iComply Investor Services commissioned a study to better understand the challenges that ICO issuers face to meet the regulatory standards for issuing and tracking digital assets. Currently, these projects face significant barriers that result in trade-offs that hinder the true potential of ICOs. The research collaboration was supported by Mitacs’s Accelerate Program.
A research team from the University of British Columbia (UBC) conducted more than 45 interviews and dozens of observations from industry experts to explore the past, present, and expectations for the future of ICOs from diverse perspectives.
The use of blockchain technology allows token issuers to efficiently gain access to global customers, partners, and capital.
Key Challenge: The burden of the cost of regulation
Challenges broadly stem from the cost of complying with regulation. In 2017 there was significant ambiguity surrounding whether and how digital assets were regulated, and many issuers neglected this dimension altogether. While a large number of ICOs were well-intentioned, others could not resist exploiting the prospect of unlimited access to global investors. Early ICOs could often raise more with savvy marketing than a well-reasoned project plan, and a large number of early ICOs were little more than Ponzi schemes. Today, regulatory clarity and enforcement are essential if ICOs are to become a safe and legitimate fundraising mechanism.
The study found that issuers currently face a compliance trilemma, whereby they can realize only two of the following three goals in their ICO:
- Widely distributed investors
- Regulatory compliance
While we focus here on ICOs, the compliance trilemma also holds more generally for other decentralized finance practices involving cryptoassets.
To date, issuers have adopted various approaches to address the trilemma:
- Sacrificing compliance by directly defying regulators and hoping to fly under the radar
- sacrificing the scope of investment by restricting token sales to a limited group of investors
- Compromising on all three dimensions in a hybrid approach
- Forgoing ICO entirely until this becomes more cost-effective
However, each of these current approaches is sub-optimal, and a solution is needed to the compliance trilemma.
The study also explored how industry experts expected the compliance trilemma to be resolved and found that the majority tended to advocate new regulatory rules and definitions that could relax what they see as the “burden” of compliance on issuers. Such an approach places the onus squarely on regulators, who would need to coordinate within and across jurisdictions to reach a coherent regulatory framework that appeases the challenges and costs of compliance for issuers. However, we argue that holding regulators solely accountable for the compliance trilemma is incomplete and misguided, and that other approaches are needed to reduce the costs and uncertainties of regulatory compliance.