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Publishing House of Wroclaw University of Economics and Business
edited by Wawrzyniec Michalczyk
Cryptocurrencies
in the Global Economic
and Financial System
Initial Coin Oerings as an Innovative Tool
of Crowdfunding and Promotion
9788376 958446
ISBN 978-83-7695-844-6
Cryptocurrencies in the Global Economic and Financial System
The monograph’s subject matter focuses on cryptocurrencies, an instrument which aspires
to be a modern form of money, and on its place in the world economy, in payments systems
and nancial markets. Special attention is paid to the principles of their usage in Initial
Coin O erings (ICOs), one of the most important areas of their application. The main aim of
the work is the identi cation of the economic essence of cryptocurrencies, including their
functions in settlement systems and as nancial instruments, and an indication of their role
in crowdfunding, as well as the characterisation of the mechanism of the ICO and its core
rules. The ICO market is becoming more and more popular among investors and companies
seeking to increase or raise the capital. The analysis of the cases done in the book shows
the importance of a well-prepared white paper, the primary document including all the
information linked with the project.
Our books can be read on:
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The address of the editor:
Wydawnictwo Uniwersytetu Ekonomicznego we Wrocławiu
53-345 Wrocław, ul. Komandorska 118/120
www.wydawnictwo.ue.wroc.pl
Orders:
tel. 71 36 80 602, e-mail: econbook@ue.wroc.pl
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Michalczyk_okladka.indd 1 2020-12-15 11:31:18
Cryptocurrencies
in the Global Economic
and Financial System
Initial Coin Oerings as an Innovative Tool
of Crowdfunding and Promotion
Authors:
Sebastian Bobowski – Chapter 4
Magdalena Broszkiewicz – Chapter 3
Aleksandra Kuźmińska-Haberla – Chapter 5
Wawrzyniec Michalczyk – Introduction,
Chapter 1, Recapitulation
Magdalena Myszkowska – Chapter 2
Cryptocurrencies
in the Global Economic
and Financial System
Initial Coin Oerings as an Innovative Tool
of Crowdfunding and Promotion
edited by Wawrzyniec Michalczyk
Publishing House of Wroclaw University of Economics and Business
Wroclaw 2021
Reviewer
Katarzyna Żukrowska
Copy
-editing
Agnieszka Flasińska
Layout
Barbara
Łopusiewicz
Proof
reading
Aleksandra Śliwka
T
ypesetting
Małgorzata Myszkowska
Cover
design
Beata Dębska
The project is nanced by the Ministry of Science and Higher Education in Poland
under the programme “Regional Initiative of Excellence” 2019-2022
project number 015/RID/2018/19 total funding amount 10 721 040,00 PLN.
All rights reserved. No part of this book may be
reproduced
in any
form
or in any means without the prior written permission of the
Publisher
© Copyright by Wroclaw University of
Economics and Business
Wroclaw
2021
ISBN 978-83-7695-844-6
Printing:
TOTEM
Table of Contents
Foreword ................................................................................................................. 7
1. Cryptocurrencies and their economic essence ....................................... 11
1.1. Introduction ................................................................................................ 11
1.2. The genesis of cryptocurrencies in brief .................................................... 12
1.3. Virtual currencies and cryptocurrencies ..................................................... 13
1.4. Technological foundations of the bitcoin and other cryptocurrencies ....... 15
1.5. Characteristics of the most important cryptocurrencies ............................. 18
1.6. Cryptocurrencies and the functions of international money ...................... 21
1.7. The main barriers to the development of cryptocurrencies as a form
of money .................................................................................................... 25
1.7.1. The instability of exchange rates ............................................................... 25
1.7.2. Regulation underdevelopment ................................................................... 32
1.7.3. Security threats ........................................................................................... 36
1.7.4. Low level of dissemination ........................................................................ 40
1.8. Current trends on the cryptocurrencies’ global market .............................. 47
1.9. Summary .................................................................................................... 49
References ............................................................................................................... 50
2. Cryptocurrencies and the digitalisation of payment systems .............. 55
2.1. Introduction ............................................................................................... 55
2.2. Innovations in cross-border payment services and infrastructure .............. 56
2.3. DLT’s potential to enhance cross-border payment services and infra-
structure ...................................................................................................... 60
2.4. Limitations and feasibility of DLT-based arrangements ............................ 63
2.5. Regulatory challenges posed by technological developments in payment
services ....................................................................................................... 66
2.6. The dierent characteristics of the digital form of central bank money .... 68
2.7. Summary .................................................................................................... 72
References ............................................................................................................... 73
3. Cryptocurrenciesonthenancialmarkets ........................................... 76
3.1. Introduction ................................................................................................ 76
3.2. Historical outline of the emergence of cryptocurrency exchanges ............ 77
3.2.1. Exchanges of traditional nancial instruments and cryptocurrency ex-
changes ....................................................................................................... 77
6 Foreword
3.2.2. Intensifying the process of creating cryptocurrency exchanges ................ 80
3.2.3. Directions and trends of capital ow in the form of cryptocurrencies....... 82
3.3. The most important cryptocurrency exchanges in the world ..................... 83
