Abstract
We study the extent of fraud in initial coin offerings (ICOs), and whether information disclosure prior to the issuance predicts fraud. We document different types of fraud, and that fraudulent ICOs are on average much larger than the sample average. Issuers who disclose their code on GitHub are more likely to be targeted by phishing and hacker activities, which suggests that there are risks related to disclosing the code. Generally, we find it extremely difficult to predict fraud with the information available at the time of issuance. This calls for the need to install a third party that certifies the quality of the issuers, such as specialized platforms, or the engagement of institutional investors and venture capital funds that can perform a due diligence and thus verify the quality of the project.
Highlights
Since the advent of Bitcoin in 2008, which until today remains the most widely used digital currency worldwide, digital currencies have gained in popularity
We turn to assessing whether the differences between fraudulent and non-fraudulent initial coin offerings (ICOs) identified in the univariate analysis hold in the multivariate setting
Our results further show that the amount raised primarily affects suspected fraud, though the coefficient for confirmed fraud is significant at the 10% level
Summary
Since the advent of Bitcoin in 2008, which until today remains the most widely used digital currency worldwide, digital currencies have gained in popularity. We investigate whether information provided prior to the ICO gives hints on the risk of fraud, and document the severity of the phenomenon. We collect detailed information from the white papers for a sample of 1393 ICOs that took place worldwide from September 2016 to July 2018. Regulators and professionals have been arguing that different indicators, so-called red flags, may hint to the fact that an ICO could be a fraud (Kaal and Dell’Erba 2019). These include, for example, whether there is a soft cap during the ICO, whether sufficient information is available on the founders, or how the funds will be spent. A thorough search is done for every ICO in our sample
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