Is Sunlight an Effective Disinfectant? Transparency, Reputation, and Perceived Trust of Ethereum Tokens

Abstract

Cryptocurrencies are gaining traction in the financial markets, yet there is widespread concern about the potential for fraud. To continue the growth of cryptocurrencies, cryptocurrency issuers and benchmarking platforms must increase consumers’ perceived trust. This research provides insight into ways that cryptocurrency issuers and related platforms can identify risk while simultaneously underscoring the importance of a strong reputation system for consumer confidence. Drawing on theories of cryptocurrencies, perceived trust, and reputation systems, this paper makes several contributions to the IS literature. By capturing more than 5,000 Ethereum tokens from Etherscan.io, an Ethereum blockchain explorer, this study analyzes a large set of tokens and uses predictive modeling and text mining techniques to create risk scores for the tokens. An Amazon Mechanical Turk study is used to understand consumers’ perceived trust of the tokens. The analysis yields numerous intriguing results. First, transaction history, available information, and third-party alliance are main contributors to the risk score, and the Etherscan reputation does capture the latent risk. Second, the perceived trust is related to the risk score, but perceived trust is also driven by third-party alliance, transaction history, and available information. These results have implications for how cryptocurrency issuers can align with benchmarking platforms and provide additional information to increase consumer trust. This paper also examines the perceived trust and risk scores for tokens under investigation by the SEC. These findings reveal that tokens under SEC investigation are indistinguishable from other tokens in terms of the risk score, yet those tokens experience higher perceived trust. The tokens were all sufficiently active before the SEC investigation to garner non-negative reputations, suggesting that pertinent information such as a government probe is not necessarily incorporated into the token reputation or displayed on the token page. This analysis highlights the difficulty in identifying risky tokens and underscores need for stronger reputation systems for cryptocurrencies.