Ban, Boom, and Echo! Entrepreneurship and Initial Coin Offerings


Author Information : Cristiano Bellavitis (Whitman School of Management, Syracuse University)
Douglas Cumming (College of Business, Florida Atlantic University and Birmingham Business School, University of Birmingham)
Tom Vanacker (University of Exeter Business School, Exeter)

Year of Publication : Entrepreneurship Theory and Practice (2020)

Summary of Findings : We find that national regulation on initial coin offerings (ICOs) impacts the quality and quantity of ICOs in global markets.

Research Questions : 1) Do country regulatory institutions still matter in the context of ICOs, and if so, how? 2) How does a regulatory ban in specific countries (i.e., the China/South Korea ICO ban) influence the number and quality of ICOs in other countries over time?

What we know : Companies and individuals alike are increasingly interested in Initial Coin Offerings (ICOs) as an innovative means of entrepreneurial financing and participation in investing activities. Part of what makes ICOs so attractive is that they are supposed to circumvent the regulatory pressures of governmental institutions. Even though they are intended to operate globally, surpassing borders and nations, the reality is that local policymakers and regulators are still able to impact ICOs in various ways and with far-reaching consequences.

Novel Findings : Our first finding is that the China/South Korea ban initially made entrepreneurs rush to the ICO market in other countries, saturating the market with lower-rated ICO projects. However, we did not find evidence that this rush had an immediate impact on the ICO volume fundraised, suggesting that ICO investors did not chase after the increased offerings.

Novel Methodology : We collected a unique dataset of all ICOs worldwide. We then collected all Twitter channels for all ICOs launched and the tweets and replies associated with each account. We obtained a total of 627,470 original tweets and 866,150 replies. We then downloaded all the available news with a limit of 300 per search (i.e., country-quarter) imposed by Google. This provided a total of 179,983 pieces of news. We then used Amazon Web Services language detection to detect the language in which each news/tweet item was written and we then analyzed the title and the summary of each item using a natural language processing (NLP) algorithm targeted to that particular language.

Implications for Practice : Our theory and empirical evidence indicate that the ICO bans in China and South Korea influenced ICO numbers and quality in other countries. From a policy perspective, this finding is particularly important as it shows the importance of international coordination in ICO regulation and policies. National regulators and policymakers cannot operate independently in a vacuum without regard to other countries’ policies towards ICOs. Our findings entail both a cautionary note and a promising note. Policymakers should be particularly concerned that regulatory actions in other countries can, for example, create a rush of lower-rated ICOs in their own jurisdictions. However, our findings also suggest that regulatory actions, in specific countries, can eventually have positive effects in other jurisdictions, for example, by increasing the average quality rating of ICOs in the longer term. Regulators should be mindful of the effect of international regulation on both the size and quality of their ICO market. It is important to ensure quality standards, but also leave room for entrepreneurs to operate without prohibitive legal obstacles.

Implications for Policy: The development of innovative entrepreneurial finance markets, such as ICOs, is a critical policy concern because these markets influence entrepreneurs and entrepreneurship. Entrepreneurs, especially those with high growth potential, often require external financial resources to realize their potential. However, it is also well-known that entrepreneurs frequently experience constraints in accessing sufficient external funds. The ICO market represents a new source of financing for entrepreneurs. Accordingly, it enlarges the range of external financing sources that are available to them. Our findings suggest that the ICO market has changed dramatically after the China/South Korea ICO ban. The number of ICOs launched, albeit lower than in the pre-ban period, is still plentiful and their average quality has increased. For entrepreneurs interested in approaching the ICO market, these findings suggest that the hurdles to raise money have increased. Accordingly, more time and other resources may be required to develop successful ICO plans. Our findings further suggest that entrepreneurs that are actively preparing for an ICO need not only monitor the regulatory environment in their own jurisdictions but also in other countries. Regulatory changes in other countries can have a significant impact on the environment in which entrepreneurs will potentially raise ICO funding.

Implications on Research: Our study makes several contributions to multiple literature streams. Understanding the functioning and dynamics of innovative entrepreneurial finance markets, such as the ICO market, is a premier topic in entrepreneurial finance and the broader entrepreneurship literature (Bellavitis et al., 2017; Block et al., 2018, 2020; Fisch et al., 2019; Martino et al., 2019). Our study adds to an emerging literature on ICOs. Most closely related to our work is the paper by Huang et al. (2019), who examine the relationship between factor markets and institutions in specific countries and ICO activity in those countries using a cross-sectional dataset of ICO activity covering more than 100 countries.

Full Citations : Bellavitis, C., Cumming, D., & Vanacker, T. (2020). Ban, Boom, and Echo! Entrepreneurship and Initial Coin Offerings. Entrepreneurship Theory and Practice.

Abstract : Regulatory spillovers occur when regulation in one country affects either the expected regulatory approach and/or entrepreneurial finance markets in other countries. Drawing on institutional theory, we investigate the global implications of a regulatory spillover on entrepreneurship. We argue that regulatory spillovers have both short- and long-term effects on the number and quality of entrepreneurial finance initiatives such as Initial Coin Offerings (ICOs). Based on a large-scale sample of ICOs in 108 countries, we find that a regulatory ban of ICOs in one country causes a short-term increase in the number of low-rated ICOs in other countries and a long-term drop in the number of ICOs, especially low-rated, which increases the average ICO rating. That is, a restrictive regulation triggered a process of increased market selection.

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