial regulators could promote best
practices to that end and inquire into ICOs based on the assumption that financial legislation
applies. In most jurisdictions, financial regulators have the right to start an investigation
where there is reasonable grounds to assume that financial law does apply.
In order to enhance efficiency, regulators could ask for evidence supporting the information
provided by the ICO initiator (for instance, auditors may be required to certify the
information sent to regulators).
If the outcome of such an investigation is that financial law does not apply, the financial
regulator could (i) issue a warning notice that a certain ICO is not regulated by any financial
regulator, and (ii) forward the information regarding the ICO to the relevant consumer
protection agency. If the outcome is that financial law does apply, financial regulators have
all the traditional enforcement methods at their disposal, ranging from requiring additional
disclosures to outright bans by virtue of cease-and-desist orders138 and emergency asset
freezes.139
Since it is not certain whether financial law will apply, concerted action from public
enforcement agencies in a range of domains may be required. For instance, in addition to
financial regulators, information could be shared with consumer protection agencies as well
as the police and criminal investigators in the case of fraud.
Indeed, if we are to make predictions, we expect to see in a range of jurisdictions a series of
such enforcement actions initiated by regulators precisely to send a message to the market
that simply raising money on a blockchain does not put the activity beyond the purview of
relevant laws. In other words, watch this space, especially in the countries that are hosting the
most ICO activity. In our view, the series of actions which have been initiated by the SEC as
well as the warning notices issued by European and Asian regulators signal less generous
regulatory attitudes.
138 Cf. In the Matter of Munchee Inc., Securities Act of 1933 Release No. 10445 (Dec. 11, 2017),
https://www.sec.gov/litigation/admin/2017/33-10445.pdf.
139 Cf. Press Release, SEC, SEC Emergency Action Halts ICO Scam (Dec. 4, 2017),
https://www.sec.gov/news/press-release/2017-219.

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5. Widening the scope of financial law?
In some circumstances it may well prove necessary to widen the scope of financial law and
expand existing restrictions. In cases where existing financial, legal and regulatory
frameworks do not apply to currency and investment ICOs (due for instance to drafting
limitations, such as laundry list definitions of securities, instead of functional definitions as in
the Howey test in the U.S.), there is a clear need for legal and regulatory changes to bring
such ICOs within the scope of financial law and regulatory frameworks.
At the same time, it is probably unnecessary to apply the spectrum of financial regulation to
all ICOs, namely those that are effectively donation or rewards structures. For example, if
one regulates all Usage Tokens that grant some rights of use in return for consideration, then
logically into such a regulatory net would fall all license-based business models such as
online music stores, software licenses etc., unless expressly exempted. Such a step would
expand financial law beyond its natural limits. While consumer protection is an increasingly
accepted objective of financial law, financial regulators may not be the best equipped to
combat wide-ranging consumer fraud, whether or not perpetrated on a blockchain. What
justifies the application of financial law when, for instance, a tulip bulb is sold via a
blockchain-based token instead of in a gardening store?
At the same time, we suggest that all ICOs, regardless of what the token represents, should be
required to provide certain information. This could be done in the context of private ordering
(particularly industry and/or ISO guidelines or certifications) but, in its absence, legal and
regulatory changes would need to be implemented, probably on a cooperative international
basis. These would – similar to basic prospectus or crowdfunding rules – require the
following information:
• name, address and Legal Entity Identifier of the issuer, plus names and addresses of
key people;
• the target group of the ICO (including a specification of whether retail or professional
participants are targeted) with any regional restrictions;
• details of the participants’ rights and obligations;
• details of how the participants’ consideration is to be treated;
• details of any intermediary that may store the participants’ consideration as well as
the mode of storage;
• details of all fees, costs, etc to be charged against the participants’ consideration; and
• details on the applicable laws and regulations.
The new Russian draft legislation “On financial assets” published on 25 January 2018140
seeks to reduce information asymmetry. In addition to requiring the information we ask for
above,141 it imposes a retail cap of about 900 USD which is not unlike the funding caps we
140 Cf. Russian Finance Ministry Proposes Draft Law on ICO Regulation, https://www.coindesk.com/russian-
finance-ministry-proposes-draft-law-on-ico-regulation/ (last accessed 31 January 2018).
141 Cf. client mailing by Liniya Prava of 30 Jan 2018, online
http://lp.ru/alert_ico_regulation_minfin_eng?lang_id=2 (last accessed 31 January 2018): “The draft law
requires token issuers to disclose certain information prior to the offering in the forms of public offer and
investment memorandum. These documents should include among other: information on token issuer and its
beneficiaries (name, place of business, corporate structure, website, etc.); the token owners´ rights and the
procedure of their exercising; the price of the issued tokens or the procedure of its determination; information on

