A research study by iComply Investor Services, Mitacs Canada & the University of British Columbia has found that ICOs (initial coin offerings) face a compliance trilemma due to multiple approaches in the field.
Researchers thoroughly studied ICOs for about six months and focused mainly on the North American market but also skimmed through the developments and happenings in other countries too to conduct the study. The research was based on qualitative interviews with 45 individuals belonging to different work backgrounds such as finance, law and science to gather different opinions from people of different intellect in the ICO capacity.
Through the study, the research team analyzed that the major trilemma faced by ICO investors is due to the need of finding grounds on three divergent areas. These are:
- Having a compliant offering
- Reaching a distributed pool of investors
As important as all these factors are in forming ICOs, the study shows that a maximum of two objectives can be fulfilled out of the three because of the disparity. So, the compliance trilemma here means the inability to act on all three key points mentioned above, following the regulatory practices of both the investor’s and issuer’s spaces.
The most beneficial conscience for an ICO on providing funds is to reach a distributed pool of investors because more the investors, better the funding but more distributed the pool, higher is the risk and cost of following the financial regulations of a distributed network. The study states the issue as:
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.
Addressing the issue, the study has also provided issuers a way out of the trilemma which is to let go of at least one of the three objectives or to sacrifice all three points altogether. So how would ICOs go about it? If you look at established ICOs, they would emphasize more on forming the best possible scenario to carry out their funding and increasing their networks and they might compromise on the need to be cost effective but that is just an assumption, they might look the other way too. Speaking of the underdeveloped or newly formed ICOs in the crypto industry, they might prefer to be cost effective AND efficient at the same time but the chances of that happening are subjective.
Hence, this issue could be bigger than it may seem to be but this is not where it stops as it further opens up to four different approaches to ICO problems from which issuers have to choose. The four approaches are; the Maverick ICO, the Private ICO, the Hybrid ICO, and no ICO at all. So on what basis ICO issuers can direct their actions towards one of these approaches? For that, we look into details of these approaches.
The Maverick ICO refers to the situation where an issuer avoids factors such as compliance in order to increase the pool of investors to dominate in the secondary markets too and to increase cost effectiveness however, these steps are followed by regulatory issues on reaching different networks.
Secondly, the Private ICO indicates the approach of an issuer to carry out funding processes within the current space ignoring the option to increase networks. This approach is surely cost effective for an ICO but it comes at a price of being invisible in foreign trades.
Lastly, we study the Hybrid ICO approach through the sayings of the research, “compromise[s] on all three dimensions by issuing in select markets, resulting in bounded cost effectiveness, compliance and investor scope,” resulting in a combination of risks”.
Therefore, as we studied these approaches in detail we found out that the ICO formation comes at one at the cost of the other or to be accurate with the research, two at the cost of one. One has to be compromised in order to achieve the other two objectives or in some cases, all three might be sacrificed to an extent depending on the approach of the issuer.
Moreover, the study adds:
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.
Thus, for developments in this field and for better outcomes in future, the researchers concluded the study with an urge to define new regulations and provide an enhanced framework in this field so that ICOs can achieve its potential without the cost of one for the other.