There had been a number of cases when people behind the ICO simply run away with the proceeds, while purchasers received no tokens. Using escrow helps to avoid this situation. Anyone with a good reputation in the community can act as escrow as long as this person is not affiliated with the company selling tokens. Escrow acts as an independent third party in the transaction involving an exchange of something of value between the buyer and a seller. Just like in a real estate transaction, there is always a third party who makes sure that a buyer receives a title to the property and the seller receives the money.
The job of the escrow is to only guarantee the exchange between the parties. Because of its independent nature, escrow can never guarantee a quality of the items that are being exchanged or the truthfulness of statements that are being made. For example, in the real estate transaction, escrow cannot guarantee that the house being purchased is in a condition as advertised by the seller or that the money paid by the buyer are made lawfully. There is no way for escrow to have this knowledge. The parties have to do their own due diligence. The same goes for the sale of tokens. The only job of escrow is to ensure that the tokens will be issued and will be distributed to the buyers before the issuing company gets the funds.
Therefore, it is important to understand the nature of escrow.
1. An independent third party with no influence on either side
2. A trusted individual or a company with a good reputation in the community
3. A limited participant, whose involvement ends as soon as the tokens are distributed to buyers and company receives funds
Escrow IS NOT:
1. A part of the company, which is selling tokens
2. A guarantor of the tokens’ quality or the company’s future performance
3. A guarantor of the legitimacy of the buyer’s funds
When seeing escrow being included in the ICO process, you should expect getting the tokens prior to the company getting your money. But it does not mean that the tokens will be worthy or useful, that the company will perform or spend your money according to the promises it made during the ICO, and that the company will not violate any law or make truthful statements. Escrow cannot in any way prevent this from happening just like nobody other than the company can.
Written by Katrina Arden
Attorney and founder of Blockchain Law Group