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have seen in crowdfunding legislation (cf. supra, at IV.4.) and aims to protect retail
participants.
VI. Conclusion
The paucity of research available on ICOs is only matched by the paucity of information
typically available to ICO participants prior to their decision to participate. More than half the
ICO white papers in our dataset are silent on the initiators or backers or do not provide
contact details of these parties, and an even greater share 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. Furthermore, as most recent legislative initiatives have focused on financial actors,
the regulatory situation of many ICOs is unclear, as they vary in form and structure and will
often exist in the very grey areas in terms of regulatory treatment. Based on our analysis, we
believe ICOs will in many cases raise consumer protection issues, but only in some cases
financial regulators be able to take action.
While some regulators have taken decisive steps, including an outright ban of ICOs, we
prefer a more nuanced approach, especially as funding to support innovative, high-tech
activities is so difficult to raise in many countries.
Our approach is first to seek to reduce the key issue regarding ICOs, which is information
asymmetry. Private ordering – particularly in the context of industry certification of
blockchains and industry guidance on best practices for ICOs – will have an important role.
These approaches may well be sufficient in the context of non-financial ICOs – i.e. those
falling into the category of donation or rewards-based structures – when combined with
existing private law and consumer protection arrangements. However, we suggest that this is
unlikely to be sufficient for equity and investment ICOs.
In the context of financial ICOs, the starting point should be existing financial regulatory
frameworks. Most financial regulators worldwide have the right to require information from
anyone if there are serious grounds to believe financial legislation applies. Acquiring this
information would enable, as a second step, the enforcement of existing legislation rigorously
in a concerted movement among consumer protection agencies, financial regulators and
criminal investigators, through emergency asset freezes in cases of fraudulent ICOs and
outright bans in cases of insufficient disclosure.
In the context of financial regulation, a particular focus should be on ICO intermediaries and
infrastructure providers such as exchanges, custodians and clearing and settlement
arrangements, with a distinction between those catering only to non-financial ICOs (donation
and rewards structures) and those catering to financial ICOs (equity and investment
structures). Exchanges and other intermediaries and infrastructure providers which cover both
should have to meet the stronger regulatory requirements in the context of financial
regulation. Core to these are segregation of assets and other traditional regulatory
requirements, including minimum capital.
In jurisdictions where it is unclear whether or not equity and investment ICOs are covered by
the existing financial regulatory framework, changes will be necessary to make sure that such
structures indeed fall into the regulatory system.
formation and access to digital wallets used for the storage of data on purchased tokens; the main purposes of
token issue and spending of funds raised at the ICO; the rules of maintenance of digital transactions registry.”

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One of the difficulties with many ICOs is their cross-border dimensions. Where consumers
from many countries are involved, it will be difficult to determine a lead regulatory agency
(and it may be that no agency is interested in leading given the quantum of the regulator’s
costs relative to the small impact in their jurisdiction). Further, it will be particularly difficult
to establish the relevant jurisdiction as long as it remains unclear who is behind the ICOs and
where the instigators are domiciled. But this is all the more reason for regulatory cooperation
globally to move forward and develop rules designed at the least to remove the information
asymmetry we have identified, and the faster this is done the better. As increasing amounts of
money flow into ICOs, some with highly uncertain prospects, the greater becomes the risk of
a very hard landing that will severely damage risk-tolerant, younger tech aficionados, and
thereby severely reduce access to funding for serious tech innovators who seek to take
advantage of blockchain technology to raise funds in creative, and responsible, ways.142
142 The over $1.2 billion raised through ICOs in the first half of 2017 by far outstripped venture capital
investment into Blockchain and Bitcoin firms. See autonomous.next, supra note 3, at 6. Of course, the volume
varies from country to country, ranging from 0.45% of start-up funding in the US to 3.83% in Europe, see
Funderbeam, supra note 48, at 7.