OPEN ACCESS

ISSN Online: 2516-3957

ISSN Print: 2516-3949
https://doi.org/10.31585/jbba-2-1-(5)2019
Competing Interests: Cryptocurrencies & Initial Coin Offerings:
None declared.
Are they Scams? - An Empirical Study
Ethical approval: Daniel Liebau1, Patrick Schueffel2
Not applicable. 1IE Business School, IE University, Spain

2HEG Fribourg School of Management, Switzerland

Author’s Correspondence: [email protected]
contribution:
DL1and PS2 designed and Received: 15 January 2019 Accepted: 20 March 2019 Published: 2 April 2019
coordinated this research
and prepared the
manuscript in entirety. Abstract
The volume of Initial Coin Offerings (ICOs) had risen steeply with an all-time high market capitalisation of close
Funding: to 1 trillion USD in December 2017. Since then the digital asset market has slumped, retreating to approximately
None declared.
200 billion USD by mid-2018. Stakeholders of the crypto industry have pondered the reasons for this
Acknowledgements:
retrenchment and are increasingly focusing on the notion that many ICOs could be scams. A recent industry
The authors would like to study even went as far to claim that 80% of all ICOs are indeed scams. In this paper, we investigate the question
thank Bobby Ong and the
Coingecko team for their
whether these scams are as common as claimed. We do so by first defining what a scam is and secondly, by
proactive support. drawing on empirical data to assess the number of cases fitting such a definition. Building on Principal Agent
Theory and based on the statistical analysis of our empirical data set we attempt to establish the current state of
affairs with regards to scams in the crypto-currency world. The results of our study divert from salient beliefs.
Keywords: blockchain, scam, ICO, digital assets, ethics, crypto-currency, token
JEL Classifications: D01, D21, D26, D53, D84, K24

1. Introduction argue that a more differentiated view on ICOs and

potential scams is necessary. Hence, with this
An Initial Coin Offering (ICO) is an unregulated study, we intend to investigate the question of
process for capital-raising typically used by firms in whether and when ICOs can justifiably be called a
the cryptocurrency field as a substitute for the scam. We believe that investigating this problem is
controlled funding methods applied by other financial of importance because scholars and practitioners
intermediaries [1]. The volume of ICOs had risen alike have recently made rather coarse statements
sharply with an all-time high market capitalisation of on this subject matter which were further
close to 1 trillion USD in December 2017. Since then amplified by the broader media. Economist
the digital asset market has retreated to approximately Nouriel Roubini’s testimony to the US Senate
200 billion USD by mid-2018. Stakeholders of the Hearing on “Exploring the Cryptocurrency and
cryptocurrency industry have since contemplated the Blockchain Ecosystem”, for instance, was
causes for this retrenchment. While this “increasingly subtitled “Crypto is the Mother of All Scams” [5]
popular way to raise capital for Blockchain technology and Economics scholar Saifedean Ammous
start-ups” [2, p.2] has become the method of choice recently portrayed the Ethereum project as “a
for many crypto firms in order to raise capital, its worthless scam” [6]. As ICOs nevertheless receive
performance increasingly often lacks behind increasing attention not only by the media but also
expectations [3]. Consequently, numerous exponents by investors, we deem it a worthwhile endeavour
of the cryptocurrency industry are increasingly to investigate the magnitude of true scams in this
focusing on the notion that many ICOs could be area.
scams. A recent industry study went as far as to
maintain that 80% of all ICOs are indeed scams.[4] This article is organised in the following manner.
However, it is generally acknowledged that poor First, we lay out the theoretical foundation of our
economic performance cannot automatically be research along with definitions of the terminology
equated with a scam. Moreover, it is highly used. Secondly, the research methodology is
questionable that high failure rates are idiosyncratic to explained sideways with the sample and data
the novel phenomenon of the ICO. We, therefore, collection method. In a third step, we present the

