New OECD Report Highlights Problems With Current ICO Models

Cryptocurrency Regulations Worldwide

The OECD report examines limitations in ICO offerings that go beyond the regulatory uncertainty and arbitrage exploited by some issuers, such as pitfalls in the design and structure of ICOs and issues related to authentication, disclosure and governance.

The OECD this month published its report on Initial Coin Offerings (ICOs) ahead of the World Economic Forum Annual Meeting in Switzerland which draws to a close today (Jan 5).

The report points out that the lack of regulatory clarity around ICOs currently exposes ICO investors to considerable risks, but it remains positive that appropriately regulated ICOs offer enormous fundraising potential.

“Appropriately regulated and supervised ICOs offer a potential new way to raise capital for projects enabled by Distributed Ledger Technologies (DLTs) and the blockchain,” said an OECD outline of the report.

Despite this potential, the report points out that, “the absence of a strong business rationale for the use of blockchains, such network effects cannot be materialised, pointing to the limits in the use of ICOs as a ‘mainstream’ financing tool for SMEs.”

While most of the discussion around ICOs has focused on the uncertainty of the applicable regulatory framework for ICOs and crypto-asset markets, this OECD report claims to take the analysis further by “discussing tokenomics and limitations in ICO structuring which can give rise to conflicts of interest and expose investors subscribing to ICO offerings and SMEs issuing tokens to significant risks.”

The report examines limitations in ICO offerings that go beyond the regulatory uncertainty and arbitrage exploited by some issuers. These include pitfalls in the design and structure of ICOs, issues related to authentication, disclosure and governance can lead to misalignment of interests between founders and investors in token offerings.

The structuring of ICOs can give rise to conflicts of interest by the issuer, particularly given the ability of entrepreneurs to receive tokens issued on the back of a concept that is yet to be executed and without having taken any personal financial risk in the venture. In the absence of lock-up period requirements, the lack of any “skin-in-the-game” from the entrepreneur can be a source of conflict (e.g. pump and dump schemes), said the report.

“The absence of disclosure requirements in ICOs exacerbates information asymmetries already present in early stage SME financing. In addition to the lack of transparency, difficulties in applying traditional valuation methodologies further prevent investors (particularly retail investors) from making rational, informed decisions and exposing them unduly to risks.

“There is also a lack of financial consumer and investor protection safeguards in ICOs that would allow investors to obtain redress and compensation, in a situation where coverage by bankruptcy laws is not assured, and the risk of fraud is high. Operational risks related to DLTs, cyber risk and data privacy issues expose investors subscribing to ICO offerings and SMEs issuing tokens to significant risks,” notes the report.

About the author

Maciek Klimowicz

Maciek Klimowicz

A seasoned writer and editor with 10 years of experience in a variety of print and online media. Recognizing the transformative potential of the blockchain technology, Maciek has now put his pen to work to explore the key issues of this fast-evolving sector. Contact him on [email protected].

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