3.3.1. The most important cryptocurrency exchanges – factors of capital inow 83
3.3.2. Organization of the stock exchange compared to currency exchanges ..... 86
3.3.3. Organization of trading .............................................................................. 87
3.3.4. Exchange rates design, indices, cryptocurrencies pricing stability ............ 88
3.3.5. Factors aecting exchange rates ................................................................ 90
3.3.6. Examples of exchanges and their characteristic features ........................... 91
3.3.7. Crises on currency exchanges and cryptocurrency exchanges .................. 93
3.4. Cryptocurrencies as an investment. Investment/hedging strategies in en-
terprises using cryptocurrencies ................................................................. 96
3.5. Current technology trends on stock exchanges, legal regulations for the
functioning of cryptocurrency exchanges .................................................. 98
3.6. Summary .................................................................................................... 100
References ............................................................................................................... 101
4. TheprinciplesofInitialCoinOerings ................................................. 103
4.1. Introduction ................................................................................................ 103
4.2. Initial Coin Oering – genesis and denitional considerations ................ 104
4.3. Initial Coin Oering vs. information asymmetry and signalling theory .... 106
4.4. Characteristics of tokens and blockchain technology ................................ 111
4.5. Initial Coin Oering as a process and business model .............................. 115
4.6. Initial Coin Oerings in entrepreneurial nance ....................................... 123
4.7. Regulatory frameworks of Initial Coin Oerings ...................................... 127
4.8. Advantages and disadvantages of Initial Coin Oering ............................ 130
4.9. Initial Coin Oerings – best practices and recommendations ................... 134
4.10. Summary .................................................................................................... 138
References ............................................................................................................... 139
5. InitialCoinOeringsinpractice ............................................................ 146
5.1. Introduction ................................................................................................ 146
5.2. White paper as a primary form of ICO’s promotion .................................. 147
5.3. Initial Coin Oering listings ...................................................................... 152
5.4. Funds raised by Initial Coin Oerings (2014–2019) ................................. 157
5.5. Top Initial Coin Oerings – countries and projects .................................. 159
5.6. Projects with the biggest return of investment ........................................... 164
5.7. Summary .................................................................................................... 168
References ............................................................................................................... 170
Recapitulation ......................................................................................................... 172
List of Figures ......................................................................................................... 174
List of Tables ........................................................................................................... 175
Foreword
These times are marked by progressing globalisation and the accompanying pheno-
mena of regionalisation, internationalisation of enterprises’ activities, accelerating
technical and technological progress, deepening global problems and strengthening
the position of transnational corporations. In this changing landscape of the glo-
bal economy, an important meaning is given by the increasingly frequently occur-
ring and more and more advanced innovative solutions in the field of international
finance. These solutions translate into progressively modern investment instruments
and categories of services provided by financial institutions, into the amplifying
role of the Internet and of the digitalisation of this sector, into advancing processes
of deregulation in some areas, in others of a deepening scope of regulation scale, and
into the growing degree of the integration of financial markets. Financial connections
between entities, both individual and institutional, are taking on new shapes, beco-
ming faster, safer, cheaper and more accessible. The fast developing payment and
settlement channels occupy a special place here, and due to them the transfer of value
resulting from transactions concluded at various levels is more and more effective.
Cryptocurrencies, systematically improving their share in international financial
relations, in cross-border settlements and in public awareness, as well as being more
and more widely used by business entities, are an important tool in this area. Their
current and future significance in the global economic and financial system cannot
be overestimated, and their development potential is undeniable. The possibility of
making electronic payments with them turns out to be particularly crucial in the era
of global pandemics, when the use of cash or other traditional forms of settlement
is perceived as unsafe in epidemiological terms. Cryptocurrencies are becoming an
important alternative to traditional international money, and also play an important
role as an innovative tool of crowdfunding and promotion within the framework
of the so-called Initial Coin Offerings, being a modern way of raising capital for
pioneering and risky market ventures.
This monograph’s subject matter focuses on cryptocurrencies themselves, an
instrument which aspires to be a modern form of money, and on its place in the
world economy, in systems of payments and financial markets. Particular attention
is devoted to the principles of their usage in Initial Coin Offerings, one of the most
important areas of their application. The main aim of the work is the identification
8 Foreword
of the economic essence of cryptocurrencies, including their functions in settlement
systems and as financial instruments, and an indication of their role in crowdfunding
within Initial Coin Offering.
