Challenges and Insights for US Initial Coin Offerings

Abstract

Initial Coin Offerings (ICOs), based on blockchain technology, has been used for crowdfunding ventures since 2015. Blockchain technology promises to address many challenges faced by the financial sector, however, in the past few years, many fraudulent undertakings in this space have raised concerns and diminished the enthusiasm for blockchain-based crowdfunding activity. Using a hand-collected dataset from several different sources, we study a range of characteristics of 943 US-based ICO tokens, for the period of 2015 to April 2020. These bouts of enthusiasm in this space point to the fact that a systematic review and a rigorous assessment of each ICO project remains a challenge, both for investors and regulators.

Our detailed assessment of more than 900 US-based ICOs indicates that successful tokens are associated with higher expert ratings as well as higher number of social media followers. Know-Your-Customer (KYC) and whitelist due diligence procedures lend an ICO a higher expert-rating and a greater social media attention. On the other hand, an ICO's utilization of an incentive program, such as offering bonuses and bounties, yields a higher expert-rating, but doesn't positively influence social media following. Many more ICO teams provide incentives to investors than those that demand investor KYC disclosures, whereas tokens lacking KYC mandates tend to more often be fraudulent compared to fraudulent tokens that did not offer incentives. After the 2018 crypto- slump, ICO teams increased lock-up features of ICOs to signal a long-term commitment to their project.

Keywords: Initial Coin Offerings, FinTech, Financial Regulation, Blockchain, and Data Analysis

JEL Classification: G32, G23, L26