The economics of financial scams: Evidence from Initial Coin Offerings

• Main Authors: PHUA, Kenny, SANG, Bo, WEI, Chi Shen, YU, Yang
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2023
• Subjects: Financial scams; Forensic finance; Cryptocurrency; Finance and Financial Management; Technology and Innovation
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/7439; https://ink.library.smu.edu.sg/context/lkcsb_research/article/8438/viewcontent/SSRN_id4064453.pdf
• Institution: Singapore Management University

We examine the economics of financial scams by analyzing the market for initial coin offerings (ICOs). Using data snapshots of 5,873 ICOs, we find that irregularities in ICO characteristics across listing websites predict higher scam risk and are likely intentional. These patterns are consistent with a model where malicious issuers maximize profits by using irregularities to screen for naïve investors. Almost half of the ICOs in our sample may be scams, amounting to more than U.S. $6 billion in losses. Our results draw attention to the frequent use of screening mechanisms in financial scams.