Initial​ ​Coin​ ​Offerings​ ​(ICOs):  

Risks,​ ​Regulation,​ ​and​ ​Accountability 
30​th​​ ​November,​ ​2017 
Usman​ ​W.​ ​Chohan,​ ​MBA 
School​ ​of​ ​Business​ ​and​ ​Economics 

University​ ​of​ ​New​ ​South​ ​Wales,​ ​Canberra 

Discussion​ ​Paper 

Discussion​ ​Paper​ ​Series:​ ​Notes​ ​on​ ​the​ ​21​st​​ ​Century 

 
Abstract:​ I​ nitial​ ​Coin​ ​Offerings​ ​(ICOs)​ ​provide​ ​rapid​ ​access​ ​to​ ​capital​ ​for​ ​new​ ​ventures,​ ​but 
suffer​ ​from​ ​drawbacks​ ​relating​ ​to​ ​non-regulation,​ ​considerable​ ​risk,​ ​and​ ​non-accountability, 
which​ ​has​ ​created​ ​controversy​ ​and​ ​raised​ ​questions​ ​about​ ​the​ ​mechanisms​ ​for​ ​regulation 
in​ ​an​ ​era​ ​of​ ​emergent​ ​cryptocurrencies.​ ​This​ ​discussion​ ​paper​ ​provides​ ​a​ ​timely​ ​review​ ​of 
the​ ​regulatory​ ​and​ ​other​ ​risks​ ​that​ ​ICOs​ ​pose​ ​for​ ​participants,​ ​which​ ​thereby​ ​situates​ ​ICOs 
in​ ​the​ ​underexplored​ ​domain​ ​of​ ​accountability. 
 

   

Electronic copy available at: https://ssrn.com/abstract=3080098

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Initial​ ​Coin​ ​Offerings​ ​(ICOs):​ ​Risks,​ ​Regulation,​ ​and​ ​Accountability 

An​ ​Initial​ ​Coin​ ​Offering​ ​(ICO),​ ​also​ ​termed​ ​token​ ​sale​​ ​or​ ​crowdsale​,​ ​ ​is​ ​a​ ​mechanism​ ​for​ ​raising 

capital​ ​through​ ​the​ ​emission​ ​of​ ​bitcoins​ ​to​ ​investors​ ​as​ ​a​ ​percentage​ ​of​ ​total​ ​newly​ ​issued 

currency​ ​in​ ​exchange​ ​for​ ​capital​ ​that​ ​may​ ​be​ ​legal​ ​tender​ ​or​ ​another​ ​cryptocurrency.​ ​ICOs​ ​sell 

cryptocurrencies​ ​or​ ​may​ ​sell​ ​a​ ​right​ ​of​ ​ownership​ ​or​ ​royalties​ ​to​ ​a​ ​project,​ ​in​ ​contrast​ ​to​ ​an​ ​Initial 

Public​ ​Offering​ ​(IPO)​ ​which​ ​sells​ ​a​ ​share​ ​in​ ​the​ ​ownership​ ​of​ ​the​ ​company​ ​itself. 

As​ ​such,​ ​it​ ​offers​ ​significant​ ​promise​ ​for​ ​new​ ​startups​ ​in​ ​the​ ​cryptocurrency​ ​space​ ​as​ ​means​ ​of 

quicker​ ​and​ ​easier​ ​capital​ ​raise.​ ​Furthermore,​ ​as​ ​of​ ​this​ ​writing​ ​(November,​ ​2017),​ ​there​ ​are​ ​more 

than​ ​50​ ​ICOs​ ​taking​ ​place​ ​every​ ​month.​ ​ ​However,​ ​there​ ​are​ ​various​ ​regulatory​ ​and​ ​other​ ​risks​ ​that 

emerge​ ​from​ ​the​ ​ICO​ ​model,​ ​and​ ​they​ ​need​ ​to​ ​be​ ​situated​ ​within​ ​the​ ​accountability​ ​domain,​ ​as​ ​they 

are​ ​at​ ​the​ ​cutting​ ​edge​ ​of​ ​technological​ ​progress​ ​but​ ​raise​ ​concerns​ ​that​ ​match​ ​those​ ​highlighted 

in​ ​earlier​ ​periods,​ ​and​ ​therefore​ ​represent​ ​something​ ​of​ ​a​ ​revisitation​ ​of​ ​regulatory​ ​&​ ​accountability 

issues,​ ​albeit​ ​in​ ​a​ ​new​ ​context. 