The central thesis, which constitutes in a sense the guiding light of the monograph
and which the authors try to prove, is the statement that the application of
cryptocurrencies in modern international finance is already relatively broad and has
equally significant development potential. This thesis is qualitative in its nature, and
therefore the main research method used in the preparation of the study which is the
literature analysis, has also a largely qualitative dimension. Nevertheless, to find
answers to specific research questions other methods were also employed, including
primarily techniques in the field of statistical and case-study analyses.
The first chapter is entitled “Cryptocurrencies and their economic essence”. Its aim
is to identify the nature of cryptocurrencies and their core from the economic point
of view. The following research questions were asked in order to achieve this aim:
yWhat is the origin of cryptocurrencies and how can they be defined against the
background of virtual currencies?
yWhat are their technological foundations?
yWhich of them are the most important in international finance?
yHow may cryptocurrencies perform the functions of international money and
how do they fulfil them in reality?
yWhat are the barriers to their development?
The second chapter, “Cryptocurrencies and the digitalisation of payment systems”,
concentrates on the examination of how cryptocurrencies and the underlying
distributed ledger technology might be used in settlements and the financial market
infrastructure. The questions to be answered here include:
yWhat is the potential impact of a sudden increase of the role and use of crypto-
currencies and innovative enabling technologies on payment services?
yWhether and if so, how the distributed ledger technology-based arrangements
can contribute to improve payment systems?
yWhat are the potential risks related to the use of innovative payment products
and services?
yWhat is the relevance of the existing regulatory frameworks for new technolo-
gies and innovative business models?
yWhat are the risks and challenges that must be considered prior to the distributed
ledger technology implementation into payments?
yHow should regulatory authorities respond to the challenges posed by the recent
Fintech developments in payments?
yWhat are central bank digital currencies? What are the experiences with, and
results of, the current research and experiments in this domain?
Foreword 9
The title of the next chapter is “Cryptocurrencies on the financial markets”, and its
goal is to recognise the most important cryptocurrencies exchanges in the global
economy. The analyses are directed to answer the following questions:
yWhat is the chronological process of creating cryptocurrency exchanges?
yWhat are the most important cryptocurrency exchanges in terms of turnover?
yWhat are the factors that mobilise and slow down the emergence of cryptocur-
rency exchanges?
yIs it possible to observe the directions of capital flow in the form of cryptocur-
rencies?
yWhat are the most important cryptocurrency exchanges in the world? How is
trading organised on them?
yWhat are the current technology trends on the stock exchanges, legal regulations
for the functioning of cryptocurrency exchanges?
The aim of the fourth chapter, “The principles of Initial Coin Offerings”, is the
characterisation of the mechanism of the Initial Coin Offering and its core rules. To
achieve this goal, the following research questions were asked:
yWhat are the genesis and theoretical framework of Initial Coin Offering?
yWhat are the characteristics of Initial Coin Offering as a process and a business
model?
yWhat is the role of Initial Coin Offering in entrepreneurial finance in comparison
to other mechanisms of fundraising?
yWhat are the approaches of different national regulatory authorities to Initial
Coin Offering?
yWhat are the advantages and disadvantages of Initial Coin Offering as a mecha-
nism of fundraising?
yWhat kind of practices and recommendations concerning Initial Coin Offerings
have been developed to date?
The last chapter bearing the title “Initial Coin Offerings in practice”, focuses on
a presentation of the main statistics regarding Initial Coin Offerings and the most
important elements connected with the promotion of token sales. The research
questions adopted in order to achieve this were:
yWhat is the Initial Coin Offering’s white paper? What elements should it con-
sist of?
yHow should the Initial Coin Offering project be promoted?
yWhat are the Initial Coin Offerings’ listings? How are the Initial Coin Offering
projects evaluated (rating systems)?
yWhat is the value of funds raised by Initial Coin Offerings? What is the number
of Initial Coin Offerings in consecutive years?
10 Foreword
yWhat are the top countries regarding the amounts of money raised and the num-
ber of Initial Coin Offerings?
yWhat are the biggest Initial Coin Offerings regarding the value of tokens sold
and returns of investment?
The monograph ends with the recapitulation which encompasses the most important
conclusions made during the research process.
On behalf of the authors, I would like to thank the Head of the Department of
International Economic Relations at the Wrocław University of Economics
and Business, Professor Bogusława Drelich-Skulska, for the substantive and
organisational support provided in the process of preparing the monograph. Special
acknowledgment is also due to Professor Katarzyna Żukrowska from the SGH
Warsaw School of Economics for the in-depth review, valuable suggestions and
helpful advice.
