ICOs: The Tech Is Here, But Where Are the Standards?

ICOs may be here to stay, but self-regulation can make all the difference for the fledgling industry, the head of Gibraltar's stock exchange argues.

AccessTimeIconJan 5, 2018 at 3:30 a.m. UTC
Updated Sep 13, 2021 at 7:20 a.m. UTC
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Nick Cowan is CEO of the Gibraltar Blockchain Exchange and the Gibraltar Stock Exchange Group, which operates the Gibraltar Stock Exchange.

The following article is an exclusive contribution to CoinDesk's 2017 in Review.


Let's face facts: initial coin offerings (ICOs) have done more this year to encourage the adoption of blockchain technology, as well as its activity, invention, debate and reaction, than just about anything else in the industry.

Many technological purists are skeptical about this. They roll their eyes. They look forward to a more sophisticated future for blockchains. This is very understandable, but it's also short-sighted. Tokens and ICOs are a "killer app," a truly great use case that will spur adoption.

Of course, it's still early days, and there's a lot more work to do. For the purists, at the very least, it is undeniable that the extraordinary increase of interest in ethereum, in particular, and the fiat price of ETH, has coincided with the ICO phenomenon.

Many regard this first wave of tokens as similar to internet 1.0, and they are more interested in, so to speak, "tokens 2.0." Everyone else wants better technology, too, but the importance of innovation in standards or culture should not be underestimated. White papers, posts to GitHub and blog posts about token investment criteria are all part of what we might call "best practice 1.0."

Entering 2018, the blockchain community must review "best practice 1.0" from the last year and, alongside technology, begin working toward "best practice 2.0."

Consumer satisfaction

True to the spirit of blockchains, the ICO phenomenon this year has been very decentralized.

Projects across all sorts of areas and all over the world popped up. Anyone was free to launch a project and anyone was free to participate. Again, true to the spirit of blockchains, people have experimented for themselves, created and launched projects, committed their ETH and done so with very few obligations or expectations beyond the execution of the smart contract.

In many ways this was very liberating, but a lack of obligation or expectation too often meant a lack of responsibility or accountability, principally toward ICO participants. Many participants did focus on the technological promises of the projects to which they committed their ETH. Many also saw ICOs as a path to financial gain… and this is where everything began to get difficult.

Technology is just one part of a successful project. Organization, management, a well-considered plan, risk mitigating measures, communication and full and fair explanations about what someone can expect are also important. ICOs began to run into difficulty because there have not been clear standards and delivery on a project in line with expectations.

For example, some projects attracted a lot more for their ICO than either expected or planned for. Questions arose about how to deal with that excess:

  • Which participants get how many tokens?
  • Is it fair to keep the excess or should it be returned?
  • Do you issue more tokens?

These are just some of many questions.

Even worse, some projects have attracted attention for straying from the plans they set out in their white papers. With no preparation, there were no answers. This has meant many ICO participants were left dissatisfied.

Ethical considerations

Regulators are primarily concerned with protecting the integrity of the market and protecting investors.

Something in the form of ICOs, that was unexpected and not initially technically well understood, thus set off many warning signals and in some cases resulted in real loss and grievance. The reaction has been very understandably to err on the side of caution. The string of bans, warnings, statements and even lawsuits which began in September should have been entirely predictable.

Many in the blockchain community compare the stage of development and adoption to the early days of the internet.

If we are in 'internet 1.0,' or 'token 1.0,' or 'best practice 1.0,' then we should consider what other lessons we can learn. When popular use of the internet first started, very few people thought about, predicted or understood that there might be ethical, rather than technological issues, that we'd have to try to figure out. These were issues like privacy, intellectual property violation, identity theft, internet bullying. Recent fears about state propaganda and election interference were certainly not anticipated.

What will the concerns of the future be when it comes to cryptocurrencies, blockchains and ICOs?