For​ ​Cryptocurrencies,​ ​the​ ​early​ ​token​ ​sales​ o

​ f​ ​ICOs​ ​occurred​ ​as​ ​recently​ ​as​ ​July,​ ​2013​ ​(Mastercoin), 

with​ ​Ethereum​ ​(3700B​ ​=​ ​$2.3m)​ ​and​ ​Karmacoin​ ​following​ ​in​ ​2014,​ ​and​ ​the​ ​more​ ​“mainstream”​ ​ICOs 

occurring​ ​with​ ​Kik​ ​(messaging​ ​app​ ​developer),​ ​which​ ​emitted​ ​$50​ ​million​ ​in​ ​tokens​ ​(“Kin”)​ ​to 

institutional​ ​investors​ ​in​ ​September,​ ​2017.​ ​Related​ ​to​ ​this​ ​emission,​ ​an​ ​unknown​ ​3rd​​ -party 

conducted​ ​a​ ​phishing​ ​scam​ ​by​ ​circulating​ ​a​ ​false​ ​URL​ ​for​ ​the​ ​Kik​ ​offering​ ​via​ ​social​ ​media.​ ​In​ ​fact, 

as​ ​this​ ​paper​ ​explores,​ ​there​ ​are​ ​significant​ ​regulatory​ ​and​ ​accountability​ ​issues​ ​within​ ​the​ ​ICO 

space.​ ​However,​ ​this​ ​is​ ​not​ ​dissuading​ ​investors​ ​from​ ​leaping​ ​into​ ​the​ ​arena,​ ​as​ ​for​ ​example​ ​when 

Electronic copy available at: https://ssrn.com/abstract=3080098

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web​ ​browser​ ​Brave’s​ ​ICO​ ​generated​ ​$35​ ​million​ ​in​ ​less​ ​than​ ​30​ ​seconds.​ ​Volumes​ ​are​ ​growing​ ​at 

breakneck​ ​speed,​ ​even​ ​though​ ​the​ ​market​ ​share​ ​of​ ​emissions​ ​is​ ​dominated​ ​by​ ​a​ ​single​ ​entity:​ ​the 

successful​ ​Ethereum​ ​project.​ ​To​ ​monitor​ ​ICO​ ​emission,​ ​there​ ​are​ ​more​ ​than​ ​20​ ​websites​ ​that​ ​offer 

tracking​ ​data,​ ​and​ ​a​ ​cumulative​ ​analysis​ ​shows​ ​that​ ​ICO​ ​value​ ​in​ ​October​ ​2017​ ​year-to-date​ ​(YTD) 

was​ ​$2.3​ ​billion,​ ​ten​ ​times​ ​greater​ ​than​ ​calendar​ ​year​ ​2016. 

Risks,​ ​Regulation​ ​and​ ​Accountability 

Ethereum’s​ ​ICOs​ ​demonstrate​ ​the​ ​challenges​ ​that​ ​persist​ ​in​ ​the​ ​ICO​ ​area,​ ​as​ ​their​ ​ICOs​ ​have 

resulted​ ​in​ ​substantial​ ​scam-artistry,​ ​phishing,​ ​Ponzi​ ​schemes,​ ​and​ ​other​ ​shenanigans​ ​-​ ​which 

cumulatively​ ​account​ ​for​ ​more​ ​than​ ​10%​ ​of​ ​ICOs.​ ​The​ ​US​ ​Securities​ ​and​ ​Exchange​ ​Commission 

