Cryptocurrencies & Initial Coin Offerings: Are they Scams? - An Empirical Study

Abstract

The volume of Initial Coin Offerings (ICOs) had risen steeply with an all-time high market capitalisation of close to 1 trillion USD in December 2017. Since then the digital asset market has slumped, retreating to approximately 200 billion USD by mid-2018. Stakeholders of the crypto industry have pondered the reasons for this retrenchment and are increasingly focusing on the notion that many ICOs could be scams. A recent industry study even went as far to claim that 80% of all ICOs are indeed scams. In this paper, we investigate the question whether these scams are as common as claimed. We do so by first defining what a scam is and secondly, by drawing on empirical data to assess the number of cases fitting such a definition. Building on Principal Agent Theory and based on the statistical analysis of our empirical data set we attempt to establish the current state of affairs with regards to scams in the crypto-currency world. The results of our study divert from salient beliefs.

Which investors’ characteristics are beneficial for initial coin offerings? Evidence from blockchain technology-based firms

“…Although 2019 has represented a slowdown compared to 2018 when more than 14 billion USD were raised within more than 2430 ICOs (Fromberger and Haffke 2019), the volume and value of ICOs has remained considerably high. While the general economic slowdown in 2019 might has translated into a lower number of ICOs, Liebau and Scheuffel (2019) contemplate that a considerable number of past ICOs were scams and hence lead to a current retrenchment of investors. Following this argument, one needs to consider that poor economic performance is often regarded as scam which is in fact misleading.…”

“…Following this argument, one needs to consider that poor economic performance is often regarded as scam which is in fact misleading. Rather it can be assumed that ventures that conduct an ICO are disproportionately at risk to fail due to their nascent development stage (Liebau and Scheuffel 2019) and their foreignness to the institutional environment (Zaheer 1995). However, it cannot be ruled out that disappointing token price developments of past ICOs have dampened investor's enthusiasm in 2019 and led to a decline of ICOs as indicated by Shifflett and Jones (2018).…”

“…As a result of the comparable high number of fraud incidences, several countries such as China and South Korea have decided to ban ICOs while others such as the USA established a regulatory framework based on the assessment of tokens and whether they qualify to be treated as securities or not (Tiwari et al 2020). While a recent study claims that more than 80% of all ICOs are scam (Dowlat 2018), other studies conclude that the percentage of fraudulent ICOs is much lower and accounts for 2,2% (Liebau and Scheuffel 2019) to 10% (Ernst and Young 2018), which represents still a high percentage compared to other investments but seems to be more reliable.…”

Singapore’s Open Digital Token Offering Embrace: Context & Consequences

“…Surely, despite these barriers, the low cost of structuring an open digital token offering can allow fraudsters to solicit funds with relative ease. As much as ten percent of pre-mid-2018 digital token sale dollar-volume were scams [49], although some research suggests that the degree of fraud is much lower [50] and that "investors are shrewd enough to spot [scams]" [46]. Moreover, in Singapore, fraud can result in lengthy jail sentences [51], and while some uncertainty surrounds the applicability of criminal law to matters involving digital tokens [17], two foreigners recently charged for promoting a fraudulent digital token project may face up to five years in jail [52].…”

ITO: The Sponsored Token Technology

“…With the advent of Bitcoin (BTC) and the beginning of the token economy, four notable financing methods have emerged in the blockchain world. Initial Coin or Crypto-Token Offerings (ICO) [12] refers to the initial issuance of tokens by blockchain projects to the public in exchange for cryptocurrencies such as BTC, Ethereum (ETH) or others with liquidity for the project operations. Initial Fork Offerings (IFO) refers to the issue of new tokens generated by forking mainstream cryptocurrencies such as Bitcoin.…”