Initial Crypto-asset Offerings, Tokenization, and Corporate Governance

Blockchain and other types of distributed ledger technology pose various new legal and economic questions for companies. Are crypto-asset holders a new kind of corporate stakeholder? If so, are they like shareholders or bondholders, and how can they participate in the governance of a company? Are smart contracts useful tools for corporate governance? How can free-rider problems in initial crypto-asset offerings (ICOs) be solved? What is the governance of a decentralized autonomous organization (DAO)? And is there such a thing as algorithmic or distributed governance for firms?

In a new article, “Initial Crypto-asset Offerings (ICOs), tokenization and corporate governance”, we offer an interdisciplinary analysis of, and contribute to the legal and economic literature on, the potential impacts of distributed ledger technology, ICOs, STOs, and digital tokens/crypto-assets on corporate governance. The article discusses Initial Crypto-asset Offerings, which consist of ICOs and security token offerings and issuances (STOs), and several developments based on distributed ledger technology (DLT). Unlike many academic and regulatory papers, we do not focus on legal issues such as whether crypto-assets are securities[1].

DLT, its implementation through ICOs, STOs, and smart contracts, and their regulation are too new to reach definitive conclusions. Initial Crypto-asset Offerings, tokenization and tokenomics, for example, are only five years old. We are only witnessing now the potential digitalization of “financial or tangible”[2] assets and the creation of new kinds of investor rights, which raise substantial governance issues. Security tokenization could generate several beneficial effects, including simplification of regulation implementation, fractionalization of assets, redefinition of traditional asset classes (e.g. debt, equity, derivatives), and lower issuance fees (through a more efficient execution, clearing, and settlement process of securities trades)[3]. It could also provide issuers with new asset distribution channels and access to a global pool of capital with increased liquidity and more market exposure, particularly on public DLTs where transactions are public and transparent to anyone with internet connection.[4]

From a corporate governance perspective, the use of DLT and smart contracts could help in “retrofitting”[5] and strengthening the digitalization of companies’ management and in solving long-standing issues by, for example, restructuring “the old-fashioned and rigid Annual General Meeting of shareholders.”[6]

There is also an increasing probability that a new kind of corporate stakeholder will emerge: crypto-asset holders. These new actors, in conjunction with DLT and smart contracts, could lead to changes in securities issuance and trading and in shareholder involvement and dialogue with management. These new factors could reduce the cost of accessing information for minority shareholders and enhance transparency in governance while reinforcing the rights of various corporate stakeholders (due to the issuance of utility tokens)[7]. They could also create a larger role for stakeholders, rather than just shareholders, and enhance firms’ reputations online and client experiences.

The article also emphasizes the potential emergence of new ways to think about firms, management, shareholders, and other stakeholders. The path towards decentralization and the aggregation of several smart contracts could not only affect the current state of corporate governance rules, and the nexus of contractual relationships within a firm, but also the definition of a firm. The role of the board of directors, for example, could be fundamentally disrupted and evolve to a mere supervisory role of automated decisions made by computer technology. It could even become obsolete, because there are no managers or boards of directors in a decentralized autonomous organization (“DAO”). From an economic standpoint, we consider that DAO’s construction as a network of smart contracts could be compared to the “nexus of contracts” described by Jensen, Meckling, and Fama as the fundamental definition of firms[8], and propose to define DAO as a nexus of computer code contracts.

The possibility that a company would be governed by algorithmic code instead of humans (the so-called “algorithmic governance”) is still at an early stage. It is possible nevertheless that the evolution of corporate governance could be enhanced by algorithmic code. In the long term, based on a belief that algorithms are more trustworthy than humans, it could be possible to establish governance rules at least partially in computer code, and to delegate some decisions by the management of a company to algorithms that would automatically, under certain conditions, execute smart contracts and other actions.


[1] French Financial Markets Authority, “Towards a new regime for crypto-assets in France”, AMF, 15 April 2019; Directorate General for Economic Development, Research and Innovation (DG DERI) of the State of Geneva, “Guide: Initial Coin Offerings (ICOs) in the Canton of Geneva”, 28 May 2018; Swiss federal financial regulator FINMA, “Guidelines for enquiries regarding the regulatory framework for initial coin offerings (ICOs)”, 16 February 2018; J. Rohr and A. Wright, “Blockchain-Based Token Sales, Initial Coin Offerings, and the Democratization of Public Capital Markets”, Cardozo Legal Studies Research Paper No. 527, 5 October 2017; US federal financial markets regulator Securities and Exchange Commission, “Report of Investigation under 21(a) of the Securities Exchange Act of 1934: The DAO”, Release No. 81207, and “Investor Bulletin: Initial Coin Offerings”, 25 July 2017.

[2] United Kingdom regulator Financial Conduct Authority, English HM Treasury and Bank of England, “Cryptoassets Taskforce: final report”, October 2018, p. 13.

[3] D. Yermack, “Corporate Governance and Blockchains”, Oxford Review of Finance, Volume 21, March 2017.

[4] H. Marks, “The future of US securities will be tokenized”, Medium, 22 May 2018.

[5] Retrofitting is defined by Fenwick and Vermeulen as “adding digital solutions to older systems, models and organizations in the belief that this will “future proof” an existing approach and make it more efficient.” Cf. M. Fenwick and E. Vermeulen, “Technology and Corporate Governance: Blockchain, Crypto and Artificial Intelligence”, ECGI Working Paper No. 424/2018, November 2018, p. 13.

[6] A. Lafarre and C. Van Der Elst, “Blockchain Technology for Corporate Governance and Shareholder Activism”,, Law Working Paper N° 390/2018, March 2018; A. Lafarre and C. Van der Elst, “Blockchain and the 21st century annual general meeting”, European Company Law Journal 14, no. 4, 2017; P. Boucher, “What if blockchain technology revolutionized voting?”, European Parliamentary Research Service, September 2016.

[7] V. Akgiray, “Blockchain Technology and Corporate Governance”, Report for the OECD Corporate Governance Committee’s roundtable discussion on blockchain technologies and possible implications for effective use and implementation of the G20/OECD Principles of Corporate Governance, 6 June 2018.

[8] M. Jensen & W. Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure”, Journal of Financial Economics, Vol.3, Issue 4, pp. 305-360, October 1976; E. Fama & M. Jensen, “Separation of Ownership and Control”, Journal of Law and Economics, Vol.26, No 2, pp. 301-325, June 1983; A. Wright and P. de Filippi, “Decentralized Blockchain Technology and the Rise of Lex Cryptographia”, SSRN, March 2015, p.15.

This post comes to us from Stéphane Blemus, legal counsel at the French-Swiss Kalexius Law Firm and a PhD student on blockchain and capital markets regulation at Paris Sorbonne University, and from Dominique Guégan, emeritus professor of mathematics at Paris Sorbonne University and research associate at the University Ca’ Foscari in Venice. The post is based on their recent paper, “Initial Crypto-Asset Offerings (ICOs), Tokenization and Corporate Governance,” available here.

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