November 20, 2018 AtoZ Markets - A recent study funded by both the Canadian government, and the University of British Colombia (UBC), shows that Initial Coin Offering, or what is known as ICOs, are undergoing regulatory restrictions, the study identified as “compliance trilemma”.
Over a period of six months, the research team investigated in their study the ICO venue, with emphasis on areas like North America, in addition to scanning some other countries and regulatory systems.
From financial, legal, and scientific backgrounds, the research team interviewed 45 qualitative individuals involved in the ICO campaigns, to delve into the issues those find as prominent in the industry.
The interviews resulted in that ICO issuers face a “trilemma”, that they can work on two objectives at a time, out of three, as per the study.
Those three objectives were mentioned as being “having a compliant offering”, “reaching a distributed pool of investors” in a cost-effective way. In return, the term “compliance” was identified as the process of following the regulations set by both the issuer and the investor in the home jurisdiction in which the ICO campaign runs.
ICO issues have four approaches
The study referred as well to that even with the fact that the pool of investors is regarded as the core that contributes to an ICO, when it comes to how the campaign is funded, complying with the financial regulations imposes a high cost if the investors becomes more distributed.
“If issuers forgo these costs, the risk of being non-compliant rises significantly. The result is a trilemma, whereby issuers currently must forgo one of these goals to realize the other two, or to compromise on all three”, explained the study in one of its paragraphs.
In the research, the team uses the term “trilemma” to reveal four basic approaches connected with ICO issues; “the Maverick ICO”, which refers to not responding to the compliance for a better reach of ICO and cost effectiveness, wherein a noticeable risk of regulatory enforcement poses due to such practice.
The second approach is “the Private ICO”, in which the focus is on targeting accredited and institutional investors by sacrificing distribution. The thing that might bring a high chance of not effecting cost-effectiveness, while it is likely to pose challenges controlling the secondary market trading.
The third approach is the Hybrid ICO, which compromises on all of the three dimensions by issuing in specific markets, which consequently results in bounded cost effectiveness, the compliance provision, and the investor’s scope, which altogether pose multiple risks.
In conclusion, the study found that what was identified as “trilemma” affect ICOs and push investors back from getting involved more in the industry, which therefore imposes more confusion in understand how they can comply with the regulations.
“To date, the ICO has been hampered by a trilemma that has substantially limited its potential… Many actors with legitimate ventures that could benefit from ICOs are likely holding back, due to combination of confusion over how exactly they might comply with financial regulations within and across jurisdictions, and the prohibitive costs of doing so manually.”, concluded the study.