The evolution of token launches

Why regulation pushed the industry from ICOs to airdrops

Nathan Catania


To date, cryptoassets have entered into circulation by various methods. As early as 2017, it was becoming increasingly popular for crypto projects to raise funds with Initial Coin Offerings (ICOs) by selling cryptoassets to retail and institutional investors in exchange for funds.

Today, one of the most common ways for crypto issuers to put tokens into circulation is by way of an airdrop. In an airdrop, free cryptoassets are distributed to users as a reward for using a platform or staking a number of cryptoassets (locking them on-chain for a set period of time). Many crypto natives are now farming or collecting airdrops as a viable investment strategy.

So, what prompted the industry to shift from ICOs to airdrops? It was not so much a technological innovation, but a change in crypto’s rapidly evolving regulatory landscape.

The beginning of token issuance

Prior to the airdrop frenzy of recent years, cryptoassets were created in two main ways:

  1. Through consensus and reward mechanisms in native code of blockchain protocols or distributed ledger technologies (DLTs). For example, Bitcoin miners are rewarded with Bitcoin when they add new blocks to the ledger via a proof-of-work consensus mechanism. Other protocols like Ethereum and Solana reward token holders through a proof-of-stake consensus mechanism for staking native assets on-chain.
  2. Entities or groups issuing cryptoassets or tokens. This process gained significant traction during the ICO boom of 2017, and although some aspects of this type of issuance can be automated, it requires manual intervention and decision making from intermediaries, i.e. people or groups of people.

However, airdrops are a third route to token circulation that has been growing in popularity, and this may have been propelled by increased regulatory oversight of crypto asset issuance.  

How token issuance is currently regulated

To date, on-chain crypto asset generation usually sits outside of the scope of the majority of regulatory regimes globally. The Financial Action Task Force’s (FATF) guidance on virtual assets (VAs) and virtual asset service providers (VASPs) confirms that the “act of creating VA software to issue a VA does not make the creator a VASP”. The EU’s Markets in Crypto-assets (MiCA) Regulation also has an exemption for those crypto-assets which are “automatically created as a reward for the maintenance of the DLT or the validation of transactions”.

However, the regulatory position regarding the issuance of cryptoassets that are not generated on-chain has shifted in recent years. Most ICOs during 2017 did not comply with anti-money laundering and counter-terrorist financing (AML/CTF) regulations, largely because they were not required to do so. In 2019, FATF guidance clarified that countries were required to bring an issuer’s offer of VAs in the scope of a regulatory regime. Regulatory action has also been taken on a number of ICOs for not complying with traditional regulatory regimes, especially when a token is considered to represent a security or financial instrument.

Although global adoption of virtual asset regulation has been slow, most jurisdictions have or are in the process of developing a broader regime for the issuance of cryptoassets. Some of these regimes go beyond the FATF requirements, which are solely focussed on AML/CTF, and also require crypto asset issuers to put in place detailed disclosures and risk warnings as well as other protections for purchasers of tokens.

A shift towards airdrops

In recent years, airdrops have become the preferred method for the initial distribution of tokens. Unlike on-chain or ICO-like methods of issuance, airdrops provide users with free tokens for using a platform or staking cryptoassets.

In September 2020, a major decentralised protocol set a precedent with a landmark airdrop that successfully increased the adoption of their token and demonstrated the potential of this novel approach. Following this success, numerous other decentralised finance (DeFi) and hybrid finance (HyFi) projects that have certain decentralised components have adopted airdropping as a key strategy. Airdrops do not only reward early adopters, but also create immediate liquidity and valuation for the tokens on decentralised exchanges.

The majority of regulatory regimes do not currently capture tokens offered for free, or they have exemptions for token issuances below certain thresholds. This presents an opportunity for projects to distribute tokens with fewer regulatory hurdles and potentially achieve higher adoption rates. Airdrops align with the decentralised ethos of crypto natives and allow some issuers a way to navigate through a complex regulatory landscape.


As we navigate the relationship between technological advancements and regulatory frameworks in crypto, it’s clear that the evolution from ICOs to airdrops represents more than just a shift in fundraising strategy. It signifies a broader transformation in the digital asset landscape. This change not only reflects the industry’s adaptive responses to regulatory pressures but also highlights a growing emphasis on community engagement and user-centric models in token distribution.

Both challenges and opportunities lie ahead as policymakers and regulatory bodies continue to evolve their frameworks to catch up with crypto’s rapid pace of innovation. The key question for the future is how these evolving regulations will shape the next wave of innovation in token launch strategies. Will there be a new mechanism that strikes a balance between regulatory compliance and the decentralised ethos of the crypto world?

For industry participants, staying informed and agile is crucial. It’s essential to navigate these changes with a keen understanding of both the technological possibilities and the regulatory parameters.

XReg Consulting is a team of policy and regulatory experts that helps governments formulate sound policy, regulators supervise effectively, public authorities build capacity and crypto businesses thrive and follow the rules. For further insights or guidance in navigating the complexities of token issuance, contact Nathan Catania at