GRIFFITH UNIVERSITY

GRIFFITH LAW SCHOOL

Social Science Research Network

Legal Scholarship Network

Griffith Law School Research Paper No. 17-23

John Flood & Lachlan Robb

Trust, Anarcho-Capitalism, Blockchain and Initial Coin Offerings







Trust, Anarcho-Capitalism, Blockchain and Initial Coin Offerings

UNSW Centre for Law Markets and Regulation
Regulators Forum—DLT and Blockchain

John Flood
Professor of Law and Society, Griffith University and Research Fellow at the UCL
Centre for Blockchain Technologies
Lachlan Robb
Law Student, Griffith University

Contact: j.flood@griffith.edu.au

Contents
Introduction .......................................................................................................................................... 2
Anarcho-Capitalism and the Genesis of Blockchain ............................................................. 4
First Moment of Disjunction ........................................................................................................... 7
Second Moment of Disjunction .................................................................................................. 10
So What Makes a Good ICO? ........................................................................................................ 12
Use of Blockchain ........................................................................................................................ 12
Confidence and trust .................................................................................................................. 13
Legal regulations ......................................................................................................................... 15
Tezos ................................................................................................................................................. 16
The Regulatory Miasma ................................................................................................................. 18
Conclusion ........................................................................................................................................... 19

Electronic copy available at: https://ssrn.com/abstract=3074263

Abstract
Blockchain - distributed ledger technology - is seen as heralding what some call the
internet of trust because it provides an immutable chain of authority that is difficult to
hack. Satoshi Nakamoto created an algorithm that required immense amounts of
computing power to solve cryptographic problems that when resolved would create
consensus throughout the blockchain community by rewarding miners with Bitcoin
and prevent the "double-spend" problem. Trust, in either one's opposite party or
intermediaries would be unnecessary. The cryptographic work made trust redundant.

Unfortunately, Satoshi could not predict how the blockchain community would
behave once the software was launched into the community. Trust became the core
issue as different factions among developers and miners squabbled over changes to
the software. Trust is also deeply implicated in the ways the community uses
blockchain to raise money to fund developments through initial coin offerings (ICO).

In this paper we trace how this these issues emerged in blockchain's short history. We
use arguments over block sizes, transaction fees, and hard forks, and the process by
which ICOs are run to exemplify our account. We contextualise our story by
examining the history of blockchain. Blockchain seems so recent that it doesn't really
have a history, but in fact it has a long history stretching back to the Austrian School
of Economics. We argue that blockchain can trace its philosophical roots to the
anarchy-capitalist strain of the Austrian school. Anarcho-capitalists believe in peer to
peer contractual transactions as the foundation for society, They abhor collective
action even that which includes the defence of the realm. Dyadic collaborations are
sufficient for a society to survive by. Theorists such as Murray Rothbard and Leland
Yeager promoted these views in the second half of the 20th century. Satoshi's paper
was published in the Great Recession (2008) and incorporated this philosophy. As the
blockchain community has developed distributed ledger technology these basic
philosophical tensions have surfaced causing dissension and strife. It has all come
down to a fundamental issue: who do you trust?
Keywords: blockchain, distributed ledger technology, ICO, initial coin offerings,
bitcoin, ether, trust, anarcho-capitalism, Satoshi, Nakamoto,

Introduction
On October 17, 2017 the value of the Cryptocurrency Tezos was at a trading high
following their incredibly successful Initial Coin Offering (ICO) with Tezos being
valued at over US$232m as a result of increased Bitcoin prices.1 However within
a few days, they had suffered a catastrophic drop in confidence—falling 75 per
cent in mere hours before even being officially launched.2 This was a result of an
emerging legal battle between the founders of Tezos and the chairman of the
Swiss foundation tasked with independently managing the ICO funds. This in-
fighting appears to not only be causing investors to suffer, but may also stand as
a key case in determining the legal status of certain ICOs—with rumours
circulating into the actions of the founders,3 the role of Switzerland as a crypto-
haven, 4 and investigations into the nature of the token as a security5. Tezos is
now no doubt synonymous with ICOs and governance—just not for the reasons
that the founders initially hoped for.6

This recent brouhaha over Tezos further recalls an earlier controversy around
“The DAO”. 7 Both essentially brought into question a central tenet of the

1 See CryptoCompare, (17 October 2017)

<https://www.cryptocompare.com/coins/xtz/charts/USD?t=LC&p=3M>
2 See eg, William Suberg, Tezos Team Spat Sends Futures Price Diving 75% as Investors Panic (19

October 2017) Coin Telegraph, <https://cointelegraph.com/news/tezos-team-spat-sends-

futures-price-diving-75-as-investors-panic>; Jeff John Roberts, Is Tezos in Trouble? Crypto Firm
Beset by Infighting After $232M ICO (19 October 2017) Fortune
<http://fortune.com/2017/10/19/tezos-ico/>; Samuel Haig, Tezos Founders Enter Legal Battle
for Control of $400m in Raised ICO Funds (19 October 2017) Bitcoin.com
<https://news.bitcoin.com/tezos-founders-enter-legal-battle-for-control-of-400m-in-raised-
funds/>
3 Anna Irrera, Steve Stecklow, Brenna Hughes Neghaiwi, Special Report: Backroom battle imperils

$230 million cryptocurrency venture (19 October 2017) <https://www.reuters.com/article/us-

bitcoin-funding-tezos-specialreport/special-report-backroom-battle-imperils-230-million-
cryptocurrency-venture-idUSKBN1CN35K
4 Samuel Haig, Lawyer on Tezos Dispute: “The Court May Decide… That The Suit Should Be Heard in

Switzerland” (12 November 2017) Bitcoin.com <https://news.bitcoin.com/lawyer-argues-tezos-

suit-heard-switzerland/>
5 http://fortune.com/2017/10/28/tezos-sec/
6 With a reported reason for Tezos being ‘to solve the governance challenges faced by bitcoin’, it

was reported that at an October appearance, the founders stated that ‘We appreciate the irony of
the situation.’; see Marc Hochstein, Tezos Founders on ICO Controversy: ‘This Will Blow Over’ (25
October 2017) Coindesk <https://www.coindesk.com/tezos-founders-ico-controversy-will-
blow/>
7 Quinn DuPont, ‘Experiments in Algorithmic Governance: A History and Ethnography of “The

