A cross-disciplinary research team from the University of British Columbia (UBC) conducted an industry study spanning the compliance, assurance, and technology requirements that financial institutions, legal and accounting firms need to see in place before digital assets can be used at scale in their sectors. Hundred of hours of interviews with industry experts across 13 leading financial jurisdictions explored the past, present, and future state expectations that are blocking the industry adoption of digital assets, security tokens, tokenized payments, and digital identity from diverse perspectives.

iComply Investor Services Inc, in partnership with the Government of Canada, Mitacs, and the University of British Columbia commissioned the study in order to better understand the challenges that token issuers face to meet the regulatory standards for issuing and tracking digital assets. Currently, these projects face significant barriers that result in trade-offs – hindering the true potential of blockchain managed assets. The research collaboration was supported by Mitacs’s Accelerate Program.

The Findings:

The use of blockchain technology allows token issuers to efficiently gain access to global customers, partners, and capital.

Key Challenge: The burden of the cost of regulation

Challenges broadly stem from the cost of complying with regulation. In 2017 there was significant ambiguity surrounding whether and how digital assets were regulated, and many issuers neglected this dimension altogether. While a large number of issuers were well-intentioned, others could not resist exploiting the prospect of unlimited access to global investors. Early offerings could often raise more with savvy marketing than a well-reasoned project plan, and a large number of early token offerings were little more than Ponzi schemes. Today, regulatory clarity and enforcement are essential if tokenized securities are to become a safe and legitimate fundraising mechanism.

The study found that issuers currently face a compliance trilemma, whereby they can realize only two of the following three goals in their token offerings:

• Cost-effectiveness
• Widely distributed investors
• Regulatory compliance

While we focus here on ICOs, the compliance trilemma also holds more generally for other decentralized finance practices involving cryptoassets including ICOs, STOs, TGEs, and IEOs.

To date, issuers have adopted various approaches to address the trilemma:

• Sacrificing compliance by directly defying regulators and hoping to fly under the radar
• sacrificing the scope of investment by restricting token sales to a limited group of investors
• Compromising on all three dimensions in a hybrid approach
• Forgoing a token offering entirely until this becomes more cost-effective

However, each of these current approaches is sub-optimal, and a solution is needed to the compliance trilemma.

The study also explored how industry experts expected the compliance trilemma to be resolved and found that the majority tended to advocate new regulatory rules and definitions that could relax what they see as the “burden” of compliance on issuers. Such an approach places the onus squarely on regulators, who would need to coordinate within and across jurisdictions to reach a coherent regulatory framework that appeases the challenges and costs of compliance for issuers. However, we argue that holding regulators solely accountable for the compliance trilemma is incomplete and misguided, and that other approaches are needed to reduce the costs and uncertainties of regulatory compliance.

Read the research by downloading the report here

About iComply Investor Services Inc.
iComply Investor Services Inc. (iComply) is an award-winning software company focused on reducing regulatory friction in the capital markets. With powerful data, verification, tokenization solutions, iComply helps companies overcome the cost and complexity of multi-jurisdictional compliance to effectively access new markets. Learn more: iComplyIS.com