The cryptocurrency market reached all-time highs of more than $800 billion during the initial coin offering (ICO) craze of 2017-2018.
There were many huge scams carried out during this time, which involved seemingly promising, but too good to be true companies like BitConnect.
While not all projects were outright scams, there were many blockchain-focused initiatives that weren’t really necessary but were still launched because people just wanted to capitalize on the ICO mania.
For instance, a Bangladeshi company called NOBAR wanted to disrupt the $4 trillion global e-commerce sector with its “unique” utility token and blockchain-powered payments system. However, the Estonia-headquartered firm never really took off and the project had to be abandoned, presumably due to lack of demand or poorly planned business strategy.
More recently, the Marconi protocol developers, who introduced their distributed ledger technology (DLT) solution last year, said they were also forced to shut down operations due to the “bear market.”
Another project called Swachhcoin, which had the ambitious goal of providing a decentralized waste management system, has now also disappeared. A Dubai-based initiative, called OneGram, which had been offering a gold-backed blockchain token has also become inactive. The list of scams and poorly-planned crypto projects is endless.
There are also projects that have been able to maintain operations, like EOS, after securing billions of dollars in investments, but only after paying huge fines due to not following regulatory guidelines when issuing tokens. Many others like Telegram have been ordered to shut down completely and pay back investors, because of non-compliance.
Nicholas Krapels and Daniel Liebau recently made several disclosure recommendations for cryptocurrency and speculative utility token issuers.
(Note: Nicholas Krapels is Adjunct Professor in Strategy and Entrepreneurship at SKEMA Business School, China.
Daniel Liebau is Founding Director at Lightbulb Capital and Affiliate Faculty Member at Singapore Management University.)
The researchers noted:
“We were astounded to find that 83% of participants stated that they do not believe utility token issuers disclose enough information to their stakeholders.”
“If cryptocurrency and utility token issuers want to list their tokens on public markets, they should provide basic levels of transparency. Such disclosures increase stakeholder confidence, enable more sound decision-making and, most importantly, attracts new market participants.”
Potential investors should have adequate token issuer information. This helps buyers figure out the “underlying motivations.” Issuer incorporation details must also be shared with would-be investors, the researchers suggested.
Furthermore, they recommend that issuers need to disclose “the total amount receiving” from the coin offerings in US dollars. Companies must also reveal the amount they’ve retained in cryptocurrency versus the amount exchanged for fiat money.
Additionally, the researchers say that firms issuing crypto tokens should disclose the amounts held in both digital assets and fiat regularly.
They go on to make more suggestions:
“Utility token and cryptocurrency issuers sometimes retain significant stakes in their token. This token treasury is allocated towards community development, software development, user incentivization and team compensation. The wallet addresses associated with the treasury should be disclosed.”
Potential stakeholders will then be able to look into the different blockchain transfers (associated with these projects) in real-time through transparent blockchain explorers. The researchers argue that with this level of disclosure, the issuer “decreases the risk of fraudulent activity.”
Blockchain token issuers must also provide accurate and updated contact information, the progress their initiative has made on a regular basis, and also provide a publicly-accessible open-source code repository that’s part of their project (this is already a widely-adopted practice in the crypto space).
The researchers clarified:
“The wholesale importation of traditional public market practices is neither advised nor warranted. Instead, we observe the utility token and cryptocurrency markets with fresh eyes and a view to support issuers, their intermediaries and buyers alike.”
“[We found that] the industry [is now adopting] these practices [which] may also have a positive effect on token prices. It is in the best interest of cryptocurrency and utility token issuers to incorporate these practices, but exchanges and information service providers have a responsibility in creating more transparency, too.”