As a recent academic study has shown, “ICOs [initial coin offerings] have much to teach us about the uneasy relationships between law, innovation, and financial technology in our present moment.” Although proponents often boast that blockchain offers a world of “trustless trust,” promises made in initial ICO contracts, typically presented in white papers, are not being met by the subsequent coding.¹
What’s wrong with the white paper?
In pre-ICO terms, white papers are reports, usually written by governments, that provide information about a complex problem or situation. They reflect the opinion of the issuing body on the subject matter, and their intent is not only to help readers understand the issues, but also to help them solve problems and make decisions.
White papers issued for ICOs are quite different. Rather than presenting a comprehensive overview, they generally offer “a simple description of the project and the structure in which tokens will support it.”²
Although the Bitcoin and Ethereum white papers are often presented as the model for ICO white papers, few ICOs since have lived up to those standards. Indeed, a significant percentage of recent ICOs provide no protection against insider trading, fail to deliver on the promises they make, and perhaps most surprisingly, fail to uphold the decentralized values that are seemingly central to the blockchain token economy.³
What information should an ICO white paper include?
Are you considering investing in an ICO? Check the white paper carefully for these key points:
Identity and location: Who are the issuers of the ICO? Will you have a reliable means of communication with them? A recent academic study has shown that approximately 18% of white papers for ICOs provide no information about the issuing entity, and more than 40% of these white papers do not include a valid postal address.⁴
- Problem and solution: What purpose does the investment have? Typically, ICOs are presented by startups that have identified a technology-based problem and are seeking financing to develop a technology-based solution to that problem. Both the problem and the proposed solution should be explained clearly. The code that will be used should be made available so that potential investors can perform necessary due diligence checks.⁵
- Token description and governance: Does the offering provide utility tokens, security tokens, or currency? Information should be provided about token delivery, whether more tokens will be issued in the future, and where and how tokens can be exchanged. Investors should also know if the founders will hold any reserve tokens and how they can be liquidated, and whether their consideration will be pooled, “from which the right or entitlement granted to the token holder is purchased,” or whether it will be segregated.⁶
- Blockchain governance: How does the underlying blockchain infrastructure operate? What impact will this have on token governance?
- Qualifications: Who is writing the code? Information about the qualifications of the technical team behind the ICO helps investors evaluate the offering.
- Risk factors: The white paper should inform investors about any significant risk factors affecting token holders. At a minimum, this should include an evaluation of the risks posed by hacking, data loss, and disruption, as well as legal concerns that may arise (privacy, cross-border data transfer) as the blockchain token economy continues to mature.
Going forward, it will be critical to develop mechanisms to protect investors from ICOs that break contract promises. Requiring developers to disclose a standard body of information about their ICOs will benefit both sides. Disclosure will create a barrier to investment in “pie-in-the-sky” projects, ensuring a greater chance of success for those that can meet the standards. Improved information about ICOs will also allow investors to make informed decisions. The implementation of an accepted regulatory structure for ICO white papers will thus be a key step in the maturation of the blockchain token economy.
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 Cohney, Shaanan and Hoffman, David A. and Sklaroff, Jeremy and Wishnick, David A., Coin-Operated Capitalism (July 17, 2018). Available at SSRN: https://ssrn.com/abstract=3215345. p. 4
 Zetzsche, Dirk and Buckley, Ross P. and Arner, Douglas W. and Föhr, Linus, The ICO Gold Rush: It’s a scam, it’s a bubble, it’s a super challenge for regulators (November 16, 2017). Available at SSRN: https://papers.ssrn.com/sol3/