Regulation of the Crypto-Economy: Managing Risks, Challenges, and Regulatory Uncertainty

Round 1

Reviewer 1 Report

Dear authors, 

Thank you for providing me with the opportunity to review your manuscript. 

Yours research touches upon a very interesting aspect of the cryptocurrency and blockchain landscape the Initial Coin Offering as a fund-raising and funding instrument of early-stage blockchain startups. The aim of this paper is to review SEC's initial statement on ICOs. 

Even though I find your research very interesting I am at the same time very confused with regards to the scope. Hereby are my questions:

- Why are you reviewing the initial statement when SEC on February 11th 2019 has reiterated guidelines on ICOs in an effort to formalise the sector? 

- Within such a volatile and constantly chancing landscape what is the purpose of reviewing something that is already old? 

- Why don't you make a comparative analysis between the two frameworks to see how the debate has developed further from a legal standpoint so as to be in line to the ever-evolving ecosystem? 

A number of observations:

- The current structure of your paper does not allow me to clearly understand your story and see the articulation of your argumentation 

- You are providing information on blockchain, ICOs, DAO etc but is all this information really required? 

- You have chosen Canada, India, China, UK and Norway/Sweden to present current international regulatory trends. Why these countries? You are missing substantial players leading the cryptocurrency legal debate incl. Singapore, Australia, Switzerland, along with, mentioning the newly-published EU guidelines on ICOs. Moreover, what is the purpose of this section and how is this relevant to the aim of your research? 

- If the aim of this paper is to read as an opinion piece reviewing and commenting on SEC's initial guidelines then I would strongly encourage you to revisit the overall structure of your manuscript 

- I am surprised to see substantial lack of academic literature especially in the regulatory component. Yes, I agree that extant literature is still in its infancy but there are some very good papers available. I would strongly encourage you to refer to them 

- Numbers are outdated. There are websites from where you can refer to the latest figures, number of ICOs, amounts raised etc 

- Some visuals especially a framework would have really helped 

- I was hoping for the provision of more insights and novel comments with regards to the review 

I would suggest that either you compare the two SEC guidelines or if you still wish to review the initial one then I would encourage you to break it down into sections, analyse, comment and iterate with academic literature. 

I wish you all the best and good luck with further developing your manuscript. 

Author Response

Thanks very much for your helpful comments.  Below, we explain our replies by first repeating your comments in italics and then our replies in regular font.

Thank you for providing me with the opportunity to review your manuscript.

Yours research touches upon a very interesting aspect of the cryptocurrency and blockchain landscape the Initial Coin Offering as a fund-raising and funding instrument of early-stage blockchain startups. The aim of this paper is to review SEC's initial statement on ICOs.

Even though I find your research very interesting I am at the same time very confused with regards to the scope. Hereby are my questions:

- Why are you reviewing the initial statement when SEC on February 11th 2019 has reiterated guidelines on ICOs in an effort to formalise the sector?

Reply: Thanks very much for your interest in our paper.  The draft was completed around February 2019.  It is hard to keep up with regulatory developments!  We have inserted a line on page 5 indicating “[o]n February 11, 2019, the SEC reiterated guidelines on ICOs in an effort to formalise the sector, and confirmed, among other things, consistent with the earlier stance, that ICOs are a security regardless of how it is referred to by marketplace participants, issuers, and promoters.

- Within such a volatile and constantly changing landscape what is the purpose of reviewing something that is already old?

Reply: It is a tricky point.  By writing this paper now, we see regulations change to frequently it is hard to keep up.  But we do hope our work helps others in academics and practice.  And it forms a collection of knowledge for others to build on as the regulatory landscape changes in the future.

- Why don’t you make a comparative analysis between the two frameworks to see how the debate has developed further from a legal standpoint so as to be in line to the ever-evolving ecosystem?

Reply: We considered this angle.  But we regret for the scope of the current paper, we think it is not tractable for the space we have here.  Perhaps future scholars in lengthier legal articles could pursue such an endeavor.

