Cryptocurrencies such as Bitcoin or Ethereum are gaining ground not only as alternative modes of payment but also as platforms for financial innovation, particularly through token sales or initial coin offerings (‘ICOs’). All of these ventures are based on decentralized, permissionless blockchain technology, distinguished by their openness to, and the formal equality of, participants. However, recent cryptocurrency crises have shown that these architectures lack robust governance frameworks and are therefore prone to patterns of re-centralization. They are informally dominated by coalitions of powerful players within the cryptocurrency ecosystem who may violate basic rules of the blockchain community without accountability or sanction. This chapter first suggests that cryptocurrency and token-based ecosystems can be fruitfully analysed as complex systems that have been studied for decades in complexity theory and have recently gained prominence in financial regulation, too. It applies these insights to three key case studies: the Bitcoin Hard Fork of 2013; the Ethereum hard fork of 2016, following the DAO hack; and the ongoing Bitcoin scaling debate. Second, the chapter argues that complexity-induced uncertainty can be reduced, and elements of stability and order strengthened, by adapting a corporate governance framework to blockchain-based organizations: cryptocurrencies, and decentralized applications built on top of them via token sales. The resulting ‘comply-or-explain’ approach combines transparency and accountability with the necessary flexibility that allows blockchain developers to continue to experiment for the sake of innovation. Eventually, however, the coordination of these activities may necessitate the establishment of a self-regulatory institution.
A Rational Regulatory Strategy for Governing Financial Innovation
