Governments must impose “reasonable supervision” on token sales and ICOs as soon as possible, says a director at China’s central bank. But while regulation is necessary to protect investors and develop a healthy blockchain industry, he wrote, it must also consider blockchain’s unique attributes.
The comments come from an academic paper by Yao Qian, director of the People’s Bank of China’s Digital Currency Research Institute.
Of particular note was Qian’s acknowledgement that blockchain technology is unique, and is even somewhat capable of self-regulation:
“In this process, preemptive and excessive intervention by regulator will damage the market’s automatic clearing mechanism. At the same time, features of blockchain technology like decentralization, traceability, tamper-proof, transparency and auto-execution of smart contracts has created a unique democratic management mechanism (like the DAO model), which, to a certain extent, also reduce the need for excessive regulatory intervention.”
Personal Research, Not Official Policy
8BTC.com News, which translated the original paper into English, stressed the findings were Qian’s personal academic viewpoint, and do not reflect PBOC policy. However given his title, it’s likely his view will carry more weight at the central bank than others.
Qian demonstrates a thorough understanding of his subject matter, with descriptions of several existing cryptocoins and their consensus protocols. He also gives a rundown of how tokens may be used, even using the term “censor-resistant”.
Valuing Tokens and ICOs, and Differences to IPO Shares
He goes into some detail about how to accurately value tokens issued. Advances in blockchain technology are unpredictable and industry startups are often proposing cutting-edge, unproven platforms. This makes traditional stock-valuation methods like price-to-earnings ratio and cash flow discount difficult.
Next, Qian looks at the regulatory aspect of ICOs. He notes it’s possible a token could be considered an investment contract or security under current regulations, citing the “Howey Test” that considers (among other things) investors’ profit expectations when buying a share or token.
He notes some key differences between ICOs/token sales and traditional, regulated IPOs (initial public offerings of company shares). These include the facts that ICOs accept only cryptocurrencies and not fiats, and exist in an unregulated environment where there are no limits on investment and no specific conditions for issuing entities. For example, IPO shares may only be issued by a registered enterprise — anyone or anything can hold an ICO, without even having to disclose identities.
IPOs are strictly regulated for a good reason, Qian says. This is to reduce risks of loss that comes from shady ventures and uninformed investors.
This applies not just to token sales but also to other crowdfunding practices, like Kickstarter. Under the U.S. JOBS Act, startups raising less than $1 million USD are regulation-exempt. Similar conditions exist in China, with limits on company size and number of investors.
Sandbox Blockchain Crowdfunding and Limit Scope
Qian recommends similar “sandboxing” as a solution to ICO proliferation and risk. These include funding caps and investor whitelists in higher-risk businesses. However, since limiting investors is difficult in the anonymous cryptocurrency world, approved VC companies could manage the issuance.
He also proposes a more staggered approach to fundraising, rather than one token sale raising massive amounts in one hit. Spreading token issuances out over longer timeframes will help build and maintain their value, he wrote.
There must also be greater international cooperation between regulators, since investors are likely to come from all over the world.
Qian’s conclusions are likely to win favor from those who think ICOs are too “wild west” and pose risks to average investors. On the other hand, those who like blockchain for its unemotional and code-based law will claim market forces and math alone should decide.
Do you think Qian’s conclusions are wise, or is government irrelevant to this industry? Let’s hear your thoughts.
Images via Modern Banker (China), Pixabay