Regulated ICOs Could Be Sustainable Crowdfunding Model for DLT Projects: OECD
The right oversight could protect investors and lead to economic benefits, the OECD has said in a report analyzing the impact of ICO on small and medium enterprises.
The Organization of Economic Cooperation and Development (OECD) has called for an international and well-measured approach in regulating the crypto crowdfunding model of initial coin offerings (ICOs). A proper legal framework could protect investor rights and unlock significant capital-raising potential for small and medium blockchain enterprises (SMEs), the intergovernmental economic body said on Tuesday.
The OECD published a report analyzing the ICO impact on SMEs. According to the document, the crypto model has significant capital-raising potential for distributed ledger-based projects, but it is not a proper crowdfunding scheme for non-DLT businesses.
The OECD analysis shows that ICOs have several key advantages compared to public equity financing: cost-efficiency, democratization of the crowdfunding mechanism, exposure for startups to an unlimited and diversified investor pool, and capital-raising without conferring ownership rights. Moreover, the ICO model creates liquidity, flexibility, and network values as it allows investments in part of a token and monetization of network effects.
However, those advantages currently have limited benefits for investors due to the severe problems with the ICO model. The regulatory uncertainty and the possibility for arbitrage create serious risk for investors, the organization explained. The lack of disclosure requirements and obligatory compensations are also major reasons for concern. Moreover, the token pre-sales with discounts typically bestow similar rights to the main sales, the OECD said.
“As the uncertainty and the risks involved in ICOs at their current form are vast, ICOs cannot be considered as an appropriate investment for retail investors who do not necessarily have the financial skills required to undertake such high-risk, high-volatility investments,” the report notes.
The ICO problems can be overcome through a global approach that should introduce standardized disclosure requirement so that investors could assume the risks. Implementation of anti-money laundering (AML) and countering financing of terrorism rules (CFT) are also appropriate measures.
“Policymakers have a role in creating the conditions necessary to facilitate the development of ICOs in a safe and fair way, and allow for the potential benefits of ICO structures to be enjoyed in a viable and sustainable way by SMEs, while at the same time protecting SMEs and investors from risks involved in such structures,” the OECD says in its paper.
The Paris-based organization has 36 members, including France, Germany, the United Kingdom, Canada, Australia, New Zealand, and Turkey. Japan and South Korea, two of the states with the largest cryptocurrency markets in terms of daily trading volumes, are also part of the OECD.
Last September, Secretary-General Angel Gurria called on governments to make blockchain a standard.