Our paper brings together two areas seemingly far apart in finance ─ the world of sustainable and social finance and the largely unregulated markets in initial coin offerings (ICOs). The UK regulators are likely to issue guidance on the regulatory perimeter for crypto-tokens in the near future. Although this will be aimed at reducing regulatory arbitrage taken advantage of by token issuers, we argue that the potential of ‘tokenisation’, a disruptive and innovative means of fund-raising, is immensely useful for markets where gaps have persisted in fund-raising such as in sustainable and social finance. We suggest ways in which sustainable and social finance can be scaled up by going directly to investors rather than relying on institutions or intermediaries. We see the underlying technology that has powered ICOs to be relevant for the scaling up of marketization in sustainable and social finance, but will argue for a new regulatory approach in order to support the market revolution we advocate.
The gaps in finance for sustainable and social needs are well-canvassed. These gaps are largely due to the slow pace in successful marketization of such finance, perceived to be often incompatible with the needs and requirements of investors in conventional markets. Conventional investment instruments such as securities and other asset classes have attained characteristics of ‘investibility’ and ‘marketability’ that sustainable and social finance are not yet fully able to offer. Further, these characteristics are secured and reinforced by financial regulation of traditional financial instruments. Hence, sustainable and social finance continue to face obstacles in terms of scaling up and raising funds.
We argue that ICO markets hold insights for transforming sustainable and social finance into a different asset class altogether, and the application of these insights may greatly increase the marketization potential of such finance. In this proposal we move away from treating sustainable and social finance as securities or securitised assets, and propose regulatory reforms to support a new asset class. These regulatory reforms move away from a merely incremental approach that focuses on encouraging conventional investors to diversify their portfolios to include sustainable and social finance. We argue that sustainable and social finance can be made more widely marketable through a form of dual-class tokenisation that appeals to two different types of investors. One group would be long-term holders who are committed to the ultimate sustainable and social outcomes, and the second group would be more transient funders who may wish to exit and enjoy the benefits of liquidity sooner. We argue that such offers maximise the market appeal of sustainable and social finance and at the same time facilitate and protect the achievement of sustainable and social outcomes from being compromised by short-term financial and market pressures. We canvass a number of regulatory policy reforms that would be needed to support these new markets, including legal structures for such offerings, protection of investors, governance rights for long-term funders and regulatory policy for trading in secondary markets.
We capitalise on the wide and borderless appeal that ICOs have already gained, in reaching out to communities and forming new markets for sustainable and social finance. Our proposal ultimately seeks to integrate the social and commercial dimensions in a new way in fund-raising, towards the construction of a new form of capitalism based on crowdsourcing to create value in an integrated social-commercial manner. This phenomenon, powered by technology, meshes the social and commercial dimensions in fund-raising and disrupts existing marketplaces where sustainable and social finance have been inadequately served.
In this analysis, we do not seek to fit sustainable or social finance into ICOs or suggest that they should take advantage of hitherto unregulated ICO markets. We are also keenly aware of the nascent efforts in the regulatory treatment of ICOs, especially in relation to the extension of securities regulation over ICOs by the US Securities and Exchange Commission. We argue that policy-makers will miss the innovative and transformative elements in ICOs if ICOs are forced to submit to existing regulatory regimes for traditional securities and commodities. Our approach departs from the conventional mould as we seek to transform sustainable and social finance into a new asset class with the help of technology. In taking this approach, we accept the enormous financing potential of private markets to provide for sustainable and social finance that may deliver public goods. The public interest in the outcomes of sustainable and social finance would be optimally met by drawing upon resources in the private markets while being overseen by a regulatory framework that strikes an appropriate balance between the public and private interest aspects of this integrated approach.
Iris H-Y Chiu is Professor of Corporate Law and Financial Regulation, University College London
Edward F Greene is Visiting Professor of Law, University College London, an Adjunct Senior Research Scholar at the Faculty of Law, Columbia University, and a partner based in the New York office of Cleary Gottlieb Steen & Hamilton