The Organization for Economic Cooperation and Development (OECD) has called for greater clarity in the regulatory and supervisory frameworks applied to initial coin offerings (ICOs). In its latest report OECD (2019) Initial Coin Offerings (ICOs) for SME Financing, the world body stated that the ICOs must be allowed to deliver its potential for the financing of blockchain-based SMEs. And this can be achieved through a coordinated global approach.
The report acknowledged the media hype around ICOs. “ICOs enable value creation through the potential development of network effects and efficiency gains driven by the use of the blockchain. It has the potential to offer a new way to raise capital for projects enabled by distributed ledger technologies (DLTs) and the blockchain, benefiting from efficiencies, cost savings and speed for execution.” That is, if its appropriately regulated and supervised. The OECD said ICOs also carried risks which are mainly linked to the uncertainty of the applicable regulatory frameworks for ICOs and crypto-asset markets. Then there is lack of financial consumer protection safeguards, limitations in the structuring of ICOs as well as operational risks related to DLTs. The report states that most ICO offerings do not fit the standard investment paradigm because of the ways value is created and attributed between the different participants of a network.
The OECD highlights that regulatory uncertainty and arbitrage exploitation by some issuers limits ICOs. The organization also drew attention to the lack of financial consumer and investor protection. “There is a lack of financial consumer and investor protection 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.” Because of the vast forms of risks, the report says ICOs cannot be considered as an appropriate investment for retail investors who do not necessarily have the financial skills to undertake such high-risk, high volatility investments.
The report also stresses the fact that ICOs are not the right solution for every project. The reason is that its very limited at this time which is attributed to the regulatory vacuum of the crypto-asset market. Policymakers can bring about conditions necessary to facilitate the development of ICOs in a safe and fair way. “Clarity in the regulatory and supervisory framework applying to ICOs is arguably a stepping stone to the safer use of token issuance for financing purposes,” the report states.
ICO Can ‘Democratize’ SME Financing
Concentrating decision power will no longer be in the hands of financiers, as ICO will democratize SME financing, distributing control among SMEs and participants. SMEs can also diversify their financing options. Besides cost savings, financing through ICOs, the report says offers SMEs and entrepreneurs direct access to an unlimited investor pool. “At their current form, ICOs are directly communicated and addressed to the public on a global scale and without any restriction or limitation on the type of investor.” Experts also agree that SMEs have enormous potential with unlimited funding pools to gain funding. However, in it lies risks for investors because financial consumer protection safeguards are not applicable.
Overall, it cannot be overlooked that ICOs are changing capital formation and inclusive financing. It can be a more inclusive financing vehicle. The report suggests that this can be achieved “by allowing small retail investors to participate in the financing of small businesses and start-ups. ICOs can provide SMEs with direct access to an unlimited investor pool, offering near-immediate liquidity and the potential to create economic value.”