The JBBA | Volume 2 | Issue 1 | 2019 Published Open Access under the CC-BY 4.0 Licence 1
results, before discussing them in a fourth phase. The article ICO projects typically exert considerable discretionary power
concludes with highlighting its contributions as well as its over capital and resource allocation upon completion of the
limitations and specifically the many possible future research ICO. This corresponds with the assertion that “[t]he agent’s
directions with regards to the subject of scams in the Blockchain problem is basically that of a choice of acts to best satisfy his
ecosystem. preference for self and other goals" while being endowed with
"considerable discretion with respect to the agent’s goals” [8,
2. Theoretical Foundation p.34]. Such a constellation leaves the agent with the task to
resolve a trade-off between self-goals and the agent’s goals. We,
therefore, pose that it is tempting for ICO teams to engage in
Investigating scams is a multifaceted undertaking, and the term
scam is not being used identically by all scholars, practitioners fraudulent activities, especially in the absence of incentive
and the broader media. On the contrary, we believe that systems that usually “include negative mechanisms like
sanctions, threat of force, or reduction of agent return”.[8, p.35]
investors frequently mistake a poor economic performance for
a scam and that this misjudgement is then further conveyed and These incentive systems which typically reduce the likelihood of
conflicts between the Principal and the Agent hardly exist in the
amplified by the broader media. Over the next paragraphs we,
therefore, provide a brief overview of the theory we ground our crypto industry, increasing the risk for the Principal.
research on as well as the terms “scam” and “economic
performance”. Then again this leads our thoughts to the subject of policing.
“The cheapest method of policing the agent with respect to
2.1 Principal-Agent Theory (PAT) policing the principal’s goals is to have the agent do it himself.”
[8, p.39]). Some, not all, ICOs work against a timeline with
milestones. If a project does not hit the milestones, the
Agency Theory is a framework explaining how objectives are community of Principals will publicly (mostly through social
reached by separate players interacting with each other. As such media) complain. Since many ICOs list their token on
it elucidates self-goals and other-goals and how distinct actors, exchanges very swiftly after the ICO is complete, these
so-called Principals and Agents, deal with difficulties in their complaints can impact the token price adversely. In summary,
coexistence. These challenges mostly arise from conflicts of we consider the policing mechanisms available in the token
interest between the Agent and the Principal [7]. Examples of world relatively weak and therefore conflicts of interest for the
such relationships include investor and broker, teacher and Agent are foreseeable.
student, physician and patient as well as lawyer and client.
3. Scam
The conclusion that “agency, or acting for another, is pervasive”
[8, p.1] holds in many aspects of life, and the cryptocurrency
The Oxford Dictionary defines a scam as “[a] dishonest
industry is no exception to this. Drawing on the findings of
Mitnick [8] we employ the following four assumptions: first, scheme; a fraud.” [9]. In a similar vein, Merriam-Webster states
actors are rational and sensibly weigh returns against that a scam is “a fraudulent or deceptive act or operation” [10].
In turn, a fraud is an unlawful, respectively criminal act as it
investments. Second, actors will always seek for increasing
returns. Third, the underlying model is a static one, that is there "consists of some deceitful practice or wilful device, resorted to
with intent to deprive another of his right, or in some manner
is no change in the actors’ behaviour and learning. Lastly, acting
on behalf of a third party may lead to fundamentally “different to do him an injury"[11]i In the context of business, scams are
therefore regularly seen as acts throughout which the scammer
behaviour than acting for oneself.” [8, p.4].
purposefully deprives the trustful investor of his or her funds
to advantage to the scammer. Consequently, the investment will
We deem PAT to be highly suitable to analyse the ICO not perform to the extent initially suggested by the scammer
phenomenon as the business entities’ can be delineated as and believed by the investor. By comparison, the above-
follows: The Principal is the investor/token buyer and agent is mentioned study by Dowlat, delineates scams in the following
the software developer /token issuer, depicted in Figure 1. way: “Identified Scam (pre-trading): Any project that expressed
availability of ICO investment (through a website publishing,
ANN thread, or social media posting with a contribution
address), did not have/had no intention of fulfilling project
development duties with the funds, and/or was deemed by the
community (message boards, website or other online
Figure 1. Principal and Agent in the context of for-business ICOs information) to be a scam.” [4, p.23].

The ICO team typically outlines the purpose, benefits and 4. Economic Performance
roadmap of their project in a whitepaper. The Principal, for
ideological, economic or other reasons entrusts the Agent with
Economic performance is the evaluation of a firm's success
funds to progress the project in question. The ICO team
measured in monetary terms. It comprises its assets as well as
becomes the Agent acting on behalf of the Principal. The
liabilities and its ability to generate profits. Ultimately economic
following parts of PAT are specifically appealing to consider in
the context of ICOs and the Blockchain ecosystem:

