David is a tech journalist who loves old-school adventure games, techno and the Beastie Boys. He's currently on the finance beat. David is a tech journalist who loves old-school adventure games, techno and the Beastie Boys. He's currently on the finance beat.
The most extensive legal report on initial coin offerings (ICOs) is now available to the general public, and the findings are pretty damning.
University of Pennsylvania legal professors, alongside research teams, have meticulously studied the top 50 highest grossing ICOs of last year – their whitepapers and their code – to determine if there was any disparity between promises made and cryptocurrencies developed.
An excerpt from the 100-page publication reads:
Our basic finding is that ICO code and ICO contracts rarely match. In a financial ecosystem built around the proposition that regulation is unnecessary because code is the final guarantee of performance, the absence of coded governance protections is troubling. We also show 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.
One take-home is that no one reads smart contracts.
The paper concludes that the ICO market is being held together by simply trust, readily placed in software coders not well versed in the legalities of consumer protections and related fraud.
UPenn professor of law Dave Hoffman, who also contributed to the research, has since shared some of the key takeaways in a thread 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
It further considers the stark absence of any real established procedure of vetting smart contracts – attributing it to reliance on ad-hoc social validation. Supposedly, the price of a coin is meant to be reflective of its quality.
But the research notably refutes this claim, directly pointing to the sheer volume of coding problems across major cryptocurrencies that have had no certifiable impact on their price.
Our results show that the vast majority (40 out of 50) of the top grossing ICOs of 2017 had major problems with how code bore out their anti-exploitation disclosures. If investors know about the problems we’ve identified, then the makeup of the top 50 suggests that they don’t much care.
A hyperconnected investing community with no technical analysis of the cryptocurrencies they’re funding is certainly worrying. The implications are only compounded by recent analysis, which revealed that almost 80 percent of ICOs in 2017 were blatant scams. They appeared absolutely legitimate, especially when compared to their industry counterparts – but were destined to never deliver.
In fact, the SEC was so inundated with official complaints from burned investors they executed their own exit-scamming ICO, part of a sustained effort in educating the general public to avoid being swindled.
Deadcoins is a popular website worth flicking through. It provides a thorough database of all the cryptocurrencies no longer with us, a list that’s grown to include the obituaries of more than 800 projects.
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