Aresearch team led by Penn Law professor David Hoffman has conducted the first detailed analysis of “Initial Coin Offerings” (ICOs) of virtual currencies, known as cryptocurrencies, revealing the estimated $25 billion dollar industry’s protections against self-dealing may leave investors exposed to risks they don’t anticipate from issuers. The study, “Coin Operated Capitalism,” is available as a working paper.
Initial Coin Offerings are an example of financial innovation, placing it in kinship with venture capital contracting, asset securitization, and initial public offerings (IPOs). Unlike IPOs, however, an ICO does not typically involve the sale of equity or shares in a corporation. Instead, ICO participants are buying an asset from ventures or firms that are selling digital currency, namely a coin or “token,” which is actually a string of computer code of which there is a restricted supply, that enables its holder to use, or govern, a network that the ventures’ promoters plan to develop using funds raised through the sale.
“Our main finding is, in a financial ecosystem built around the proposition that regulation is unnecessary because code is the final guarantee of performance, often ICOs are not embedding the governance promises they make—which protect investors against exploitation—in software code,” says Hoffman, a contracts law expert. “We also show that at least some popular ICOs have retained the power to modify their currency’s rights, but have failed to disclose that ability to investors in plain language.”
Read more at Penn Law.