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performance will determine the likelihood of organisational any of these search terms in conjunction with an ICO yielded a
mortality. result, we furthermore conducted a more in-depth search for
any resulting legal proceedings or court cases that may have
Timmons Jeffry and Spinelli [12] estimated that the survival rate emerged subsequently. Third, if court cases were initiated, we
of new ventures is approximately 60% after the first year and investigated whether a verdict was delivered yet, if so, what the
10% over ten years. Conducting research specifically on "new, ruling was. The cut-off date for our data sampling process was
adolescent, young, emerging and high-tech, technology, the 8th of January 2019.
technology-intensive, and technology-based» ventures Song,
Podoynitsyna, Van Der Bij and Halman [13, p.9] reported more 6. Results
fine-grained results. After analysing a longitudinal data set of
11,259 New technology ventures (NTVs) established between Table 1 reports the ICOs of 2016 along with the findings from
1991 and 2000 in the United States, the authors conclude that our descriptive multi-level analysis. Next to selected
the survival rate of NTVs with five or more full-time employees demographics of the ICOs such as token name, funds raised,
is only 36 per cent after four years and that this survival rate ICO end, the table indicates whether the ICO was mentioned
drops further to 21.9% after five years [13]. As Blockchain in the news as a scam, fraud, sham, deceit, con or hoax. We also
technology is a rather young phenomenon and technology is at counted these words in case they were used as verbs or
the core of any crypto project, start-ups and NTVs and NTVs adjectives. The dataset furthermore provides information on
can provide interesting benchmarks. whether a lawsuit was initiated against any ICO of the 2016
cohort and if so, what the court's verdict was. Next, to this
5. Research Methodology information, we gather a set of control variables, such as the
issuing price of the token as well as its current price and
5.1 Sample performance in the market. The total number of subjects in the
sample was 45. Of those 45 projects, three (6.7%) were referred
As we strive to establish the extent of scams among ICOs to in the context of a scam in the news at least one time:
worldwide, the level of our analysis was set to a macro level. DinarDirham, E-dinar, and Bitconnect. Bitconnect was
Accordingly, we collected global data from relevant furthermore named a fraud, deceit, and con. Lawsuits were
international ICO Web sites, such as ICO Data [14], Token initiated against two projects (4.4%): E-dinar and Bitconnect.
Market [15], ICO Bench [16], Coin Index [17], ICO Watch List In the case of one project (2.2%), Bitconnect, the court ruled
[18], and CoinGecko [19]. While those sources did mention the that it was a fraudulent scheme whereas the court ruling for E-
ICO of the Decentralized Autonomous Organization (DAO), dinar stated that it was a legitimate token.
we decided to exclude this ICO from our sample as it would
overly skew the data analysis with its emission volume of more Looking at the control variables further points are noteworthy:
than USD 150 million. For 22 of the 45 objects, respectively for 49% of the cases, no
data could be obtained for the issuing price or the current price
The decision to use the 2016 cohort was based on the rationale or both. Cases of missing data were labelled as, “n.a.”.
of providing a long enough time frame required for potential Consequently, no performance figures could be calculated for
plaintiffs to file legal proceedings against fraudulent ICOs. those projects. For those ICOs, however, for which financial
Furthermore, 2016 was chosen as the number of ICOs performance figures could be calculated they vary from near
throughout that year was already a multiple of the previous total losses of the investment (-98%) to a significant
years, hence yielding a more solid base for a quantitative analysis multiplication in value (+15.541%). As we demonstrate in
than the cohorts of 2014 and 2015. To be included in the sample Table 1 an evenly distributed portfolio of these ICO tokens (we
an ICO had to meet the following two criteria: first, it must be assumed 1000 USD allocation to each project) would have
a public offering, i.e. advertised through the pertinent outlets of yielded a hypothetical return of approximately 598.71% over
the crypto community and second it must have completed its the two years and eight days period analysed.
ICO during the year 2016. Based on the defined sampling
criteria a sample size of 45 was obtained. 7. Discussion

5.2 Method Drawing data from a global sample of international ICOs, this
study shows that far less than the alleged 80% of ICOs are
In our attempt to elicit the true ICOs scams we conducted a scams in the legal sense of the word. On the contrary, we could
descriptive multi-level analysis on our sample. First, we scanned only identify one case (2.2%) where an ICO would match the
the Lexis Nexis Database for any news related to the sample definition of a scam as provided above. Even if we assumed
ICOs. Lexis Nexis is considered to be among the most that this figure is underestimated due to a large number of
comprehensive news databases globally, providing interfaces to unreported cases, an adjusted estimate increasing this number
36’000 international sources [20]. Search delimiters were set to previously reported 80%. What is more, even if we assume the
cover only news items as of 2016 or younger. Each ICO was worst-case scenario that the 22 projects for which we cannot
checked along with the keyword "scam" as well as the synonyms obtain data on the issuing price or the current price or both turn
*fraud", "sham" "deceit", "con", and "hoax". Second, whenever all out to be scams we would see fundamentally different results

