How Much Are We Willing To Lose in Cyberspace? On the Tail Risk of Scam in the Market for Initial Coin Offerings

Abstract

From an entrepreneurial perspective, Initial Coin Offering (ICO) has become an alternative way for attaining funding for business projects using the new evolving digital financial market for tokens. Unfortunately, the majority of all ICOs are subject to scam which casts doubt on this new innovative tool for acquiring funding. Using a unique intensively hand-collected data set covering more than 5000 ICOs which have been launched in the August 2014–December 2019 period, we could identify 1014 ICOs exhibiting data on raised funding whereof 576 turned out to be scams projects. The cumulative losses due to scam in the ICO market correspond to $10.12 billion which is 66% of our identified overall market capitalization and highlights the enormous societal impact of this criminal activity. One novel aspect of our study is that it employs a recently proposed methodology based on ‘plug-in estimation’ to quantitatively computing the risk associated with scam in the market for ICOs. Our results suggest that employing naïve statistics in risk management dramatically underestimates this risk. We argue that our findings have important implications for policy makers as they call for an urgent need for ICO market regulations from governments and regulatory agencies to protect investors.

Keywords: Crowd funding, Financial technology, Fraud, Initial Coin Offering, Plug-in estimation, Scam.

JEL Classification: C19, C49, C59, G10, G15, G19