(SEC)​ ​has​ ​issued​ ​explicit​ ​warnings​ ​to​ ​investors​ ​to​ ​be​ ​highly​ ​cautious​ ​against​ ​scammers​ ​using 

ICOs,​ ​particularly​ ​in​ ​the​ ​colloquially​ ​termed​ ​“pump​ ​and​ ​dump”​ ​schemes,​ ​where​ ​capital​ ​is​ ​fleetingly 

raised​ ​and​ ​then​ ​immediately​ ​dumped​ ​in​ ​exchange​ ​for​ ​other​ ​instruments​ ​at​ ​a​ ​profit,​ ​all​ ​within​ ​a​ ​very 

brief​ ​interval.​ ​In​ ​July​ ​2017,​ ​the​ ​SEC​ ​indicated​ ​that​ ​it​ ​could​ ​have​ ​the​ ​authority​ ​to​ ​apply​ ​federal 

securities​ ​law​ ​to​ ​ICOs,​ ​and​ ​while​ ​it​ ​not​ ​state​ ​that​ ​all​ ​blockchain​ ​tokens​ ​(ICOs)​ ​would​ ​necessarily​ ​be 

considered​ ​securities,​ ​its​ ​determinations​ ​would​ ​be​ ​made​ ​on​ ​a​ ​case-by-case​ ​basis.​ ​The​ ​SEC​ ​action 

may​ ​encourage​ ​more​ ​institutionalized​ ​investors​ ​to​ ​invest​ ​in​ ​ICOs,​ ​but​ ​it​ ​should​ ​be​ ​noted​ ​that​ ​ICOs 

typically​ ​prevent​ ​U.S.​ ​investor​ ​participation​ ​to​ ​remain​ ​out​ ​of​ ​the​ ​jurisdiction​ ​of​ ​the​ ​United​ ​States 

government.​ ​For​ ​precedent,​ ​the​ ​SEC​ ​has​ ​charged​ ​Maksim​ ​Zaslavskiy​ ​for​ ​fraud​ ​in​ ​September,​ ​2017 

in​ ​connection​ ​with​ ​the​ ​ICOs​ ​for​ ​RECoin​ ​and​ ​DRC​ ​World.​ ​The​ ​SEC​ ​has​ ​ruled​ ​that​ ​celebrity​ ​ICO 

endorsements​ ​must​ ​disclose​ ​the​ ​amount​ ​of​ ​any​ ​compensation​ ​paid​ ​for​ ​the​ ​endorsement. 
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The​ ​UK​ ​Financial​ ​Conduct​ ​Authority​ ​has​ ​also​ ​warned​ ​that​ ​ICOs​ ​are​ ​very​ ​high​ ​risk​ ​and​ ​speculative 

investments,​ ​are​ ​scams​ ​in​ ​some​ ​cases,​ ​and​ ​often​ ​offer​ ​no​ ​protections​ ​for​ ​investors.​ ​Even​ ​in​ ​cases 

of​ ​legitimate​ ​ICOs,​ ​funded​ ​projects​ ​are​ ​typically​ ​in​ ​a​ ​high-risk​ ​early​ ​stage​ ​of​ ​development,​ ​with 

considerable​ ​downside​ ​potential​ ​for​ ​investors.​ ​This​ ​is​ ​why,​ ​as​ ​this​ ​discussion​ ​paper​ ​insists, 

Increased​ ​regulation​ ​of​ ​ICOs​ ​should​ ​encourage​ ​institutional​ ​investors​ ​to​ ​invest​ ​along​ ​more​ ​stable 

horizons,​ ​and​ ​in​ ​larger​ ​volumes,​ ​over​ ​more​ ​instruments.​ ​With​ ​strong​ ​accountability,​ ​the​ ​ICO​ ​market 

can​ ​thrive,​ ​and​ ​the​ ​SEC​ ​notes​ ​that​ ​ICOs​ ​can​ ​provide​ ​fair​ ​and​ ​lawful​ ​investment​ ​opportunities. 

