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How can we trust crypto-markets?

Without formal regulatory oversight, can investors have confidence in so-called initial coin offerings?

By Emmanuel De George , Thomas Bourveau , Atif Ellahie and Daniele Macciocchi 17 January 2019)

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The emerging cryptocurrency market provides a unique opportunity to examine an unregulated capital market in which over US$13 billion (£9.96 billion) has been raised through ‘initial coin offerings’ (ICOs). In a recent paper we set out to assess whether, in the absence of formal regulations, mechanisms of self-regulation, monitoring and governance may have naturally emerged in this market and whether information disclosed by the projects can be used by investors to identify higher-quality ICOs that might perform better.

This opportunity may not last much longer, since the Securities and Exchange Commission in the US and national regulators in China and South Korea are contemplating regulatory actions to protect investors from potential scams in this market. Regulators in some countries, such as Malta and Switzerland, have adopted a more favourable stance on ICOs. Meanwhile, the crypto-market continues to grow rapidly and is the topic du jour in financial circles.

We have sifted through the data on more than 750 ICOs that were attempted between April 2014 and May 2018. ‘ICOs’ refers to the financing process in which conventional fiat (or crypto) currency is exchanged by investors for crypto-tokens that can be used to consume certain products or services that are to be developed by the issuer in the future. Our findings should provide some measure of comfort to those who put their trust in self- regulation and those who prefer to rely on mandated disclosures required by supervisors in regulated markets.

Information plays an important role in this new market. Voluntary disclosures of information about the project do take place in the ICO market and they tend to have a positive effect on the likelihood of a successful coin offering. Also, outside experts in the crypto-community provide opinions and ratings about the quality of the ICO and a higher rating also has a positive effect on successfully raising funds. These ratings can be viewed as providing some degree of self-regulation and monitoring in this market. Our analysis suggests that investors seem to value higher-quality disclosures that resemble those mandated in more mature capital markets.

By contrast, more limited or even negligible disclosures are associated with ICOs displaying less liquidity, greater volatility and the risk of an all-out crash.

Crypto-token investment and trading

First, a look at the remarkable growth in crypto-market investment and trading in the last few years. According to, a leading provider of data on the cryptocurrency market, more than 650 entities (out of the 776 we examined) originating from more than 50 countries raised about US$13 billion (£9.7 billion) from investors between April 2014 and May 2018.

This is a remarkable sum for investors to entrust to the ICO promoters, given the lack of regulation and the consequent absence of robust and reliable investor protection. Because of the decentralised nature of platforms that underpin these ICOs (i.e. the blockchain) they are, in effect, exempt from securities laws in any one jurisdiction. Moreover, there is considerable debate as to whether they qualify as securities at all.

Thus a significant and fast-growing channel for capital-raising is operating without the sort of regulatory oversight that would be routine in any other capital-market situation.

There is an irony here in that the ‘ICO’ designation is clearly inspired by ‘IPO’, the initial public offering of shares in a private business that is listing on a public stock exchange for the first time. But the major difference, of course, is that a share flotation is accompanied by strict, lengthy and costly registration procedures overseen by securities regulators. A company that sought to sell shares to investors on the basis of the sort of low or no-disclosure regime common in the ICO market would swiftly find itself in dialogue with regulatory officials and likely shunned by the investment community.

So, given the lack of regulation, how do ICOs perform in terms of investor returns? First-day trading performance is impressive: a 6% median return and 14% when calculating the average return.But this first-day excitement soon fades: during the course of the next 30 days, we observe the median return is minus 30%, indicating a significant loss for investors.

But not all ICOs are equal and, while the median return is negative, the mean return is positive 39%. In other words, a relatively small number of successful ICOs have skewed the average statistics by generating outsize returns, which may help to explain why US$1 (£0.59) invested in August 2014 in the aggregate ICO market index would have turned into US$4,621 (£3,471) by mid-May 2018. Nonetheless, over 50% of ICOs are believed to have failed.

Quite naturally, investors will want to be able to identify the sort of ICO that provides outsize returns while avoiding those that do not; which is where our work on information disclosures and, critically, the dissemination of that information, comes in.

In short, the successful completion of an ICO and subsequent lower volatility and illiquidity of the crypto-tokens in question in the secondary market is directly related to the volume and quality of the information disclosed by the issuer.

As one may have expected – since the first-day trading sees what proves to be an unsustainable premium to the offer price – there appears to be no relationship between disclosures and the initial trading activity, suggesting that first-day frenzy is driven more by hype than by any sort of focus on the fundamentals.

But it is a different story when the longer-term performance over the 90 days following the ICO is taken into account. Here, greater liquidity and less volatility are positively associated with greater disclosure and dissemination of information; i.e. disclosure is positively related to traditional measures of market quality.

This is also true of the risk of an all-out crash of the crypto- token in question. That is perhaps unsurprising, given that our research uncovered evidence that some ICO entities deliberately time their offerings to cash in on “hot streaks” in the crypto- market – precisely the sort of “pump-and-dump” strategy that can be so harmful for investors and for which regulators in more conventional markets are constantly on the alert.

Such operators will be understandably less keen than reputable ICO participants to disclose information such as the currency’s source code, or to publish meaningfully informative material about their token’s future prospects, perhaps in the form of white papers, or to be open about the founders’ continuing interest (or lack of it) in the crypto-token that they have established. So, voluntary disclosures are emerging as a type of self- regulation in the crypto-market. But how does information about such disclosures reach investors?

The short answer is that a breed of what may be called information intermediaries has come into being to provide independent ratings to the market on the perceived quality of ICOs.

A few of the most prominent platforms are,,, and These provide assessments of forthcoming, current and past ICOs based variously on in-house analysis, external cryptocurrency experts who are invited to contribute their views (in the case of, or an internally automated ratings engine that combines several ICO characteristics (a service provided by via its ‘benchy’ tool).

Given that information is their lifeblood, these agencies are careful to award higher ratings to ICOs with good disclosure practices than those without them, and we find that a positive external rating is associated with a successful ICO.

This, in turn, suggests that these agencies, which have evolved independently in an unregulated market, are trusted by investors and are seen, to a great extent, as playing a key monitoring role.

Finally, we found that this newest of capital markets is one in which an important channel for disseminating information is the newest of communication tools: social media.

We hope our findings will be relevant both to current and future investors in ICOs and to financial-market regulators who – to end where we began – are turning their attention to this young and unregulated market.

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