DAO”, A Failed Decentralized Autonomous Organization’, in Malcom Campbell-Verduyn (ed)

Bitcoin and Beyond: Cryptocurrencies, Blockchains and Global Governance (2017, forthcoming);

Electronic copy available at: https://ssrn.com/abstract=3074263

blockchain ideology: that trustless systems could be set up through
cryptographic means. A crucial part of blockchain is the inbuilt scheme of trust
based on proof of work creating, in effect, an “ex-trust” system that does not
depend on third parties, either as intermediaries or adjudicators. In 2008 Satoshi
Nakamoto argued for the removal of trusted third parties by a system of
cryptographic proof.8 While this may appear to work in a Bitcoin environment,
the concept is imperfect; Bitcoin and blockchain are not hermetically sealed
worlds separated from the wider world. To build systems in which trust is
present by virtue of the system itself or to remove the necessity of trust defies
the reality of the lived world and our modes of sociality. Issues of trust have
ways of reinserting themselves into the world in unanticipated ways, even, pace
Satoshi, with blockchain. It would be naïve to believe that in the modern world
we can remove trust by ex cathedra statements, no matter how authoritative the
source. Cryptography, itself, needs a social context—developers, programmers,
and miners—and it is there that the problems of trust reassert themselves.


In this paper we draw attention to the disjunctions where trust becomes a
pivotal aspect of blockchain work. We use two moments, possibly three,9 to
illustrate: one is the argument over the size of blocks to be mined and the second
is the constitution and composition of initial coin offerings (ICO). These
disjunctions leave regulators in quandary as they ponder a decentralised,
delocalised and digital technology that is difficult to capture. But in order to
understand these particular moments it is necessary to locate the philosophical
and historical “jurisdiction” of blockchain. We use the term jurisdiction not in its
legal and technical sense but rather as a way of separating a category of thought

available at <http://iqdupont.com/assets/documents/DUPONT-2017-Preprint-Algorithmic-
Governance.pdf>
8 Satoshi Nakamoto, Bitcoin: A Peer to Peer Electronic Cash System (2008) Bitcoin.org

<https://bitcoin.org/bitcoin.pdf>
9 The present state of regulation of cryptocurrencies and tokens by financial regulators around

the world is extremely variable and so could count as a disjunction. See “The Regulatory Miasma”
below.

3
from others as an ecological category.10 In the case of blockchain the main
ecological jurisdiction is within the field of anarcho-capitalism.

Anarcho-Capitalism and the Genesis of Blockchain

The rise of Blockchain may indeed be a reflection of a technologically enabled
modern iteration of anarcho-capitalism. To establish context, we begin with a
brief explanation of blockchain or Distributed Ledger Technology (DLT).
Essentially blockchain and DLT are a series of interconnecting ledgers that have
been approved by consensus in a decentralised network where every member
(node) has a copy of the ledger. It is for this reason that Data61 in its 2017 report
stated: “Distributed ledgers record the transactions supporting modern life.”11
An example of this is Bitcoin, where the exchange of digital cryptocurrency was
ensured by a competition among node members to solve the cryptographic
problem created when Bitcoin was spent. Once node members accepted the
solution to the problem it became part of the blockchain, immutable, permanent
and accessible to all.12 Each block that is attached to the blockchain contains a
small element of previous blocks, hash, so the chain is traceable back to the
original “genesis” block.13 It gives integrity to the system. Moreover, it is not
essential for a blockchain to run with cryptocurrency or tokens. As long as the
members to the particular blockchain can achieve consensus it is sufficient and
will be “trusted”. There are many blockchains some of which are open and public
like the Bitcoin blockchain and others which are closed to specified sets of
members, but all exist in the cloud. From this understanding of blockchain as
being a technologically-driven mechanism that records and supports elements of
modern life, we can turn to Anarcho-capitalism as a theoretical mechanism to
understand the environment in which this trend has evolved.

10 see, Andrew Abbott, The System of Professions: An Essay on the Expert Division of Labor
(University of Chicago Press, 1998) 33
11 Hanson, RT, Reeson, A, and Staples, M, (2017) Distributed Ledgers, Scenarios for the Australian

Economy over the Coming Decades, Canberra, iv.

12 Ibid, 3.
13 Ibid, 4.

4
Anarcho-capitalists are distinguished from anarchists by their love of property
acquired through free and voluntary trade.14 They reject the state, its agencies,
and all forms of collective action. 15 While conventional anarchists condemn
capitalism as authoritarian and would expropriate private property, anarcho-
capitalists are to be found on the far right of the political spectrum espousing
libertarian, free market philosophies (and should not be confused with anarcho-
communists).16 Indeed anarcho-capitalists would reject government defence of
the realm, dispute resolution systems based on state courts, and regulation
arguing the free market can supply these institutions more efficiently and
economically through market price mechanisms. 17 At the core of anarcho-
capitalism are the theories of the Austrian school of economics.18 Eugen von
Böhm-Bawerk, Friedrich von Hayek and Ludwig von Mises espoused the
freedoms of market and the price mechanism as a counter to the autocracy of the
Bismarckian and Austro-Hungarian empires. They were radical and their ideas
had the potential to destabilise established orthodoxies, both economic and
social.19 In effect, over the longue durée we have seen they were prescient as
their disciples—Hayek and Friedman—created the infrastructure of neo-
liberalism, the hegemony of the price mechanism, and the eradication of the
post-war welfare state 20 Anarcho-capitalists conjoin decentralisation,
individualisation, and privatisation. Their atomistic view of the world celebrates
the individual as a societal unit divorced from everything but individual willed