It will likely take some time and it is very likely that we won’t predict them. However, we can certainly start thinking differently. Technological innovation is only one half of what the community needs to consider.

We must also give serious thought to standards, or cultural, or ethical innovation.

Regulation isn't a panacea

Regulation and new laws may be a welcome start, but they are also not a complete solution.

Although bitcoin was originally started with the intention of taking aim at the traditional financial sector, there are lessons we can learn from the past. There are many good ideas, standards and best practices which we can review and adapt. There is no reason not to keep the best that traditional financial services had to offer, to keep what was good and worked, and adapt it for the best fit with the realities of new technology.

After all, regulators themselves only have so many resources, whether that’s time or expertise. They also often have mandates not to act in ways which hinder new business and innovation. They often make very reasonable efforts. The reason we have seen bans and warnings is not that regulators are against innovation. They just don't want to be caught out by it.

Yet, regulators can only provide so much of the answer. For example, the way that hedge funds became mainstream was by developing their own industry norms and standards which acted in a complementary way to regulation. These kinds of standards reduced the risk for investors, created reliable expectations and ultimately allowed that industry to flourish.

We should expect to see these kinds of standards and industry practices begin to take shape next year for ICOs. Instead of being shut down indefinitely, the blockchain community must take some responsibility for itself. That is how the industry can figuratively grow up and it’s how we can move forward and increase adoption. If you want to go "to the moon" then that’s how you get there.

The good news is that over the last year there have been some very encouraging signs.

The Government of Gibraltar, which has experience in fostering the growth of online gaming, announced that it would introduce a new "Distributed Ledger Technology Regulatory Framework" which is due to pass into law in 2018. Instead of acting prescriptively and prohibitively it instead sets principles for conduct of business.

In the U.S., there is a team developing EDGAR-style rules for ICOs. Electronic Data Gathering, Analysis, and Retrieval (EDGAR) rules are information-filing standards that were originally intended to increase fairness in the securities market.

The SEC has issued some guidance about what kind of tokens can be classified as securities and which are not, and issued guidance on celebrity endorsements. The Japanese Financial Services Agency (FSA) has started a supervisory regime for cryptocurrency exchanges.

Toward best practice 2.0

These are all great signs that, whether they understand it or not, or whether it's particularly coordinated, market participants are in the early stages of building best practice 2.0.

If we want the next year to be better and a clear improvement on the last, these are some of the most important questions we must answer:

  • What criteria do we use to decide whether a token is a security?
  • What standards should apply to non-security “utility” tokens?
  • Who should be allowed to issue tokens?
  • How do you identify a good service provider?
  • Who should be able to buy what kind of token?
  • What can I say about my project?
  • What are good technological, governance, risk management, planning, and commercial standards?
  • Who do we hold accountable for what?

The blockchain community has an opportunity to be proactive and to start answering some of these questions themselves. Too often a raising of standards or change of practice is a response to what should have been a completely avoidable disaster. The fallout of the 2008 financial crisis, the same crisis which led Satoshi Nakamoto to create bitcoin in the first place, is an apt example. This past year has already seen law suits filed and the SEC start to file its first fraud charges. There are rumors of more charges to come and of regulators investigating with the intention to prosecute..

There is an opportunity for the blockchain community to reassess, reorganise and act to prevent rather than to cure.

Over the next year, we should look to exchanges to lead the way. In traditional financial services they compete with each other but otherwise, theoretically and practically, they sit neutral to other market participants. This is because the point of an exchange is to sit centrally as a common venue for the bringing together of buyers and sellers. It is an exchange’s job to set standards to help ensure the smooth, orderly running of their marketplace. Exchanges make decisions about who can participate and under what conditions. Confidence in the market is key – it’s what allows participants to conduct business and for industries to grow.

We should expect the same in the blockchain community.

Don't have high hopes for ICOs? CoinDesk is still accepting submissions for its 2017 in Review. Email news@coindesk.com to share your views on the historic year that was.

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