Analysis of Top 50 ICOs of 2017 Reveals Empty Promises
A new paper written by researchers at the University of Pennsylvania analyzing the top 50 ICOs from 2017 found that crypto startups often failed to put into code what they promised in their whitepapers, leaving investors vulnerable to fraud.
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ICO Claims and Project Code Often Don’t Match
The authors of the paper, entitled Coin-Operated Capitalism, include University of Pennsylvania Law School professor Dave Hoffman and Shaanan Cohney, a doctoral student in Computer and Information Security and Applied Cryptography.
The paper is presented as “legal literature’s first detailed analysis of the inner workings of Initial Coin Offerings.” ICOs are treated in the paper as a legitimate form of startup financing, with the report stating that, “the old guard of investment banks and public capital markets is being replaced by equity crowdfunding and peer-to-peer lending.”
The paper looks at the top 50 ICOs from 2017, comparing what was promised in their respective whitepapers to the actual implementation of the project code. The paper looks at whether the project code actually implements three common claims made by ICO promoters — namely, a restriction on the maximum number of tokens, a vesting plan preventing insiders from selling their tokens, and plans to burn tokens. The paper also examined how often the ability of the project team to modify smart-contract code at a later date was disclosed.
The researchers concluded that project code and promises made in whitepapers often fail to match. Further, they state that “at least some popular ICOs have retained the power to modify their tokens’ rights but have failed to disclose that ability in plain English.”
Hoffman posted some of the results on Twitter:
2/ Of the 50 ICOs:
* of 37 that promised vesting, 80% didn't code it
* of 32 that promised supply restrictions, 25% didn't code it
* of 17 that promised burning, 35% didn't code it
* of 10 with tokens that could be modified (like #Bancor), only 4 disclosed that right in English
— Dave Hoffman (@HoffProf) July 17, 2018
There Is Fraud, and Many ICOs Are Lemons
The paper notes that while there is a “nebulous contractual relationship” between token buyers and a project’s promoters, in the end, token holders have few, if any, rights. This leaves many ICO participants having to trust that the management team will do what they promised. This makes ICOs “a financial form ripe for fraud.”
However, Professor Hoffman made clear on Twitter that the paper wasn’t trying to argue that any ICO in which governance wasn’t adequately coded was necessarily a scam. He added that “there may [be] other guarantees of performance that we can’t easily observe.” However, he did say that:
“[T]he paper takes the position that failure to encode governance erodes ICO’s trustless-trust foundation, and it inevitably pushes potential investors to older (reputation-based) forms of assurance.”
The paper concludes by noting how the ICO phenomenon could eventually impact the legal profession, stating, “We may be witnessing the emergence of a new form of transactional technology that will drastically alter how they [lawyers] do their jobs.”
Have your say. If ICO promoters fail to code their claims fully, are they acting fraudulently or negligently? And does the law care to parse those differences?
Images via Pixabay