Australia’s​ ​regulator​ ​(ASIC)​ ​has​ ​issued​ ​guidance​ ​(September,​ ​2017)​ ​stating​ ​that​ ​the​ ​legality​ ​of​ ​an 

ICO​ ​is​ ​dependent​ ​on​ ​the​ ​specific​ ​circumstances,​ ​on​ ​a​ ​case-by-case​ ​basis. 

A​ ​more​ ​cautious​ ​attitude​ ​has​ ​been​ ​taken​ ​by​ ​financial​ ​regulators​ ​in​ ​countries​ ​such​ ​as​ ​China,​ ​where 

seven​ ​regulatory​ ​agencies​ ​officially​ ​banned​ ​all​ ​ICOs​ ​within​ ​the​ ​People’s​ ​Republic,​ ​and​ ​they 

demanded​ ​that​ ​the​ ​proceeds​ ​from​ ​all​ ​past​ ​ICOs​ ​be​ ​refunded​ ​to​ ​investors​ ​or​ ​face​ ​being​ ​"severely 

punished​ ​according​ ​to​ ​the​ ​law".​ ​A​ ​similarly​ ​strong​ ​line​ ​has​ ​been​ ​taken​ ​by​ ​regulators​ ​in​ ​South​ ​Korea, 

where​ ​the​ ​Financial​ ​Services​ ​Commission​ ​prohibited​ ​ICOs​ ​in​ ​September​ ​2017​ ​and​ ​promised​ ​"stern 

penalties"​ ​for​ ​violations.​ ​The​ ​Chinese​ ​context​ ​is​ ​important​ ​because​ ​ICOs​ ​has​ ​raised​ ​nearly​ ​$400 

million​ ​from​ ​about​ ​100,000​ ​investors​ ​prior​ ​to​ ​the​ ​ban.​ ​However,​ ​more​ ​recent​ ​statements​ ​from 

Chinese​ ​regulators​ ​have​ ​stated​ ​that​ ​the​ ​ICO​ ​ban​ ​is​ ​intermittent,​ ​pending​ ​a​ ​more​ ​systematic 

regulatory​ ​framework.​ ​A​ ​similar​ ​situation,​ ​and​ ​a​ ​more​ ​surprising​ ​one,​ ​has​ ​emerged​ ​as​ ​of​ ​this 

writing​ ​in​ ​Switzerland.​ ​ ​Although​ ​Switzerland​ ​was​ ​previously​ ​viewed​ ​as​ ​a​ ​jurisdiction​ ​amenable​ ​and 

friendly​ ​to​ ​ICOs,​ ​in​ ​September,​ ​2017​ ​the​ ​Swiss​ ​Financial​ ​Market​ ​Supervisory​ ​Authority​ ​announced 
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an​ ​investigation​ ​of​ ​an​ ​unspecified​ ​number​ ​of​ ​coin​ ​offerings​ ​to​ ​examine​ ​whether​ ​they​ ​complied​ ​with 

Swiss​ ​regulations. 

Given​ ​the​ ​recency​ ​of​ ​the​ ​ICO​ ​phenomenon,​ ​many​ ​important​ ​jurisdictions​ ​such​ ​as​ ​Canada​ ​and 

France,​ ​have​ ​yet​ ​to​ ​issue​ ​regulatory​ ​guidelines,​ ​of​ ​this​ ​writing.​ ​However,​ ​more​ ​comprehensive 

guidance​ ​has​ ​been​ ​issued​ ​by​ ​Hong​ ​Kong,​ ​New​ ​Zealand,​ ​Australia,​ ​Gibraltar,​ ​and​ ​the​ ​UAE.​ ​In​ ​Hong 

