“Soft law” and innovations: empirical analysis of ICO-related statements

Date12 August 2019
Publication Date12 August 2019
AuthorVictor Dostov,Pavel Shust,Anna Leonova,Svetlana Krivoruchko
SubjectInformation & knowledge management
Soft lawand innovations: empirical
analysis of ICO-related statements
Victor Dostov, Pavel Shust, Anna Leonova and Svetlana Krivoruchko
Purpose The purpose of the paperis to explore the initial coin offering (ICO) statementsas ‘‘soft law’’
instrumentused to regulate disruptive innovations.
Design/methodology/approach The research is based on the qualitativecontent analysis of 40 ICO
statementsissued by regulators in 37 countries by applyinga custom-made coding table.
Findings The research shows that ‘‘soft law’’ is used predominantly by high-capacity
jurisdictions. ‘‘Soft law’’ allows for more flexibility and less technological and business neutrality.
The findings also show the contradiction between empirical evidence and public sentiment: it
seems that the widespread notion that virtual currencies have connotations with money
laundering/financing of terrorism (ML/FT) is not shared by the regulators, who are more concerned
by the fraud. Finally, it was found that the standard-setting bodies are lagging behind in providing
guidance on the emergence technologies.
Research limitations/implications The content analysisis based on 40 statements, which is a limited
set of data. The method might be subject to interpersonal bias,although arrangements were made to
ensurethe uniformity of coding process.
Practical implications The findings imply that soft law is an attractive risk-mitigation tool when the
object of regulation is still evolving but the risks are present. Soft law also might contradict with the
‘‘technologyand business neutrality’’ principle whichrequires further research. Finally, the findingsshow
the need for moreactive involvement of the standard setting bodies.
Originality/value This is the first in-depth research of the ICO-related statements as ‘‘soft law’’
instruments.It also offers a new perspective on the issue of financialinnovations regulation.
Keywords Soft law, Cryptocurrency, ICO, ICO regulation, Initial coin offering, Tokens, Risks, Regulator
Paper type Research paper
The emergence of Bitcoin a new virtual, private,decentralized currency became a
challenge for the regulators. Bitcoin is the currency without central issuer, has
unpredictable price fluctuations and allows for instant cross-border
transactions[1]. Technology behind the Bitcoin is blockchain that can be used for the
decentralized exchange of any information and has uses beyond payments (Crosby
et al., 2016). One of these uses is attracting investments i.e. initial coin offerings
(ICOs). The process is very similar to issuing shares but unlike traditional initial public
offerings (IPOs), it is mostly unregulated. In this paper we examine the nature of ICOs
and how financial regulators deal with “disruptive innovations” (Cortez, 2014). We are
primarily interested in the “soft law” instruments, such as warnings and policy
statements. Using the content analysis toolkit, we analyze the ICO-related warnings
that are publicly available on the regulators’ websites, to identify how disruptive
innovations such as ICOs affect regulatory approaches. The paper is structured as
follows. First, we describe the ICO phenomenon and look at the soft law-related
research so far. Then we outline the research method and process. Then we test our
hypotheses using the coding results. In the final section we draw some theoretical and
policy implications and outline areas for further research.
Victor Dostov and
Pavel Shust are both based
at Saint Petersburg State
University, St. Petersburg,
Russian Federation, and
Russian Electronic Money
and Remittance
Association, Moscow,
Russian Federation.
Anna Leonova is based at
Russian Electronic Money
and Remittance
Association, Moscow,
Russian Federation.
Svetlana Krivoruchko is
based at Financial
University, Moscow,
Russian Federation.
Received 15 March 2019
Revised 25 April 2019
21 May 2019
22 May 2019
Accepted 23 May 2019
PAGE 476 jDIGITAL POLICY, REGULATION AND GOVERNANCE jVOL. 21 NO. 5 2019, pp. 476-493, ©EmeraldPublishing Limited, ISSN 2398-5038 DOI 10.1108/DPRG-03-2019-0018
1. The concept of the initial coin offering
Distributed ledger technology (DLT, also casually referred to as “blockchain”) is a relatively
new phenomenon. In short, it allows to securely store and transfer information without the
trusted third party. The technology is sometimes compared to Rai stones that were used on
the Yap Island in the Pacific. The huge stones were used as a currency: their ownership
was transferred from person to person by word of mouth (Cortez, 2014). All transactions
were public and confirmed collectively by the villagers. DLT works the same way but
instead of individuals, it comprises of a network of computers or servers to store and verify
information. This technology is also used for the Initial Coin Offerings. The ICO is an
innovative way to raise venture capital. When the firstICOs appeared a few years ago, they
were few and far between. In 2016, $90.5m were raised during ICOs; in 2017 40 times
more $6.2bn; in 2018 $7.9bn[2].
During ICOs investors purchase rights to tokens - a special kind of purely virtual digital
assets. Ownership of such asset is recorded in a distributed ledger (blockchain)[3]. There
is no universal taxonomy for the tokens, as they may take different forms. Tokens might
be classified as “non-financial” (i.e. community tokens or usage tokens) and “financial” (i.e.
cryptocurrency tokens or equity tokens)[4].The first type gives investors the right to receive
goods/services from the issuer. In this case, ICO is similar to crowdfunding: investors buy
tokens, which are then exchanged for goods and services of the issuer. The second type
tokens have attributes of securities[5]. As well as “classic” securities, they entitle the holder
to receive part of the profit and/or participatein the management of the company.
Unlike IPOs, ICOs are mostly unregulated. While some types of token can fall within the
existing regulatory framework (Nolan et al., 2018), others may not, pushing regulators to
play a “whack-a-mole” game: the regulatory responses may vary fromno regulation at all to
heavy regulation and even ban (Kaal, 2018). Lack of regulation also means lower
transaction costs and regulatory arbitrage: making ICOs a more attractive alternative to
overly regulated IPOs. In that respect, ICOs may have mitigated the acceptance problem
(Shin, 2009) to some extent. However, thisalso means that unqualified persons may think of
it as absolutely risk-free technology.
According to the EY analysis, only 5 per cent of the companies launching the ICO have a
running project, while 84 per cent are only trying to sell the idea[6]. Usually information
about the project is specified in a “white paper” alternative to the investment prospectus
that includes information about the team, project, market analysis, etc. However, these
disclosures are not standardized, each company discloses the information on its own
judgement. The “white papers” are not audited, hence their reliability may vary (Zetzsche
et al.,2017). This devalues the importance of formalinformation disclosure some research
shows that the success of an ICO is unaffected by the availability of a “white paper” at all
(Adhami et al., 2018). All this increases the information asymmetry between the issuer and
the potential investor and thereforethe risks of complete loss of investments.
2. Literature review
While there is a significant body of literature on “soft law,” the research of ICO is still limited.
Papers on “soft law” usually refer to the often-cited paper of Kenneth Abbott and Duncan
Snidal on the benefits of the “soft law” in international governance (Abbott and Snidal,
2000). Abbott and Snidal consider “soft law”as “deviations from hard law” (i.e. conventional
legal arrangements). These “deviations” are researched by the international law scholars,
as this provides insight in the long-standing discussion on why the world does not fall into
the abyss of chaos and perpetual war among the predominantly uncooperative states.
Unlike “hard law,” “soft law” (such as “recommendations” and “provisional legal
frameworks”) does not impose hard obligations, might be less precise and does not allow
for delegation of sovereignty fromstates to supranational bodies.

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