14 Although the use of these terms appears melodramatic, they do serve the dramaturgical ends

of showing how opposing factions characterize themselves and perform their beliefs; see Erving
Goffman, The Presentation of Self in Everyday Life. (Doubleday Anchor Books, 1959)
15 Susan Love Brown, ‘The Free Market as Salvation from Government: The Anarcho-Capitalist

View’ in James Carrier (ed) Meanings of the Market: The Free Market in Western Culture (Berg,
1997)
16 Murray Rothbard, An Austrian Perspective on the History of Economic Thought (Edward Elgar

Publishing, 1995)
17 Ibid.
18 Ibid.
19 Harald Hagemann, Tamotsu Nishizawa, and Yukihiro Ikeda (eds) Austrian Economics in

Transition: From Carl Menger to Friedrich Hayek (Palgrave Macmillan, 2010)

20 See Leland Yeager, Is the Market a Test of Truth and Beauty? Essays in Political Economy

(Ludwig von Mises Institute, 2011); In contrast, Thomas Picketty has dramatically shown how
this philosophy has created enormous disparity between those wealthy with capital and those
who rely on increasingly precarious labour markets for their upkeep. Those who represent the
elites in modern society are the technology oligarchs who promote individualism under the guise
of sociality. The linking of this group with anarcho-capitalism, despite the establishment of
foundations like the Gates Foundation, is not accidental; see Thomas Picketty, Capital in the 21st
Century (Harvard University Press, 2014)

5
action. There is no sense of structure or even history in their worldview, which
emphasises an episodic and disconnected approach to life, one that has no social
context. Anarcho-capitalism speaks of a society based on bilateral contract—
voluntary actions—instead of collective action. In one sense it is an aspirational
philosophy representative of particular groups that has little chance of becoming
prevalent throughout society. Nevertheless, these groups are powerful and
influential with established networks into the locus of power.21 Blockchain is the
most recent iteration of this worldview and one which seems to have taken the
philosophy to heart more than most.

Some of the founding literature on blockchain captures and exemplifies the
philosophical grounding of anarcho-capitalism. For example, Satoshi in his
paper, Bitcoin: A Peer to Peer Electronic Cash System22, articulates its central
problem thus:
Commerce on the Internet has come to rely almost exclusively on
financial institutions serving as trusted third parties to process
electronic payments. While the system works well enough for most
transactions, it still suffers from the inherent weaknesses of the trust
based model. (emphasis added)23
Satoshi’s original whitepaper essentially posits itself as his ‘trust-manifesto’,
from this position it is clear to see how these ideas align as a modern, techno-
centric form of anarcho-capitalism. From the future developments and
disjunctions of the blockchain concepts we can observe how this is further
substantiated.

21 The roles of the giant technology companies cannot be over-emphasised. Amazon, Apple,

Facebook, Google, and Netflix are repositories of huge amounts of data, freely given by us, that
lets them create micro-worlds for us of which we are not aware. The age of big data and analytics
is for some the start of the Fourth/Fifth Industrial Revolution.
22 Satoshi Nakamoto, Bitcoin: A Peer to Peer Electronic Cash System (2008) Bitcoin.org

<https://bitcoin.org/bitcoin.pdf>
23 Satoshi Nakamoto, Bitcoin: A Peer to Peer Electronic Cash System (2008) Bitcoin.org

<https://bitcoin.org/bitcoin.pdf> (emphasis added)

6
First Moment of Disjunction
It is fair to say that the developments in blockchain since Satoshi’s 2008 paper
have followed this philosophy. Bitcoin runs itself through rewards to miners and
transaction fees paid by users, again reinforcing the self-financing and autonomy
of the technology.24 Ethereum has a similar process with its “gas” fuelling the
network.25 Even though transaction fees are voluntary, the trade off between
cost and the time it takes to mine a block means that users are compelled to pay
fees to incentivise miners (who are under no compulsion to accept transactions
into a block).26 Without transaction fees the very nature of the transaction
becomes precarious and can potentially lead to double-spend problems if
transactions are withdrawn, for example. Transaction fees are a means of
balancing out the diminishing returns from mining, as the creation of new
bitcoins is reaching its ultimate limit.27 One way of looking at transaction fees is
as a demonstration of the free market providing a solution to scarce resources: if
you want your transaction to have priority over others then you bid with a
transaction fee—as with any other auction. This in turn causes issues of trust to
surface as those engaged in transactions are forced to reduce costs by calculating
and predicting the optimum transaction fee. For those who don’t wish to bid low
and risk losing their gas, you can always set a high bid and if it comes under your
limit you only get charged what was required. Yet this is a process that can go
awry when the system experiences a glitch, as seen in a recent transaction on the
Ethereum network. This transaction, worth millions of dollars, involved the
individual setting his transaction fee so high that when the transaction failed, he
was charged a non-refundable fee of US$80,000.28

24 See, eg, Nik Custodio, Still Don't Get Bitcoin? Here's an Explanation Even a Five-Year-Old Will

Understand (9 January 2014) Coindesk <https://www.coindesk.com/bitcoin-explained-five-year-

old/>
25 See, eg, Jeff Coleman, What is meant by the term ‘gas’? (20 Janurary 2016) Stack Exchange

<https://ethereum.stackexchange.com/questions/3/what-is-meant-by-the-term-gas>
26 Ibid.
27 Kyle Torpey, Bitcoin is closing in on its transaction capacity limit, for real this time (20 January

2017) Coinjournal https://coinjournal.net/bitcoin-closing-transaction-capacity-limit-real-time/