A number of observations:

- The current structure of your paper does not allow me to clearly understand your story and see the articulation of your argumentation

Reply: At the end of the introduction we introduce a new paragraph as follows:

“This paper is organized as follows.  Sections 2 and 3 provide an overview of blockchain and initial coin offerings, respectively, in terms of the new technology, the evolving regulatory process, and regulatory needs.  Sections 4 and 5 provide more details about crypto and cyber security frauds, respectively.  Section 6 discusses regulatory developments in select countries around the world and different pace of regulatory development.  A discussion of the implications of managing crypto risks, challenges, and regulatory uncertainty follows in the last section before the concluding remarks.”

- You are providing information on blockchain, ICOs, DAO etc but is all this information really required?

Reply: Somewhat consistent with suggestion for a comparative analysis, in this paper we felt that it is relevant to discuss these related technologies together in one paper.

- You have chosen Canada, India, China, UK and Norway/Sweden to present current international regulatory trends. Why these countries? You are missing substantial players leading the cryptocurrency legal debate incl. Singapore, Australia, Switzerland, along with, mentioning the newly-published EU guidelines on ICOs. Moreover, what is the purpose of this section and how is this relevant to the aim of your research?

Reply:  Thanks – we have identified differential changes in regulations in different regions to explain market developments around the world and highlight regulatory uncertainty.  At the end of section 6 we now write: “The EU released in January 2019 a set of guidelines for ICOs.   There are clear differences across European countries, but these guidelines will help to harmonize policies and regulations pertaining to ICOs and crypto assets.  Future research could empirically examine the implications of the introduction of these guidelines on marketplace volatility and uncertainty, among other things, one more time has passed and data are available (see also Corbet et al., 2018 for earlier work that pre-dates these guidelines).  Regulatory approaches and their effects on markets in other regions around the world could likewise be examined in more detail in future work.”

- If the aim of this paper is to read as an opinion piece reviewing and commenting on SEC's initial guidelines then I would strongly encourage you to revisit the overall structure of your manuscript

Reply: We do consider the SEC initial guidelines on regulating the crypto-economy, but we also explain more broadly the implications for managing risks in the crypto economy in terms of challenges and regulatory uncertainty.

- I am surprised to see substantial lack of academic literature especially in the regulatory component. Yes, I agree that extant literature is still in its infancy but there are some very good papers available. I would strongly encourage you to refer to them

Reply: We did a search on Google Scholar and Google News.  Most of the academic work is outdated, since things change frequently.  Hence, by referring to current news, we have documented the evolving landscape for this particular period of time.  When other academics study the intersection of financial risk management and regulatory uncertainty over this period of time for these markets, we hope the information we provide here is useful.

- Numbers are outdated. There are websites from where you can refer to the latest figures, number of ICOs, amounts raised etc

Reply: We referred to the figures that were available for the period that we have considered.  We finalized the paper in early 2019.  Some of the figures pertain to earlier periods which were pertinent to the context in which we refer to them.  We hope it is okay.  If there is something specific you think we should change then we would be happy to take another look.

- Some visuals especially a framework would have really helped

Reply: As a paper that provides an evolving legal/regulatory analysis in relation to financial risk management, we found it tough to pick one, but in the end we did include one from another paper.  We hope it is okay.

- I was hoping for the provision of more insights and novel comments with regards to the review

Reply: We did our best to be factual and explain how regulatory uncertainty and other things were pertinent to the topic.  Perhaps regulation is not the most interesting avenue, but we do thing it is pertinent here to be factual and document the evolving landscape.

I would suggest that either you compare the two SEC guidelines or if you still wish to review the initial one then I would encourage you to break it down into sections, analyse, comment and iterate with academic literature.

Reply: As discussed above, we now mention the new guidelines.  They came out right at the time of completing the current paper.  There are significant consistencies, as we have mentioned above.  

I wish you all the best and good luck with further developing your manuscript.

Reply: Thanks very much for your time and consideration.  We greatly appreciate your help and hope to return the favor.

