The devil is in the details: a taxonomy of red flags of fraudulent initial coin offering projects

The popularity of initial coin offerings (ICOs) is undeniable. Introduced in 2013 with the first ICO ever offered, this financial vehicle, which sometimes generates returns on investments beyond expectations, had raised a total of nearly $27 billion by January 2021. However, this popularity comes at a cost. ICOs scams capture media attention almost daily. Even though a significant majority of ICO projects are not based on fraudulent ideas, a notable portion of these vehicles, up to one in four, are scams. This is particularly concerning when considering that a small fraction of general revenues is typically affected by fraud. Unfortunately, this trend has definitely increased over the passing years, regulation of ICOs to protect investors is still lacking. Interviews were held with 53 key players in this environment, including financial regulators, investigators, investors, investees, and advisers, and were coded and analyzed to identify common themes and patterns in fraud detection. The findings reveal a taxonomy of fraud indicators categorized into three main areas: red flags from the investment itself, red flags from sources of information, and red flags from the project teams. This study contributes to the literature by providing guidance to investors on the red flags to watch for in order to avoid investing in fraudulent ICO projects. It will also inform and help financial regulators develop relevant ICO regulations in response to distinctive ICO red flags.