28 John Wilmoth, This AirSwap ICO investor lost $80,000 on a failed transaction (13 October 2017)

Cryptocoins News https://www.cryptocoinsnews.com/this-airswap-ico-investor-lost-80000-on-

a-failed-transaction/

7
An additional aspect of the diminishing returns is if (and to what extent),
changes can be made to the mining process in order to improve the capacity of
the mining system. Mining farms are based in countries such as Mongolia where
fuel sources and energy are cheap,29 and currently many of them are arguing
against proposed changes to the Bitcoin Architecture. These proposed changes
involve increasing the size of the blocks to allow for more transactions to take
place and thus assist with the scalability of the system. However, miners (and
mining pools) have an incentive to keep the process as it is with the size of the
blocks at 1MB. It means they have large numbers of blocks to mine and greater
potential to generate bitcoin.30 These arguments occur over abstruse elements of
blockchain such as Segwit and Segwit2x. 31 These are ways of structuring
information required in the hashing such that it is not actually included in the
mining process. The consequence of adopting new software is that it creates a
non-reversible hard fork 32 that places transactions in a kind of limbo until
sufficient numbers take to the new approach. Take Segwit2x, for example, which
is explained thus:
First, SegWit2x seeks to upgrade bitcoin in two ways:
1. It would enact the long-proposed code optimization Segregated
Witness (SegWit), which alters how some data is stored on the
network.
2. It would set a timeline for increasing the network's block size to 2MB,
up from 1MB today, to be triggered about three months after the
SegWit activation.33

29 Zheping Huang, and Joon Ian Wong, The lives of Bitcoin miners digging for digital gold in Inner

Mongolia (August 17 2017) Quartz <https://qz.com/1054805/what-its-like-working-at-a-

sprawling-bitcoin-mine-in-inner-mongolia/>
30 See, eg, Corin Faife, Will 2017 Bring an End to Bitcoin's Great Scaling Debate? (5 January 2017)

Coindesk <https://www.coindesk.com/2016-bitcoin-protocol-block-size-debate/>
31 Daan Pepijn, What the fork is Segwit? Everything you need to know about Bitcoin scaling (13

September 2017) The Next Web <https://thenextweb.com/contributors/2017/09/13/fork-

segwit-everything-need-know-bitcoin-scaling/>
32 A Hard fork is ‘A permanent divergence in the block chain, commonly occurs when non-

upgraded nodes can’t validate blocks created by upgraded nodes that follow newer consensus
rules;’ see also Bitcoin Developer Guide, https://bitcoin.org/en/developer-guide#consensus-
rule-changes
33 Daan Pepijn, What the fork is Segwit? Everything you need to know about Bitcoin scaling (13

September 2017) The Next Web <https://thenextweb.com/contributors/2017/09/13/fork-

segwit-everything-need-know-bitcoin-scaling/>

8
But Segwit2x is competing with another proposal, BIP148, which is a User
Activated Soft Fork (UASF) which would run as an alternative to Segwit2x.34
Despite attempts to make them compatible, the resulting implementations could
result in a network fork leaving bitcoin users in a quandary as to which to use
and to guess which one might succeed.35 Some of this controversy was seen in
the BTC1 panic – where BTC1 is another name given to Segwit2x.36 This issue
began to cause concerns when in August 2017 BitPay, a payment processor,
urged users to download BTC1 which caused a storm of dissent in the
community. For example, on twitter responses included:
‘User trust is hard won, easily lost. What were you thinking? I'll avoid
dealing with anyone displaying the #BitPay logo from today.’
‘Yes me and a lot of Bitcoiners have decided to never use @BitPay they
believe in destroying Bitcoin and support s**t code like btc1/segwit2x.’37

34 Aaron van Wirdum, A Bitcoin beginners guide to surviving the BIP148 UASF (updated) (31 May

2017) Bitcoin Magazine <https://bitcoinmagazine.com/articles/bitcoin-beginners-guide-

surviving-bip-148-uasf/>
35 Exchanges such as IndependentReserve.com are posting notices warning their customers of

the potential pitfalls of impending hard forks such as the SegWit2x due in mid-November 2017.
They say:
‘Our current plan is as follows:
1) At around 24 hours prior to the fork we will disable Bitcoin deposits and withdrawals. Any
clients who wish to have access to their Bitcoin at the time of the fork, should withdraw Bitcoin
to an address under their own control prior to this.We will take a snapshot of all client Bitcoin
balances at the moment of the fork.
2) At the time of the fork, we will consider the side of the fork which follows the existing
consensus rules to be “Bitcoin” with ticker symbol “XBT”
3) Within two days of the fork, we will credit all customers who had a Bitcoin balance at the
moment of the fork, with the equivalent amount of a new token called “Bitcoin2x” with ticker
symbol “B2X”
4) When we consider it safe to do so, we will re-enable Deposits and Withdrawals on the Bitcoin
and Bitcoin2x sides of the fork. We will only do this when we are certain that there is no risk to
client funds and the blockchains are at a stable state. We have developed our own mechanism to
ensure that transactions are replay protected.
5) If the Bitcoin2x blockchain becomes the chain with the most accumulated difficulty, and the
chain is in a stable state, we will consider renaming it to “Bitcoin” and send an additional
communication at that time. We will consider other factors such as price and community support
to determine stability. We will start evaluating this two weeks after the fork.
As this hard fork is especially contentious in nature due to its technical and political aspects, we
may need to deviate from this plan in order to react to unexpected developments.
Customers who wish to remain in total control of their Bitcoin at the time of the fork should
withdraw their Bitcoin to their own wallet two days prior to the fork.’; see Adrian Przelozny,
Segwit2x Hard Fork (02 November 2017) Independent Reserve
<https://www.independentreserve.com/News/Media/Segwit2x_Hard_Fork>
36 Ibid.
37 Pete Rizzo and Rachel Rose O’Leary, SPECTRE Creators Seek VC Backing for Blockchain-Free

Cryptocurrency (25 October 2017) Coindesk <https://www.coindesk.com/spectre-creators-seek-

vc-backing-for-blockchain-free-cryptocurrency/>

9
This debate also raged at the 2016 Satoshi Roundtable summit in Cancun, Mexico
where one commentator stated that ‘In Cancun, everyone was fighting about
1MB to 2MB ... no one was talking about increasing on-chain scalability.’ This
prompts responses in the community that these issues are simply ‘a critique on
the current state of blockchain development.’38

