Better disclosures cut risk of crypto coin crashes
Initial coin offerings are more likely to crash if they fail to give investors proper information at the outset, an international academic study showed on Monday.
ICOs raise funds for startups by issuing tokens - cryptocurrencies - in exchange for an investor's money. The process typically lacks the mandatory regulatory safeguards of consumer protection that floats on a stock market require.
Despite warnings from regulators that investors can lose their shirts, the ICO market is going from strength to strength, said Emmanuel De George, an assistant professor of accounting at the London Business School and one of the study's authors.
ICOs are running at a rate of about 100 a month, De George said. Some $13 billion was raised between April 2014 and May this year across 50 countries and over 650 issuers, with messaging service Telegram alone raising a mammoth $1.7 billion. "We don't envision that to be slowing down at all," De George said.
"What you are seeing is a lot of entrepreneurs with a lot of ideas. This is by far the cheapest way of raising capital these days, because you don't have the regulation that comes with other forms of capital raising."
The study was jointly written by De George and fellow academics from Columbia Business School and the University of Utah. It looked at why many ICOs lose as much as 75 per cent of their value within a few months. It concludes that regulation to improve transparency is inevitable and that some ICOs were already ahead of the game, with a basic level of disclosure at the outset and after issue making a crash less likely. Based on the sample of 776 ICOs, the study found that the successful ones made detailed disclosures at the outset and had been active on social media.
Transparency included making available the source code for the tokens to show there was a finite supply of them, and that tokens held by founders could only be cashed in over time and not in the immediate aftermath of an issue.
Providing informative "white papers", the equivalent of a prospectus, and being rated by firms like ICObench, ICORating, ICO Drops and ICO Alert, also reassure investors, the study said.
"Conversely, issuers with a weaker information environment experience higher illiquidity and return of volatility after the ICO," the study added. Poor disclosure typically led to ICOs crashing within three to six months.
The response by authorities to ICOs has been varied, with China and South Korea banning them. The US Securities and Exchange Commission is investigating some ICOs and seeking to bring them under the umbrella of securities rules.
The Group of 20 discussed possible regulation of ICOs in March, given that the crypto market operates on decentralised international platforms, making it hard for one country to get a full grip on the sector.
G20 finance ministers were unable to reach a consensus and instead agreed to improve monitoring.
"Our team feel that regulation is around the corner to some extent," De George said.