Kong,​ ​the​ ​Securities​ ​and​ ​Futures​ ​Commission​ ​released​ ​a​ ​statement​ ​(September​ ​2017)​ ​explaining 

that​ ​tokens​ ​may​ ​constitute​ ​securities​ ​for​ ​purposes​ ​of​ ​the​ ​legal​ ​framework​ ​(Securities​ ​and​ ​Futures 

Ordinance),​ ​in​ ​which​ ​case​ ​dealing​ ​in​ ​such​ ​tokens​ ​would​ ​be​ ​a​ ​regulated​ ​activity​ ​under​ ​Hong​ ​Kong 

law.​ ​In​ ​New​ ​Zealand,​ ​the​ ​ ​Financial​ ​Markets​ ​Authority​ ​(FMA)​ ​released​ ​guidelines​ ​on​ ​the​ ​current 

regulatory​ ​environment​ ​in​ ​regards​ ​to​ ​ICOs​ ​(October​ ​2017).​ ​In​ ​Gibraltar,​ ​the​ ​government​ ​published 

regulation​ ​establishing​ ​a​ ​framework​ ​for​ ​regulated​ ​DLT​ ​(Distributed​ ​Ledger​ ​Technology)​ ​companies, 

which​ ​would​ ​encompass​ ​ICOs​ ​and​ ​subject​ ​them​ ​to​ ​financial​ ​controls​ ​and​ ​standards;​ ​to​ ​enter​ ​into 

effect​ ​on​ ​January​ ​1,​ ​2018.​ ​In​ ​the​ ​UAE,​ ​the​ ​Abu​ ​Dhabi​ ​Global​ ​Market​ ​issued​ ​official​ ​guidance​ ​on 

ICOs​ ​in​ ​October​ ​2017. 

Conclusion 
Given​ ​the​ ​incipient​ ​nature​ ​of​ ​ICOs,​ ​the​ ​regulatory​ ​response​ ​has​ ​been​ ​delayed,​ ​and​ ​as​ ​with​ ​Bitcoin, 

the​ ​response​ ​has​ ​been​ ​favorable​ ​in​ ​some​ ​jurisdictions​ ​but​ ​less​ ​so​ ​in​ ​others​ ​(Chohan​ ​2017b).​ ​There 

is​ ​a​ ​much​ ​higher​ ​risk​ ​of​ ​fraudulent​ ​practices​ ​in​ ​ICOs​ ​than​ ​in​ ​established​ ​cryptocurrencies​ ​such​ ​as 

Bitcoin,​ ​which​ ​operate​ ​in​ ​a​ ​trust-less​ s​ etting​ ​(Chohan​ ​2017a),​ ​which​ ​does​ ​not​ ​require​ ​the​ ​sort​ ​of 

oversight​ ​and​ ​accountability​ ​in​ ​the​ ​traditionally​ ​constructed​ ​sense​ ​(Chohan​ ​2017d,​ ​2017e,​ ​2017f, 

2017g,​ ​2017h,​ ​2017i).​ ​However,​ ​ICOs​ ​do​ ​require​​ ​accountability​ ​and​ ​regulation​ ​in​ ​the​ ​traditional 
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sense,​ ​and​ ​there​ ​is​ ​a​ ​strong​ ​case,​ ​as​ ​is​ ​being​ ​made​ ​by​ ​Australia,​ ​the​ ​United​ ​States,​ ​and​ ​some​ ​other 

countries,​ ​that​ ​a​ ​case-by-case​ ​approach​ ​may​ ​be​ ​most​ ​appropriate.​ ​However,​ ​there​ ​is​ ​also​ ​merit​ ​in 

the​ ​approach​ ​being​ ​posited​ ​by​ ​Hong​ ​Kong​ ​and​ ​New​ ​Zealand,​ ​which​ ​situates​ ​ICOs​ ​within​ ​regular 

security​ ​ordinances​ ​and​ ​law.​ ​In​ ​any​ ​case,​ ​the​ ​recency​ ​of​ ​the​ ​ICO​ ​phenomenon​ ​necessitates​ ​both 

academic​ ​and​ ​practitioner​ ​considerations​ ​of​ ​the​ ​risks,​ ​regulation​ ​and​ ​accountability​ ​mechanisms 

that​ ​are​ ​self-reinforcing​ ​and​ ​dynamic,​ ​in​ ​the​ ​same​ ​way​ ​that​ ​the​ ​innovation​ ​of​ ​ICOs​ ​is.​ ​The​ ​period 