It appears that the infighting between programmers, miners, and users erodes
any semblance of trust in the system. As one can see, a “trustless system” actually
needs large inputs of trust to maintain its integrity. The internal factions within
the blockchain community have created their own dissension which undermines
the very nature of blockchain. On the one hand it appears as if individualism is
triumphing over collective action, (as anarcho-capitalism prefers and would
celebrate). But on the other hand, factionalism divides and destabilises as the
participants enter periods of uncertainty. Trust is eroded and becomes
increasingly impossible in such situations both within the community and for
those outside. No answer yet has been found to resolve these conundrums and
the community predicts more hard forks.39

Second Moment of Disjunction

Initial Coin Offerings (ICO) have recently become an integral part of the
blockchain ecology and consequently created their own sets of issues and
challenges. At Griffith University, the Blockchain and Initial Coin Offering (BICO)
research group40 is creating a database of ICOs, which has grown to over 1,000 in
2017. And its findings will be the topic of another paper. In the last year the
number of ICOs has exceeded a thousand. Indeed in the last twenty days 136
new ICOs were started, and plenty more will come on stream soon. This is
similarly reflected in the nature of funding, where in Q2 of 2017 ICOs raised

38 Ibid.
39 On November 8, 2017 the SegWit2x hardfork was called off sine die owing to public hostility;

see Pete Rizzo, and Alyssa Hertig, Relief and disbelief: Bitcoin reacts to sudden ‘2x’ suspension (8
November 2017) Coindesk <https://www.coindesk.com/relief-disbelief-bitcoin-reacts-sudden-
2x-suspension/>
40 For more information on BICO see Griffith Law Futures Centre, <https://www.lawfutures.org>

10
US$850m compared to venture capital funding of US$253m.41 The trajectory of
ICOs is certainly a disjunction in the evolution of Blockchain.

The ICO, or token generation sale, is a means of raising funds which does not
involve the traditional offer of securities and listing posited by an Initial Public
Offerings (IPO). By not listing a security, companies, start-ups, or even raw
projects can attempt to gain funding in a way that avoids the arduous and costly
process of the IPO while also not diminishing the founders’ stakes in their
businesses. An ICO works by the company offering to sell tokens to the public in
exchange for cryptocurrency. Usually there is a cap on how many tokens will be
sold and the ICO is open for a fixed period of say a fortnight or a month. If it
achieves its goal before the end date, it will close early. These tokens are created
by the company, almost as a virtual mint, and distributed to those who purchase
them in the ICO. Tokens can be of different varieties such as donation tokens,
utility tokens, or tokens that generate returns.

We will return to the regulatory issues later, but the typification of the token is
crucial to how it will be treated. And the developers are not always aware of the
type of token they have created or its legal implications. Tokens are similar to
casino chips where money is exchanged for tokens that can be used at gambling
tables or in slot machines. They are specific to each particular startup. It is true
that many purchasers buy tokens as repositories of value. As the company takes
its products or services forward the tokens’ values will rise (or fall). The token’s
initial value is based on the underlying cryptocurrency used to purchase it (say
ether or bitcoin) and this affects the value of the token also. Many tokens are
designed with the ERC20 technology in mind so that they are tradeable on
crypto-exchanges.42 For example, the recent token sale by Horizon State, a digital
ballot box, was based on an ERC20 utility token. The token’s purpose is to let
voters register their votes, so the tokens have to be tradeable.43

41 Pete Rizzo, and Alyssa Hertig, Relief and disbelief: Bitcoin reacts to sudden ‘2x’ suspension (8

November 2017) Coindesk <https://www.coindesk.com/relief-disbelief-bitcoin-reacts-sudden-

2x-suspension/>
42 Castor, Amy, Ethereum ‘tokens’ are all the rage. But what are they anyway? (17 June 2017) Coin

Desk <https://www.coindesk.com/ethereums-erc-20-tokens-rage-anyway/>
43 Horizon State, Horizon State ICO Whitepaper (2017) <https://horizonstate.com/whitepaper/>

11


So What Makes a Good ICO?

With the rapid emergence of ICOs globally it is challenging to understand what
ICOs will be successful, and which ones—more importantly—are actually scams
that must be avoided. The BICO research group has conducted a series of
investigations into the trajectory of ICOs and the way in which forms of self-
governance have emerged in order to show more transparency and allow for
possible trust again in these mechanisms44. A ‘good ICO’ needs to be able to
achieve three main goals: it must be a response to a real problem and have
blockchain as a logical solution; it must create enough confidence in the solution
and team that the public will choose to purchase their token; and it must be
conducted in accordance with evolving national and international legal
restrictions.

Use of Blockchain
Dr Adrian McCullough, an Australian cryptocurrency and ICO lawyer, advocates
for Blockchain use scenarios based around the acronym FITS. The idea is that
blockchain is often being applied indiscriminately to scenarios where it simply is
not necessary, and so a company should only be considering blockchain and an
ICO if they have a problem aligned with FITS: Fraud, Intermediary, Throughput,
Stable Data. Therefore, blockchain could be a solution where there has been a
past likelihood of fraud, when there is a need for trust in an intermediary or
middleman, when the throughput or transaction speed is a factor, or when there
is a need for stability in the data being used.45

44 Detailed Research to be released in a forthcoming paper
45 Adrian McCullough, ‘ICO Masterclass’ (Speech delivered at the Block to The Future Conference,

Brisbane, 27 September 2017); For more discussions on the FITS model, see DanishMMir, Why
Blockchain Is The Greatest Invention Of 20th Century (22 September 2017) SteemKR
<https://steemkr.com/blockchain/@danishmmir/why-blockchain-is-the-greatest-invention-of-
20th-century-2017921t231951376z>; TechMojo, Future of Blockchain is Bright, (9 September
2017) Steemit <https://steemit.com/blockchain/@techmojo/future-of-blockchain-is-bright-
techmojo>

12
For example, two of Australia’s first ICOs demonstrate this clearly. The Power
Ledger ICO proposed a peer-to-peer energy trading platform using blockchain.46
The Horizon State ICO created a digital ballot box that uses tokens as voting
proofs.47 In each case the companies planned incorruptible, transparent, and
more economic answers to inefficient, centralised, and expensive conventional
approaches. Decentralised ledger technology removes the need for monopoly
suppliers or intermediaries, or, if they cannot be removed entirely48, then they
are exposed to levels of transparency quite new to them.

