Pablo de Andrés

David Arroyo

Ricardo Correia

Alvaro Rezola

Universidad Autónoma de Madrid and ECGI

Institute of Physical and Information Technologies

Universidad Autónoma de Madrid

Universidad Autónoma de Madrid

Regulatory and Market Challenges of Initial Coin Offerings


This article analyzes the main problems and the solutions adopted in the market for Initial Coin Offerings (ICO), an alternative financing solution that has experienced spectacular growth and notoriety in recent years. This market relies on the use of Blockchain protocols and is, therefore, characterized as disintermediated, decentralized and unregulated. The problems we identify in this article, their severity, and the solutions currently being adopted to address them, lead us to conclude that it is unlikely that either of these characteristics will survive in the near future. Our results also indicate that the concerns expressed by regulators and other market agents regarding ICO markets are well founded. We find it particularly disturbing that such a new, revolutionary market already displays many of the problems of traditional financial markets, and that these problems were exactly the ones that occurred at the genesis of the last financial crisis.


The global financial crisis of 2007–2009 had important repercussions for the economy. It led to a series of public bailouts of financial institutions (e.g., the US Troubled Asset Relief Program), the implementation of expansionary fiscal and monetary policies that significantly decreased interest rates (e.g., the quantitative easing programs and debt purchases by central banks), a significant increase in unemployment, and the enforcement of new regulations targeting financial markets (e.g., see Berkmen et al., 2012; McCauley, 2012). Directly and indirectly, these events have fostered the development of alternative financial markets (Monjas-Barroso, 2012; Glasius and Pleyers, 2013) based on the adoption of new technologies (e.g., Blockchain, etc.), and these markets are characterized by disintermediation and deregulation.


The emergence of alternative financing in this context can be explained by the fact that, although interest rates decreased following the crisis, lenders were rationing credit (Brunnermeier, 2009; Shleifer and Vishny, 2010; Campello et al., 2010)1. This was the primary driver of the development of alternative financing channels. However, other factors have also fostered the growth of crowdsourced financing solutions and Blockchain technology itself. Following the public outcry caused by the bailout of financial institutions, people developed a general distrust of existing financial institutions and have become very receptive to alternatives (see Glasius and Pleyers, 2013, for a thorough analysis of the motivations and aims of the Occupy movements). These alternative financing solutions allow investors to meet lenders, bypassing traditional financial intermediaries. Lenders can obtain financing at reasonable prices and investors can obtain reasonable yields in a context of very low interest rates. Furthermore, since these “new” markets are digital, they are also global by nature (with no language, geographical, cultural, or legal barriers), allowing borrowers to access a broader base of potential investors, and at the same time, allowing investors to access a broader base of investment opportunities.

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