• CFRED CUHK Law

Auditing Initial Coin Offerings and Smart Contracts

Vanessa Villanueva Collao– University of Illinois, Urbana-Champaign;

Verity Winship – University of Illinois, Urbana-Champaign


-- Smart contracts promise a world without intermediaries. However, that promise has quickly proved elusive, including in the context of Initial Coin Offerings (ICOs), a vehicle for funding startups built on smart contracts and blockchain. Particularly as ICOs reach a broader investor population, the question arises: is there a role for new intermediaries?


Our article The New ICO Intermediaries, published in the Italian Law Journal, provides a framework for understanding the potential functions of a new intermediary, the ICO auditor. The broadening of the ICO investor population to investors who are not code-literate has put pressure on the market. Without advocating the replication of old financial structures, we highlight the continuing necessity of bridging information from the code, the white paper and other human readable information, and the offline world.


In particular, the article identifies three main roles for an ICO gatekeeper. First, an intermediary is needed to translate the code for investors who are not code-sophisticates. The intermediary would act as a code reader and translator who could inform investors of the important encoded terms of the ICO. Second, the intermediary would reconcile the code with promises made in other materials aimed at ICO participant (whitepapers, etc.). Third, the ICO gatekeeper’s task is to verify the offline/offchain activity and identity where these remain important to the transactions.


All three functions of a new ICO intermediary – to translate, reconcile and verify – would support confidence in the market. As the majority of the promises are encoded, or spread in other means of communication, an ICO intermediary is in a better position to ferret out crypto-lemons to assure retailers before embarking on the transaction and after the ICO launch by controlling the verification of conditioned promises. This would reduce asymmetry of information created by coders’ programing language. By using emerging technologies, it would also support businesses that cannot afford traditional ways of raising capital.

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