Confidence and trust
ICOs should have a clear roadmap of what they will do with the proceeds from
the token sales. Their main communication method, the White Paper,49 should
explicitly detail what they will do and by when. Unfortunately, we have found
many White Papers are lax in their specifications relying on pious statements
that the money will be put to good use.

Within the whitepaper, one of the most important factors for building confidence
and trust in the solution is the presence of the team behind the ICO. The team
needs to be listed so that someone looking at participating in the ICO can see
their skills and talents. It further demonstrate their accountability to the
business and token holders and allows for the public to be able to self-investigate
team’s origins which can allow for more trust, or possibly uncover further risks.

46 Powerledger, Powerledger ICO Whitepaper (2017) <https://powerledger.io/media/Power-

Ledger-Whitepaper-v3.pdf>
47 Horizon State, Horizon State ICO Whitepaper (2017) <https://horizonstate.com/whitepaper/>
48 For example, ideas have been put forward to put water trading from the Murray-Darling basin

into a blockchain. Water is a very valuable resource and its use is under-resourced and under-
studied. Water in the blockchain would be transparent. Government and the water authorities
could see where water was going, what use it has, and who wants and does not want it. A big
problem with this plan is that water brokers who wield power and influence and are loath to give
up either have dominated water trading for many years. The question is: can a transparent
system be created that incorporates the brokers without losing the benefits of adopting
blockchain. See Murray-Darling Basin Authority, ‘Water Markets in the Murray-Darling Basin’
(Publication number 12/15, Murray-Darling Basin Authority, July 2015)
<https://www.mdba.gov.au/sites/default/files/pubs/Water-markets-Murray-Darling-Basin-
July15_A4.pdf>; see also, Katrina Donaghy, Australian Water Partnership (29 October 2017) Civic
Ledger <http://www.civicledger.com/2017/10/29/australian-water-partnership/>
49 White papers are proxies for prospectuses in initial public offerings, but without the verbiage

required by regulation. In our database we see excellent examples of white papers, which are
detailed narratives of the company’s pursuits. There are, however, awful examples which say
effectively: give us money and we will think of something to do. XX

13
These ideas are by no means new to an ICO, and the notion that someone will
feel more confident if they can put a human face to something is certainly not a
revolutionary concept.50 Acknowledging the need for a clear and transparent
team assists with the self-regulation of ICOs as the industry moves away from
truly anonymous teams. These anonymous teams were common in the some of
the earlier iterations of ICOs. In 2016 it was not uncommon to find the team
listed only by first names,51 a team not mentioned at all,52 or the team being
hidden behind usernames.53 Smith and Crown, an ICO listing agent, recently
reported a reduction in ICOs with anonymous teams being submitted. Stating
that ‘this represents a very positive development in the growth and evolution of
the sector,’54 as it helps to defeat the popular opinion of a ‘scam-ridden world of
ICOs where anonymous teams can raise XX millions with only a cobbled together
white paper.’55

The role of ICO listing agents is also important to the transparency and
confidence in an ICO as it will reflect how the team will have ventured into the
business and financial communities to explain their plans. This often means
submitting a request to an ICO listing company so that they can be found by the
public. The team will put their business plans under scrutiny by the rising
taskforce of public scrutineers such as Smith and Crown who also review, as well
as list, ICOs and commend or condemn them as they see fit.

50 See, eg, Maya Mathur, David Reichling, ‘An uncanny game of trust: social trustworthiness of

robots inferred from subtle anthropomorphic facial cues’ (Paper presented at 4th ACM/IEEE
international conference on Human robot interaction, Law Jolla, California, 09 March 2009) <
https://dl.acm.org/citation.cfm?id=1514192>
51 Wwam, ICO Whitepaper, (2017) <http://wwam.io/Whitepaper.pdf>
52 One ICO stated ‘Due to regulation risks the Team members’ names are currently kept secret’

see Demeter, Demeter ICO Whitepaper (2017) <https://demeter.life/wp-

content/uploads/2017/08/WP_1.1.pdf> ; see also Bitotal, ICO Whitepaper (2017)
<http://www.bitotal.com/whitepaper.pdf>
53 See Komodo ICO where founder is listed as JI777. Documents no longer available through

Komodo. See Matt Chwierut, ‘Komodo Platform Token Sale (ICO)’ (26 September 2016) Smith
and Crown https://www.smithandcrown.com/sale/komodo/
54 Brant Downes, ‘Trends in Token Sale Proposals’ (08 September 2017) Smith and Crown

https://www.smithandcrown.com/trends-token-sale-proposals/
55 Brant Downes, ‘Trends in Token Sale Proposals’ (08 September 2017) Smith and Crown

https://www.smithandcrown.com/trends-token-sale-proposals/

14
Legal regulations
With constantly evolving legal regulations, differences in international laws and
the anarcho-capitalist nature of ICOs the legal regulations are an element that
are going to become increasingly important and the ramifications will become
increasingly more prevalent. This third element to a good ICO is less about
having a successful ICO that raises money, and more about being in a position to
hold onto the funds raised. At its heart, ICOs have formed as an alternative way
of raising capital to the Initial Public Offer (IPO) which is a heavily regulated
process which serves as a distinct barrier to many companies. This has led to
competing arguments: that IPOs shouldn’t be as complicated, therefore ICOs help
to balance out regulations; or that IPOs are a barrier for a reason, and that ICOs
can only be seen as an abuse of the system. Without getting too much into the
history, it should be made clear that regulations in IPOs in Australia evolved in
order to protect vulnerable investors.56 Which is why it can be troubling that
while ICOs are a novel way of raising money for businesses, because of the early
stage development of blockchain technology, it can be difficult for most people to
understand both what blockchain and ICOs represent. This situates ICOs in the
“sophisticated investor” class which is reflected in US regulations.57 It would be
premature, for example, for pension funds to invest in them looking for
security.58

ICOs embrace some of the elements of anarcho-capitalism, which perturbs
regulators because the ICOs feel they are outside the regulators’ remits.