Reviewer 2 Report

See the file.

Comments for author File: Comments.pdf

Author Response

Thanks very much for your helpful comments.  Below, we explain our replies by first repeating your comments in italics and then our replies in regular font.

The contribution of the manuscript is not clear. What do the authors contribute to the existing knowledge and solutions? It should be clearly explained in the abstract as well as in the introduction. The introduction part and abstract should be better structured in order to explain the goal of the research more clearly.

Reply: Thanks very much – we have inserted a new paragraph at the start of the introduction that summarizes the main take-away in the paper.

“This paper is organized as follows.  Sections 2 and 3 provide an overview of blockchain and initial coin offerings, respectively, in terms of the new technology, the evolving regulatory process, and regulatory needs.  Sections 4 and 5 provide more details about crypto and cyber security frauds, respectively.  Section 6 discusses regulatory developments in select countries around the world and different pace of regulatory development.  A discussion of the implications of managing crypto risks, challenges, and regulatory uncertainty follows in the last section before the concluding remarks.”

Reviewer 3 Report

The authors study the Blockchain concept and show its applications in the industry, specifically in national securities and monetary regulatory agencies. They analyze advantages and disadvantages of potential problems with applying to legal framework to an ever-evolving ecosystem.

This is an interesting approach. Below are my comments to the authors:

1.       They should put a reference that evidences the popularized work of Satoshi Nakamoto when they are describing the Blockchain technology.

2.       The mentioned limitations in the related work sections and also for the Types of Cryptocurrency Frauds section can be complemented with this reference:

Valdivia, L. J., Del-Valle-Soto, C., Rodriguez, J., & Alcaraz, M. (2019). Decentralization: The Failed Promise of Cryptocurrencies. IT Professional, 21(2), 33-40.

3.       In the subsection about Unregulated Manipulated Crypto-Exchanges, the authors could analyze problems in the economy based on pools.

4.       The authors could make comparative tables on the risks and implications, in order to give order and clarity to the presented ideas.

5.       Analyze problems of "DAOsaster" and activities like selfish mining to improve the comparison of facts around the economy generated by Blockchain.

Author Response

Thanks very much for your helpful comments.  Below, we explain our replies by first repeating your comments in italics and then our replies in regular font.

The authors study the Blockchain concept and show its applications in the industry, specifically in national securities and monetary regulatory agencies. They analyze advantages and disadvantages of potential problems with applying to legal framework to an ever-evolving ecosystem.

This is an interesting approach. Below are my comments to the authors:

1.       They should put a reference that evidences the popularized work of Satoshi Nakamoto when they are describing the Blockchain technology.

Reply: Thanks – we now reference in Footnote 3: https://www.economist.com/the-economist-explains/2015/11/02/who-is-satoshi-nakamoto

2.       The mentioned limitations in the related work sections and also for the Types of Cryptocurrency Frauds section can be complemented with this reference:

Valdivia, L. J., Del-Valle-Soto, C., Rodriguez, J., & Alcaraz, M. (2019). Decentralization: The Failed Promise of Cryptocurrencies. IT Professional, 21(2), 33-40.

Reply: Thanks – we now reference the helpful paper.

3.       In the subsection about Unregulated Manipulated Crypto-Exchanges, the authors could analyze problems in the economy based on pools.

Reply: Thanks – we regret we are not exactly sure what you meant here. Can you please clarify?

4.       The authors could make comparative tables on the risks and implications, in order to give order and clarity to the presented ideas.

Reply: We think future empirical work is needed to quantify the risks.  Our remarks are introductory to inspire more reflection and empirical analyses in the future.  We hope that is okay.

5.       Analyze problems of "DAOsaster" and activities like selfish mining to improve the comparison of facts around the economy generated by Blockchain.

Reply: Thanks – we refer to DAO a number of times in the paper.  We hope what we have provided is okay.  We are not sure what more would fit in for the scope of the paper.

Thanks very much for your time and consideration.  We greatly appreciate your help and hope to return the favor.