Cryptocurrencies & ICOs: Are they scams? An empirical study

CRYPTO-CURRENCIES AND
ICOs:
Are they scams?
An empirical analysis
Daniel Liebau
&
Dr. Patrick Schueffel

AGENDA
| 2
§  Researchers
§  Introduction
§  Theoretical Foundation
§  Research Methodology
§  Results
§  Discussion
§  Contribution
§  Limitation and future research directions
§  Conclusion
Crypto-currencies and ICOs: Are they Scams? An empirical Analysis. Daniel Liebau & Dr. Patrick Schueffel

RESEARCHERS
| 3
2 Hybrids from Academia & Practice
Dr. Patrick Schueffel
Professor HEG Fribourg,
Department of Finance
Switzerland
Liaison Officer
Singapore
Daniel Liebau
Visiting Professor IE Business
School, Spain
Adjunct Faculty Singapore
Management University,
Singapore
Ph.D. Candidate, Finance Dept.,
Erasmus University, Netherlands

INTRODUCTION – ICO COMMENTRY IN THE MEDIA
| 4
Ca. 80% of ICOs are called scams?!
“Crypto is the
Mother of All
Scams”
Nuriel Roubini

INTRODUCTION – RESEARCH QUESTION
| 5
When can ICOs justifiably be called a scam?
§ We pose: Poor economic performance cannot automatically be
equated with a scam
§ It is highly questionable that high failure rates are idiosyncratic to the
novel phenomenon of the ICO
§ A more differentiated view on ICOs and potential scams is necessary

THEORETICAL FOUNDATION
| 6
Principal-Agent Theory
Source: ResearchGate
§  Agency Theory is a framework explaining how objectives are reached by separate
players interacting with each other
§  These challenges mostly arise from conflicts of interest between the Agent and the
Principal

| 7
Principals and Agents in the ICO context
§ ICO projects typically exert considerable discretionary power over
capital and resource allocation
§ Tempting for ICO teams to engage in fraudulent activities,
especially in the absence of incentive systems -> increased risk
for Principal
Source: D. Liebau, Dr. P. Schueffel

| 8
§ Oxford Dictionary: “A dishonest scheme; a
fraud.”
§ A fraud is an unlawful act as it "consists of
deceitful practice, resorted to with intent to
deprive another of his right…”
Scam

| 9
§ Economic performance is the evaluation of a firm's success measured in
monetary terms
§ Timmons Jeffry and Spinelli estimated that the survival rate of new
ventures is approximately 60% after the first year
§ Startups and new technology ventures are comparable to ICOs
Economic Performance

RESEARCH METHODOLOGY
| 10
§ 2016 cohort: ICOs sourced from ICO Web sites, such as ICO Data, Token
Market, ICO Bench, Coin Index, ICO Watch List, and CoinGecko
§ Criteria: 1) It must be a public offering, i.e. advertised through the
pertinent outlets of the crypto community and 2) it must have completed
its ICO during the year 2016
§ A total of 45 ICOs identified
Sample

RESEARCH METHODOLOGY
| 11
§ Lexis Nexis search for any news related to the
sample ICOs, delimiters (2016 or younger)
§ Keyword check for "scam”, “fraud", "sham”, "deceit",
"con", "hoax”
§ Search for any resulting legal proceedings or court
cases
§ If court cases were initiated, we investigated
whether a verdict was delivered yet, if so, what the
ruling was
Method

RESULTS
© 2018 Lightbulb Capital – Not for public distribution | 12

DISCUSSION
| 13
§ Far less than the alleged ca. 80% of ICOs are scams in the legal sense of
the word: 2.2% or one project
§ Even if we assume the worst-case scenario that the 22 projects (49%) for
which we cannot obtain data on the issuing price or the current price or
both turn all out to be scams we would see fundamentally different
results than established previously
Roubini got it wrong!?

DISCUSSION
| 14
§ Worst-case failure rate of 49% may not be idiosyncratic to the field of
ICOs. 51% survivors close to 60% survival rate for NTVs
§ “Liability of newness”
§ “Liability of foreignness”
§ ICOs typically suffer from those two disadvantages at the same time
Survival

CONTRIBUTION
| 15
§ This study shows that far less than the alleged ca. 80% of ICOs are
scams in the legal sense of the word
§ Total ca. 96 million dollars raised through the ICO mechanism & only ca.
9 million or 9.3% were invested in projects flagged ”n.a.”
§ ICO is investing as an experimental and high-risk activity our findings give
a more nuanced view on ICO scams
9.3% of investment went into potential scams

LIMITATIONS AND FUTURE RESEARCH DIRECTIONS
| 16
§ Solely an ex-post observation
§ “Collapsed relations” where Agent and Principal are identical are not in
the scope of the PAT. Differences may exist between a more community-
based, more decentralised ecosystem, such as Bitcoin and pure for-
business entities that use the ICO mechanism as a means of funding
their proprietary business
Ex Post & theoretical limitation
Source: D. Liebau, Dr. P. Schueffel

| 17
§  Can SAFTs without investor rights be considered a “valid” contract?
§  Are ICO investors not rational since “assurances and guarantees” are most
commonly missing in current SAFT agreements?
§  Does this extremely skewed risk-taking by the Principal, turn ICO teams into
scammers?
§  How can the above be aligned with current research on asset-bubbles?
§  Expand scam research to other actors in the ecosystem such as centralised
exchanges, market makers and actors on social media.
Principal Agent Theory & other areas

| 18
§  The basis of our empirical research was the 2016 cohort of ICOs
§  Replicate our study with data of 2017 and 2018 as these vintages displayed a vast
increase in ICOs
§  While the total amount of ICO projects increased drastically, it remains to be seen if
the percentage of scams changed as well
Empirical Setup

| 19
§  Research contributing to a Crypto Scam Probability Index (CSPI) in order to potentially
spot dubious projects before investors put their money into them
§  Create a mechanism that can be used to protect investors from bad actors
§  First indicators have already been raised by journalists, being 1) plagiarism, 2)
identity theft and 3) advertising of improbably returns
§  Applying hierarchical regression analysis and /or necessary condition analysis to the
2017 cohort of ICOs researchers could empirically identify relevant factors predicting
ICO scams
The Crypto Scam Probability Index (CSPI)

| 20
A rough model for the CSPI

CONCLUSION
| 21
§  Literature yields limited insights on scams in the context of ICOs. This paper
enhances our knowledge about this phenomenon, contributing to existing crypto-
currency research.
§  Magnitude of ICO scams is much smaller than initially anticipated. The article offers
alternative explanation for the allegedly poor performance of ICOs by relating them to
studies from entrepreneurship literature.
§  Moreover, our paper sketches a possibility of how scams could be more easily be
identified ex ante in the future.
There is still a lot to do

THANKYOU
&PLEASESTAYINTOUCH
d.liebau@faculty.ie.edu
liebau@rsm.nl
patrick.schueffel@hefr.ch https://www.linkedin.com/in/liebauda/
https://www.linkedin.com/in/patrick-schueffel

Cryptocurrencies & ICOs: Are they scams? An empirical study

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