56 See Jason Harris, Anil Hargovan and Michael Adams, Australian Corporate Law (5th ed)

(LexisNexis Butterworths 2017)

57 See, Securities and Exchange Commission, ‘Report of Investigation Pursuant to Section 21(a) of

the Securities Exchange Act of 1934: The DAO’ (Investigation Report, Release No. 81207, 25 July
2017)
58 One can compare the moves by pension funds into complex financial products before the Great

Financial Crisis to gain higher returns. The likes of collateralized debt obligations and other
sophisticated instruments proved far too complex for people to understand including the banks
that sold them; see John Flood, ‘Review Essay: Betting the System and Beating the House? Gillian
Tett’s Story of the Financial Crisis: “Fool’s Gold—How Unrestrained Greed Corrupted a Dream,
Shattered Global Markets and Unleashed a Catastrophe”’ (2009) 36 (4) Journal of Law and Society
579.

15
However, as mentioned at the start of this paper, not all is calm and measured in
‘ICO land’ as the Tezos fracas exemplifies.59

Tezos
Three months ago Tezos launched an ICO to raise money for a fintech blockchain
project that would be more secure than present blockchains. The ICO was hugely
successful raising over US$230m in bitcoin and ether which are now worth over
US$400m due to cryptocurrency fluctuations.60 The Tezos developers decided to
take a novel approach to their ICO. In order to secure it and protect it from
perceived undue US SEC regulation, Tezos established a Swiss foundation in the
canton of Zug. The foundation has its own board and is separate from the
developers who cannot intervene in the workings of the foundation. The purpose
of the foundation was to run the ICO and collect the funds. The Tezos intellectual
property remained with the developers. After a successful ICO the foundation
would buy the IP from the developers who would receive a proportion of the ICO
funds. The developers would work with the foundation to take Tezos forward.61

Unfortunately the developers are in a pitched battle with the foundation over
control of Tezos. In part the developers failed to understand the consequences of
outsourcing their governance protocols to Switzerland. As one commentator put
it:
it is ironical that Tezos, whose core mission is to bring a blockchain where
governance management and resolution is baked in the protocol, is
threatened by its own governance body. How can you be credible as a
better governed protocol if yourself are not able to self govern your own
company. But on the other side this may be precisely the type of test that,

59 Anna Irrera, Steve Stecklow, and Brenna Hughes Neghaiwi, Special report: Backroom battle
imperils $230 million cryptocurrency venture (October 19 2017) Reuters Business News
<https://www.reuters.com/article/us-bitcoin-funding-tezos-specialreport/special-report-
backroom-battle-imperils-230-million-cryptocurrency-venture-idUSKBN1CN35K>
60 Above, n 2.
61 see, eg, Anna Irrera, Steve Stecklow, and Brenna Hughes Neghaiwi, Special report: Backroom

battle imperils $230 million cryptocurrency venture (October 19 2017) Reuters Business News
<https://www.reuters.com/article/us-bitcoin-funding-tezos-specialreport/special-report-
backroom-battle-imperils-230-million-cryptocurrency-venture-idUSKBN1CN35K>

16
 if passed, would only reinforce the core mission and credibility of the
company.62
The crucial element in this is simple—it is trust:
The main asset of any blockchain protocol is trust. Trust in the team, trust
in the code, Trust in the throughput. If Tezos team, which trust score right
now is on the ground, does not manage to build that trust by delivering,
communicating and shipping at visible pace, we can consider the project
dead.63 (Emphasis added)

As I mentioned above, there is no escaping the need to create and maintain trust
however advanced the technology is. Human endeavour cannot be reduced to
bits and bytes no matter how desirable and efficient it appears. This is further
captured in the catastrophic “failure” of The DAO to govern itself in 2016, when a
token holder exploited infelicities in the code to divert over US$50m of tokens to
his own account. It illustrated how two communities clashed over supporting
either the diverter or those who wanted to recapture the lost tokens. The
division was based on fundamental philosophical differences: anarcho-
capitalism versus a variant of anarcho-communism.64 Those who supported the
“hacker” believed he was simply exploiting the internal workings of the software
and owed no obligations to anyone else (anarcho-capitalist); while the others
privileged The DAO community over the hacker and wanted him to be part of the
community (anarcho-communist). Without a voluntary surrender of the tokens
by the hacker, Ethereum and the majority DAO community felt compelled to
institute a hard fork resulting in the return of the tokens and two parallel
networks emerging.65 Interestingly both chains have acquired support, although
there are questions on how long the renegade chain can subsist without
development.66 The DAO controversy stimulated an investigation by the SEC,

62 Ouriel Ohayon, Is Tezos ICO Dead? (19 October 2017) Hackernoon

<https://hackernoon.com/tezos-tested-bbeeaa7a5449>
63 Ibid.
64 Murray, Rothbard, An Austrian Perspective on the History of Economic Thought (Edward Elgar

Publishing, 1995)
65 Alyssa Hertig, Ethereum’s two Ethereums explained (July 28 2016) Coindesk

<https://www.coindesk.com/ethereum-classic-explained-blockchain/>
66 Ibid.