The JBBA | Volume 2 | Issue 1 | 2019 Published Open Access under the CC-BY 4.0 Licence 3
 Table 1: Analysis of Initial Coin Offerings (ICOs), cohort of 2016.

by several hundred percent, it would not get close to the than it was established that companies which enter a foreign
established previously: These 22 cases would account for 49% institutional environment suffer from "liability of foreignness"
of the ICOs observed and not for 80% as reported formerly [4]. [24]. Consequently, ICOs typically suffer from those two
disadvantages at the same time. Previous research has shown
7.1 Survival that companies of a young age are subject to higher failure rates
than older ones. A substantial number of small firms typically
At the same time, the worst-case failure rate of 49% may not be fail early on after their inception [21, 22] because they suffer
idiosyncratic to the field of ICOs. 51% survivors is relatively from what scholars call “liability of newness” [23]. This concept
close to the above mentioned 60% survival rate for NTVs. suggests that young firms are particularly vulnerable to mortality
Literature provides abundant evidence that other factors may because they still have to generate the necessary routines,
also contribute to such high failure rates in similar settings. A relationships, and reputations that are required to efficiently
plethora of factors can influence an organisation's performance operate in their respective surroundings [23]. Drawing on the
and thus ultimately its survival. The number of potential findings of Lumpkin et al. [25] Sapienza, Autio, George and
antecedents to a firm's performance is large, especially if the Zahra [26] allege that young firms are more likely to exhibit an
company is not only of young age but especially if it ventures entrepreneurial orientation to internationalization, which results
into international markets. This is typically the case with in a higher risk-taking proclivity, greater propensity to
organisations conducting an ICO. Research has shown that innovation and a more proactive stance, yet they point out that
companies of a young age are subject to higher failure rates than these firms have a very limited stash of reserves which makes
older ones. A substantial number of small firms typically fail them extremely vulnerable in case of organizational mistakes.
early on after their inception [21, 22] because they suffer from Anand and Delios [27] and Hamel et al. [28] contend that over
what scholars call “liability of newness” [23]. At the same time, time firms will increasingly be able to utilise their reputation,
brand, marketing channels, social capital, company culture and