Wawrzyniec Michalczyk
List of Figures
1.1. Dominant features of cryptocurrencies ............................................................... 17
1.2. Planned change in the bitcoin supply over time (in million units) ..................... 20
1.3. BTC, ETH and XRP exchange rate against the dollar in the years of 2016–2019
(on 1.01.2018 = 1.00) ......................................................................................... 26
1.4. BTC/USD exchange rate in December of 2017 and January of 2018 ................ 26
1.5. Average daily logarithmic rate of return on investment in the most important
cryptocurrencies and in the euro, and its standard deviation in 2019 ................. 27
1.6. ERV indicator for the exchange rates of the most important cryptocurrencies
and the euro (in USD) in the last days of each month in 2019 ........................... 28
1.7. Relationships between security, dissemination and trust, and fulfilling by the
cryptocurrencies the functions of money ............................................................ 37
1.8. Daily number of confirmed BTC transactions in the years 2014–2019 ............. 42
1.9. Number of Blockchain wallet’s users in the years of 2014–2019 ...................... 43
1.10. Number of unique BTC addresses in the years 2014–2019 ............................... 44
1.11. Market capitalisation of BTC, ETH, XRP in the years 2016–2019 (in USD
billion) ................................................................................................................ 45
1.12. Average fee in the bitcoin’s network for a transaction with settlement time
of up to 10 minutes (in USD) in the years 2017–2019 ....................................... 47
3.1. The daily price of Bitcoin/USD in 2013-2020 on the BitStamp market ............ 94
3.2. The hourly price of Bitcoin/USD in the 5-day period 2.01.2020-6.01.2020 on
the BitStamp market, with volume bars ............................................................. 95
4.1. Relation between Bitcoin and Mastercoin .......................................................... 104
4.2. Signalling timeline .............................................................................................. 108
4.3. Common structure of a token sale/ICO .............................................................. 116
4.4. Schematic process of an ICO .............................................................................. 117
4.5. Illustration of the ICO process ............................................................................ 117
4.6. ICO mechanism with inherent risks ................................................................... 119
4.7. ICO performance ................................................................................................ 120
5.1. The ClinTex team ............................................................................................... 149
5.2. Token economics – Sentigraph ........................................................................... 150
5.3. A road map of Tradingene .................................................................................. 150
5.4. Examples of covers of ICO white papers ........................................................... 151
5.5. Funds raised between 2017 and 2019, a monthly breakdown (million USD) .... 158
5.6. ICO funds raised in the period 2014–2019 (mln USD) ...................................... 158
5.7. ICO projects 2014–2019 ..................................................................................... 159
5.8. ICO market overview by categories ................................................................... 164
List of Tables
1.1. Cryptocurrencies with a market capitalisation higher than USD 500 million on
4 Jan 2020 ........................................................................................................... 19
1.2. Values of the coecient of correlation between daily exchange rates (in USD)
of major cryptocurrencies in 2019 ...................................................................... 31
1.3. Values of the coefficient of correlation between daily exchange rates (in USD)
of major cryptocurrencies and other variables in 2019 ...................................... 32
3.1. Dierent Bitcoin trading regulations in selected countries ................................ 79
3.2. Number of exchanges by country, September 2019 ........................................... 80
3.3. Countries with the largest amount of sent transactions (reported by year,
in million USD) .................................................................................................. 82
3.4. Countries with the largest amount of received transactions (reported by year,
in million USD) .................................................................................................. 82
3.5. List of the most popular cryptocurrency exchanges (as of 17 December 2019) 84
3.6. Cryptocurrency market capitalization for ten selected cryptocurrencies ........... 85
3.7. All-time high of selected cryptocurrencies compared to the size and domi-
nance in market capitalization ............................................................................ 85
3.8. The volatility of Bitcoin cryptocurrency rates in relation to selected currencies
on the indicated exchanges ................................................................................. 89
3.9. The volatility of Ethereum cryptocurrency rates in relation to selected curren-
cies on the indicated exchanges .......................................................................... 89
4.1. Characteristics of dierent channel communications ......................................... 110
4.2. ICOs, entrepreneurship and innovation .............................................................. 121
4.3. Comparative analysis of ICOs, IPOs and crowdfunding .................................... 124
4.4. ICO, IPO, crowdfunding and venture capital ..................................................... 125
4.5. Comparative analysis of ICOs and IPOs ............................................................ 126
4.6. ICO regulations by country ................................................................................ 129
4.7. Advantages and disadvantages of ICOs ............................................................. 129
4.8. Best practices in token sales ............................................................................... 135
4.9. ICOs – recommendations ................................................................................... 137
5.1. Top countries by raised capital .......................................................................... 160
5.2. Top countries by the number of ICOs ................................................................ 160
5.3. Top ICOs by the number of sold tokens ............................................................. 160
5.4. Best ICOs according to ROI (as of 24.04.2020) ................................................. 165