Initial Coin Offerings as Seigniorage Stealing

Startups used to raise money from venture capital, followed by initial public o↵erings (IPOs). Nowadays, more and more startups, especially those in the business of online platforms building on the blockchain technology, raise money from initial coin o↵erings (ICOs), where investors purchase platform-specific tokens using either fiat money or other cryptocurrencies. These ICOs have raised the eyebrows of many regulators, who at times regard ICOs as disguises of IPOs with the purpose of circumventing existing regulation—a motive called regulatory arbitrage. Such a concern from regulators, in turn, stimulates an academic literature on possible benign motives of ICOs that may di↵er from the suspected malign one of regulatory arbitrage.

This literature has by and large focused on corporate-finance motives of ICOs. ICOs are considered by this literature as an issuance of a new kind of security which, like equity and debt, is a contract that divides future income streams between an entrepreneur and the investors. Like equity and debt, this new kind of security also addresses certain specific agency problems while giving rise to others.

This project takes a different perspective. We regard ICOs as a way to create a profit for the entrepreneur by seigniorage stealing. Instead of issuing its platform specific token, a platform could have alternatively chosen another more broadly circulated(crypto)currency-let's call it dollar for the lack of a better name-as its medium of exchange. Since holding a token is riskier than holding dollar (as a token will inevitably lose its value once the platform is out of business), token is worse than dollar as a medium of exchange. lssuing a platform-specific token hence lowers the efficiency of the platform This drawback, however may be more than compensated by the fact that selling a new currency is “almost" a profit out of thin air.“Almost", because this profit actually comes from a negative externality imposed on the society. This negative externality generated by each ICO may be imperceptible, but is as real as the damage generated by every breath of secondhand smoke. With a proliferation of special-purpose currencies for frag mented markets, the value of dollar can be depressed, rendering the broader, dollar-using economy less efficient.

This malign motive of ICOs is different from regulatory arbitrage, which used to be the main focus of suspecting regulators, and should be weighed against other redeeming virtues of ICOs-for example, a platform that wants to sell its token at a better price will have a stronger incentive to commit to a lower transaction fee, or to invest in its longevity both are ways to boost the value of its token in an ICO. Regulations of ICOs need to be designed with the malign motive and these redeeming virtues in mind.

This project is a theoretical undertaking that will put together all the above dimensions into a coherent analysis. The analysis will provide a new perspective for regulators that is different from old ones such as regulatory arbitrage. The new perspective will complement old ones and inform better government policies.