17
which found that The DAO had breached the “Howey Test” and should have been
registered as an investment vehicle.67

The Regulatory Miasma

Differing regulatory regimes around the world might also represent a moment of
disjunction, which we leave open but for heuristic purposes we treat it as a
potential third one. With the huge growth in ICOs during 2017, regulators have
taken notice and find themselves in a quandary over what action, if any, they
should take. And indeed the numbers would suggest the torrent of ICOs seems to
resist any actual or threatened pushback by securities regulators from around
the world. There have been extreme reactions from the outright prohibition of
ICOs in China and Korea (if you are Korean, that is) to their positive welcoming
by Malta, Australia, and the Isle of Man.68 And New Zealand has adopted the
highly contentious view that all tokens and cryptocurrencies are securities.69

The distribution of country types provides some clues as to the reasons for these
reactions and why ICOs are arousing such controversy. ICOs are not regulated
unless they fall under securities laws, and most try hard to exempt themselves
from regulators’ strictures. There may be some protection through consumer
laws but it could be hard to enforce them because it may be difficult to establish
jurisdiction. The dividing line between a “good” ICO and a “bad” one is
sometimes difficult to spot. Despite all the concern, ICOs are here to stay.
Blockchain is a crucial step in the development of the Internet. Cryptocurrencies
are valuable: the market capitalization of Bitcoin is over US$100bn and rising.70

67 see, Securities and Exchange Commission, ‘Report of Investigation Pursuant to Section 21(a) of

the Securities Exchange Act of 1934: The DAO’ (Investigation Report, Release No. 81207, 25 July
2017)
68 Brant Downes, Overview and analysis of ICO regulatory developments (20 September 2017)

Smith + Crown <https://www.smithandcrown.com/overview-analysis-ico-regulatory-

developments/>
69 Brady Dale, New Zealand Regulator: Cryptocurrencies are Securities (1 November 2017)

Coindesk https://www.coindesk.com/new-zealand-cryptocurrency-securities/
70 See, Coin Market Cap, (2017) <https://coinmarketcap.com>

18
And despite the jeremiads of Jamie Dimon (CEO, JPMorgan Chase) that Bitcoin is
a fraud, the very institutions he represents are among its biggest investors.71

Conclusion
Trust, however, has not been removed from the blockchain environment. It is
deeply embedded in the process and will continue to be so. Anarcho-capitalists
will find this hard to accept. Governments and their agencies have always
regulated money and investment. Decentralised systems escape their clutches
and challenge the orthodoxies. So cryptocurrencies vie with fiat currencies for
legitimacy. If people opt for cryptocurrencies, exchange controls are ineffective.
This is probably the true reason China prohibited ICOs.72 Blockchain enables the
transfer of money anywhere in the world without tracking. For China the risks to
its own economy of untrammelled money movements are dire. For the likes of
Estonia, Malta, Gibraltar, and the Isle of Man, blockchain and ICOs are
opportunities for market creation through the contrivance of favourable
regulatory regimes.73

With these small countries embracing ICOs, a parallel can be drawn between this
and the evolution of ‘tax havens’ which is again a topic of discussion following
the release of what is now known as the ‘Paradise Papers.’ 74 Through the
differing tax regulations countries can vie for interest from wealthy and thus

71 Evelyn Cheng, and Kayla Tausche, Jamie Dimon says if you’re ‘stupid’ enough to buy Bitcoin,

you’ll pay the price one day (13 October 2017) CNBC Markets
<https://www.cnbc.com/2017/10/13/jamie-dimon-says-people-who-buy-bitcoin-are-
stupid.html>
72 Kenneth Rapoza, China’s ICO ban doesn’t mean it’s giving up on crypto-currencies (6 September

2017) Forbes <https://www.forbes.com/sites/kenrapoza/2017/09/06/chinas-ico-ban-doesnt-

mean-its-giving-up-on-crypto-currencies/#53ecc5797aeb>
73 See, eg, E-Estonia, <https://e-estonia.com/> ; Application for e-Residency, Estonian Police and

Border Guard Board, <https://apply.gov.ee/>; Innar Liiv, Welcome to E-Estonia, the tiny nation
that’s leading Europe in digital innovation (4 April 2017) The Conversation
<http://theconversation.com/welcome-to-e-estonia-the-tiny-nation-thats-leading-europe-in-
digital-innovation-74446>
74 See eg, Krishnadev Calamur, Every Country is a Tax Haven (7 November 2017) The Atlantic

<https://www.theatlantic.com/international/archive/2017/11/paradise-papers-tax-
havens/545147/>; Stephen Long, Why the tax avoidance exposed by the Paradise Papers matters
(07 November 2017) ABC News <http://www.abc.net.au/news/2017-11-07/paradise-papers-
why-tax-avoidance-matters/9123850>

19
increase earnings in their country without need for infrastructure. 75 If we
consider how these countries are already amenable to foreign investment and
have established the institutions to deal with it, then Blockchain and ICOs are the
next logical step in their evolution.

A key point to notice is that no matter how hard we try to deal with trust, the
sheer complexity of modern life forces us to take shortcuts no matter how
rigorous our vetting and security procedures are. At the behavioural level we are
constantly making judgments about people we know and don’t know; we rely on
gut instinct or intuition or fast or slow thinking. But as Daniel Kahneman
demonstrates in Thinking, Fast and Slow,76 whether our thinking is fast (intuitive
and emotional) or slow (logical and rational) both are replete with biases that
lead us astray77. The question here is will Web 3.0, the internet of value, as
distributed ledger technology sometimes sees itself,78 overcome the pitfalls of
fast and slow thinking by creating an environment where trust is embedded into
the technology and thus removing from us the necessity to have to consider it?
We would argue this is highly optimistic. The state of distributed technology is
such that issues of trust are ever-present and demand decisions that are
essentially pre-technological and more philosophical in nature.

75 Ibid.
76 Daniel Kahneman, Thinking, Fast and Slow (Farrar, Straus and Giroux, 2011)
77 Ibid.
78 Amy Cortese, Blockchain technology ushers in the “Internet of Value” (10 February 2016) Cisco

<https://newsroom.cisco.com/feature-content?articleId=1741667>; Shanna Leonard, The

Internet of Value: What It Means and How It Benefits Everyone (21 June 2017) Ripple
<https://ripple.com/insights/the-internet-of-value-what-it-means-and-how-it-benefits-
everyone/>

20
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October 2017) Cryptocoins News https://www.cryptocoinsnews.com/this-airswap-
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Wwam, ICO Whitepaper, (2017) <http://wwam.io/Whitepaper.pdf>

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