2018-2020​ ​is​ ​likely​ ​to​ ​be​ ​the​ ​most​ ​crucial​ ​in​ ​the​ ​ultimate​ ​international​ ​verdict​ ​on​ ​the​ ​workability​ ​of 

ICOs​ ​for​ ​this​ ​very​ ​reason. 

   
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References
1. Chohan,​ ​U.W.​ ​(2017a).​ ​Cryptocurrencies:​ ​A​ ​Brief​ ​Thematic​ ​Review.​ ​SSRN. 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3024330 
2. Chohan,​ ​U.W.​ ​(2017b).Assessing​ ​the​ ​Differences​ ​in​ ​Bitcoin​ ​&​ ​Other​ ​Cryptocurrency 
Legality​ ​Across​ ​National​ ​Jurisdictions.​ ​SSRN. 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3042248 
3. Chohan,​ ​U.W.​ ​(2017c).​ ​A​ ​History​ ​of​ ​Bitcoin.​ ​SSRN. 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3047875 
4. Chohan,​ ​U.W.​ ​(2017d).​ ​“Public​ ​Value:​ ​Bureaucrats​ ​vs​ ​Politicians”.​ ​In​ ​Farazmand,​ ​A. 
(ed.).​ ​Global​ ​Encyclopedia​ ​of​ ​Public​ ​Administration,​ ​Public​ ​Policy,​ ​and​ ​Governance. 
Springer:​ ​NY. 
5. Chohan,​ ​U.W.​ ​(2017e).​ ​“Public​ ​Value​ ​and​ ​Bureaucratic​ ​Rhetoric”.​ ​In​ ​Farazmand,​ ​A. 
(ed.).​ ​Global​ ​Encyclopedia​ ​of​ ​Public​ ​Administration,​ ​Public​ ​Policy,​ ​and​ ​Governance. 
Springer:​ ​NY. 
6. Chohan,​ ​U.W.​ ​(2017f).​ ​“Budget​ ​Policy​ ​and​ ​Reconstruction​ ​in​ ​Iraq”.​ ​In​ ​Farazmand,​ ​A. 
(ed.).​ ​Global​ ​Encyclopedia​ ​of​ ​Public​ ​Administration,​ ​Public​ ​Policy,​ ​and​ ​Governance. 
Springer:​ ​NY. 
7. Chohan,​ ​U.W.​ ​(2017g).​ ​“Accountability​ ​and​ ​Governance​ ​in​ ​Fiji”.​ ​In​ ​Farazmand,​ ​A. 
(ed.).​ ​Global​ ​Encyclopedia​ ​of​ ​Public​ ​Administration,​ ​Public​ ​Policy,​ ​and​ ​Governance. 
Springer:​ ​NY. 
8. Chohan,​ ​U.W.​ ​(2017h).​ ​“Pension​ ​Fund​ ​Regulation​ ​and​ ​Governance”.​ ​In​ ​Farazmand,​ ​A. 
(ed.).​ ​Global​ ​Encyclopedia​ ​of​ ​Public​ ​Administration,​ ​Public​ ​Policy,​ ​and​ ​Governance. 
Springer:​ ​NY. 
9. Chohan,​ ​U.W.​ ​(2017i).​ ​“Budget​ ​Reform​ ​and​ ​Political​ ​Reform”.​ ​In​ ​Farazmand,​ ​A.​ ​(ed.). 
Global​ ​Encyclopedia​ ​of​ ​Public​ ​Administration,​ ​Public​ ​Policy,​ ​and​ ​Governance.