Initial Coin Offerings (ICOs) fill an essential gap in funding for entrepreneurs with limited access to other forms of capital, but a new report from the C.D. Howe Institute says smart guidelines are needed to get the balance right between investor protection and innovation.
Authors Thorsten Koeppl and Jeremy Kronick propose a simple test to ascertain whether an ICO is fundamental to a business venture’s success. For an ICO to be an efficient way of financing, the business venture needs to develop:
- a decentralized platform, usually based on blockchain technology; where
- a coin gives digital access to the platform; and serves as
- a means of payment for users that engage in decentralized, person-to-person (P2P) exchange in order to create and transfer value between them.
If these conditions are met, access to regulatory relief should be granted.
ICOs are a form of crowdfunding where many investors – mostly with very small stakes – combine to fund a project. In an ICO, an entrepreneur raises funds from many investors in the form of government-backed currencies or from common cryptocurrencies like bitcoin or ether. In return, investors receive new tokens or coins. Typically, these coins are themselves cryptocurrencies stored on either new or existing blockchains as a smart contract.
The authors suggest that Canadian securities regulators develop specific regulations for ICOs passing this simple test, including less onerous disclosure requirements, exemptions from securities dealer registration requirements, an extended timeframe for exemptions to be granted, and the restriction of investments to smaller amounts. As an alternative, possibly faster way forward, the simple test could be formalized quickly and be used to decide whether an ICO obtains access to the Canadian Securities Administrators Sandbox.
“Our proposed test can also create guidelines for the right approach to taxation that is consistent with the value that is added by such financing," notes Koeppl. “Tax rules can be based on the dual roles of the coins, which are both an investment stake and a currency.”
is Professor and RBC Fellow in the Department of Economics at Queen’s University and Scholar in Financial Services and Monetary Policy at the C.D. Howe Institute.
is Associate Director, Research, at the C.D. Howe Institute.