Knowing Your Customer: Empirical Implications for Raising Capital through Initial Coin Offerings (ICOs)

Major legal jurisdictions like the European Union (EU), Switzerland and the US took a stricter stance on ICOs in the period 2017-2018 by imposing anti-money laundering (AML) provisions and know-your-customer (KYC) requirements on ICOs. Shortly after that, a sharp decrease in the number of ICOs was registered. Moreover, this study provides empirical evidence of a negative impact of the introduction of KYC procedure on the amount of raised capital in ICOs. Furthermore, the fundraising impact of additional ICO characteristics like duration, team, vision, rating, and location is also studied in the paper. The study is based on a multivariate regressional analysis of an international sample of 855 ICOs in the period 2015 – September 2019. The paper concludes that introducing a KYC requirement crowds out anonymous (presumably delinquent) investors at the cost of the raised capital. At the same time, the stricter legislation enhances the establishment of a level-playing field for all tokenized financing instruments such as ICOs, security token offerings (STOs) and initial digital offerings (IDOs) thus putting the end of the “gold rush” of the ICOs.