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customer loyalty to ease disruptions caused by the business 8. Limitations and future research directions
environment or by internal mistakes.
This study is not exempt from limitations which in turn enable
Companies that enter the international domain are typically other researchers to contribute. We encourage further studies
confronted with a range of costs associated with their on scams in the crypto sphere considering variations in the
expansion. Typically, such costs include learning costs, but methodological as well as empirical setup. Moreover, as our
more specifically also adjustment costs for adapting to the study is solely an ex-post observation which is only of limited
foreign environment [24]. Foreign entrants typically display a utility to crypto investors, we issue a call to put a larger
lack of familiarity with legal, social, and economic conventions, emphasis on investigating the antecedents of scams.
as well as consumer preferences and cultural features of the
targeted foreign markets. In addition, firms that enter foreign 8.1 Methodology
markets are typically obliged to modify their routines and
processes to properly operate within these markets. Whilst these Mitnick [8, p.9] maintains that so-called “collapsed relations”
companies typically do benefit from the experience they had where Agent and Principal are identical are not in the scope of
previously made with marker entries when further entering the PAT. Consequently, one could argue that differences may
subsequent markets [29], these companies are nonetheless faced exist between a more community-based, more decentralised
with the task of adapting some of their existing processes and ecosystem, such as Bitcoin and pure for-business entities that
creating some new ones in order to optimally serve this foreign use the ICO mechanism as a means of funding their proprietary
market. Creating those routines and adapting others will business. In the context of Blockchain, such relationships are
consume additional resources [30]. These costs can be best depicted as “interwoven decentralisation” where ICO
significant and enduring and in the worst case fatal to the teams, ecosystem users, and token holders can be both
venture [31]. Besides, companies regularly incur yet additional Principals and Agents at the same time. Borders may not be as
costs associated with their internationalization. These costs clearly defined as initially assumed, leaving the subject
stem from an increased organizational and environmental interlocked as depicted in Figure 2.
complexity which leads to additional costs for governance,
coordination, and transaction that may outweighing the benefits
gained from internationalization [32].Lastly, internationalization
increases ventures’ exposure to financial and political risks
resulting from currency fluctuations, governmental directives,
and trade regulation [33, 34].
Figure 2: Principal and Agent in the context of cryptocurrencies &
interwoven decentralization
Taken together liability of newness and liability of foreignness
can pose severe obstacles to new ventures conducting business Building on the findings of Mitnick [8] further aspects of PAT
internationally. Sleuwaegen and Onkelinx [35] established that offer additional research directions in the context of ICOs. We
29% of their surveyed international new ventures had to consider the following four topics as particularly noteworthy.
withdraw from the international market place and, as a First, as Mitnick [8, p.17] puts it “[a] rational party would not
consequence, failed to survive altogether. enter into a contract if he/she did not expect it to be fully and
perfectly operative, i.e. all parties will abide by it (Alternatively,
7.2 Financial performance of course, the party may expect the contractual arrangement to
malfunction to his benefit)”. Henceforth, the research
The results pertaining to the financial performance of the ICO questions arise whether ICO teams understand that a SAFTii
also yielded some interesting insights. As mentioned before, contract - which virtually does not contain any investor rights -
assuming a worst-case scenario an investor investing in all will indeed malfunction? Moreover, does this understanding of
tokens throughout the 2016 ICO vintage would have suffered a the extremely skewed risk-taking by the Principal, turn ICO
total loss for many of them. However, those tokens which teams into scammers? Secondly Mitnick [8, p.17] points out that
survived would have handsomely compensated for those losses. "[t]he rational contracting party with preference characterised
As mentioned above, an evenly distributed portfolio of ICO by some measure of risk aversion, i.e. security rather than
tokens would have yielded an interest of approximately 164% adventure, will demand that some guarantees or assurances
p.a. or 598.71% total return over the ca. two-year period. accompany the contract.". Here, the following research
Despite all controversy, it may even occur justifiable to the questions emerge: Does this suggest that most ICO investors
rational investor to be scammed in individual cases as long as are indeed not rational since “assurances and guarantees” are
other portfolio components display the growth in value leading most commonly missing in current SAFT agreements? How
to the above returns. Of course, caveat emptor remains true and can this be aligned with current research on asset-bubbles such
historical performance was seldom a good predictor of future as Zetzsche, Buckley, Arner and Föhr [37]? Thirdly, Mitnick [8,
performance. Other recent ICO research focusing on historical p.18] argues that valid agreements should be kept. Validity
returns during the same period could be an indication of requires an absence of … fraud or deceptions". Building on the
bubbles [36] which explain these abnormally high returns after previous research questions we therefore ask whether a SAFT
such a short period, even in the start-up space. without investor rights be considered a “valid” contract?
Furthermore, we suggest considering the consequences if it was

The JBBA | Volume 2 | Issue 1 | 2019 Published Open Access under the CC-BY 4.0 Licence 5
not a valid one. Fourth, throughout this study we have focused DA: developers are active (no = 0; yes =1)
on the Principal as the investor and token holder and the Agent
representing the token issuer and ICO teams. Consequently, KD: KYC on clients is done (no = 0; yes =1)
there is the opportunity to expand ICO scam research to other
actors in the ecosystem such as centralised exchanges, market VE: vesting is required (no = 0; yes =1)
makers and actors on social media aiming to deceive potential
investors through misleading statements and false offerings.
SO: code is open source (no = 0; yes =1)
Fraudulent market practices in today's securities markets such
as "Pump and Dump" as observed by Li, Shin and Wang [38]
in the crypto-currency markets may be considered a scam. XY: other factors

8.2 Empirical Setup Conclusion

As outlined above the basis of our empirical research was the So far, literature yields only limited insights on scams in the
2016 cohort of ICOs. The subsequent years, 2017 and 2018 context of ICOs. This paper enhances our knowledge about this
displayed a vast increase in ICOs. Hence, the most obvious phenomenon, contributing to existing cryptocurrency research.
opportunity to build on our research is to replicate our study Using a global sample, this study has revealed that the
with data comprising those two vintages. While the total magnitude of ICO scams is much smaller than initially
amount of ICO projects increased drastically, it remains to be anticipated. The article offers alternative explanation for the
seen if the percentage of scams changed as well. allegedly poor performance of ICOs by relating them to studies
from entrepreneurship literature. Moreover, this paper sketches
a possibility of how scams could be more easily identified ex
8.3 Antecedents to scams - The Crypto Scam Probability
Index (CSPI) ante in the future.

In order to warn investors of scams ex-ante, we would welcome References:

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i ii
We accounted for any fraud case, independent of its regulatory status, i.e. The Simple Agreement for Future Tokens (SAFT) is a contract offered by
whether it is an unregulated utility token or a regulated security token. ICO teams to investors. It conveys the rights in tokens prior to the development
of the tokens’ functionality.

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