The risk around ICOs and recent scams
Initial
Coin Offerings (ICOs) have become the new vehicle for raising funds. ICOs are
quickly transforming the process of crowdfunding and are slowly taking over the
traditional way of raising funds from a venture capitalist.
The current craze for
Initial Coin Offering (ICO), however, has without a doubt opened the floodgates
filling the market with many unscrupulous individuals, ready to take advantage
of this new phenomenon to fraud unsuspecting investors and easily raise more
money for themselves.
Over the last few years,
investors have lost millions of dollars to market reactions or scams, hurting
the credibility of cryptocurrencies and blockchain in general. The term “ICO”
has been called everything from “revolutionary” to “a Ponzi scheme."
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| Image Courtesy: pixabay.com |
Lately, though,
blockchain has been gaining more and more mainstream attention.
Blockchain-based startups have creates solutions to the internet mess that we
have created in the last decade. Over the last few years, many terms associated
with cryptocurrency have become more mainstream. With a small number of tech
industries managing almost all of the information online, the decentralized model has attracted a growing number of
internet users.
The big question remains,
is investing in ICO a gamble or not? To avoid falling victim to scams or wobbly
projects, it is important to find out what ICO really is and what to consider
before investing in ICO.
What is ICO?
We are currently living
in a very digital era. The cryptocurrency’s proliferation came as no surprise
when it was finally introduced to the world as Bitcoin. As Bitcoin and other
cryptos become popular, the public is slowly understanding the mechanics behind
it, which is Blockchain.
Initial
Coin Offering (ICO) is a new form of a fundraising mechanism in which
blockchain startups issue their own crypto tokens. New projects use it to sell
freshly mined crypto tokens in exchange and for Bitcoin, Ether, other
cryptocurrencies and fiat. Basically, anyone can start their ICO. ICO gives
entrepreneurs a simpler alternative to the meticulous process of raising funds
through various capitalists or banks.
Users can
easily draft a document outlining the project, commonly referred to as the
white paper, launch a website and seek funding. Users then spend digital tokens
on the platform or sell them later.
In many
different countries, ICO has little to no regulations at all. This makes
fundraising very easy. In a way, it resembles Initial Public Offerings (IPO),
except that ICO’s are mostly unregulated and grant little to none rights to
investors.
Risks of ICOs
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| Image courtesy: Pixabay.com |
Given the
speculative success of ICOs, the lack of clear regulations has inspired a
number of fraudulent campaigns. It comes with no surprise that a lot of media
buzz and celebrity endorsements were added to the mix creating large scams,
with the most thriving scam raising a whopping $660 million and $600
million.
ICO’s have
attracted a large number of institutional investors as well as individuals who
have poured money based on hype and a promise made by the founders. The scams
have not only hit their pockets but also blockchain’s reputation worldwide.
Countries such as China, Nepal and Bangladesh have resorted to banning ICOs
altogether.
ICOs are
not similar to IPOs (initial public offerings), in which buyers acquire shares
and voting rights in a company. Most ICOs only offer tokens, that could be
traded at a later date for whatever services the ICOs issuers plan to provide.
The big problem with this is that the exit scams are not so easy to spot.
Individuals
who are new to digital trading and ICOs can be easily influenced and conned
into investing in business models and products that are unclear. Queer claims
about products or promises of impractical returns on investments are two major
red flags to look out for when thinking about an ICO investment.
Large ICOs
cannot just amount to large earnings. Investors are often surprised by a lot of
the details that they fail to realize about ICO. Below are some of the top 4
cons of ICO.
The absence of a security token
In the world of cryptos, ICO
is considered less secure. The fact is, even with a decentralised ledger that
is supposedly impossible to tamper with, there are ways to rig the system and it has been done in scale. This
has led to the invention of security tokens and security tokens offerings
(STOs). STOs have long been discussed within the blockchain and financial
circles. Security tokens contain information about the fundraising process and
allow investors to claim shares after the launch of the ICO process.
Proponents of the STOs
however, have argued that they will likely serve as the next generation of
ICOs, making up for a number of notable disadvantages in the ICO market. The
absence of security tokens and any regulatory oversight in the ICO market has
continuously given rise to a number of scams within the cryptocurrency market.
As the world continues to
observe the gradual shift from ICOs to STOs, the cryptocurrency industry will
be provided with a big boost in confidence. The added layers of protection and
security tokens offer into the cryptocurrency market will attract a large
number of investors who were not thinking of investing their money into the
token economy.
The increase of investors
will have wide economic advantages on the cryptocurrency industry with an
increase in Over- The – Counter transactions. STOs will bring rise to new and
creative types of security measures that will prove to be the safest, most
certain way of bringing institutional money to the crypto industry.
Trading in Security Token
Offerings is still very new. There are no models yet. The legal situation is
also not yet clear and will definitely have to go through some changes and
adaptations in the coming years.
Trading with ICO is not a guaranteed process.
ICO is often considered
as an unregulated transactional process from both the issuer as well as the
investors’ end. This is because investors are not sure of profits for their
invested cryptocurrency and issuer is also not sure about the success of the
ICO. There are more ICOs that have unsuccessful results.
Openness nature towards Investors.
ICOs’ cross-border nature of blockchain technology is based on the principle of openness and a decentralized system. The ICO unregulated status and anonymous nature allow everyone to take part as investors.
This creates an unsafe
space for individuals who are not keen or may not know about the risks of
investing in ICO, because they are easily manipulated falling prey to a series
of fraudulent activities.
Security Token Offerings
will only allow business experts to take part as issuers or investors. This
will reduce difficult situations that occur in ICO eventually eliminating all
fraudulent activities that occur in ICO.
Most recent ICO scams
We have heard it over and
over again. Experts have repeated that we must protect ourselves from crypto
scams and ICO projects. However, as the cryptocurrency climbs in value
following the last bear market, cybercriminals are once again trying to defraud
cryptocurrency investors.
While you may be tempted
to think that open-source, decentralized, anonymous cryptocurrencies are safe
because they are controlled by one single authority and operate in a
transparent manner, the truth is, they are a huge target for scams, including
digital theft, phishing, fraud, and hacking.
We have grown accustomed
to hearing about new scam projects that have successfully escaped with millions
of dollars from unsuspecting investors. In a recent discovery by Bitcoin News,
two blockchain startups RepuX and JoyToken are said to have stolen $4.7 million
and $3.3 million from investors respectively.
The “sister startups”
aggressively advertised their ICOs at industry events, on digital platforms and
through paid ads on the news website known as Cointelegraph. RepuX was
attempting to raise funds for a blockchain-backed platform that allows Small
and Medium Enterprises (SMEs) to capitalize on business solutions via the data-sharing
network.
JoyToken advertised
vigorously claiming that it was developing a platform and protocol that will
form the foundation for a safe online gambling ecosystem where smart contracts
will be used to automatically determine the results of the game. The sister startups
succeeded in the exit scam leaving unsuspecting investors in yet another round
of pain.
As people continue to
invest in ICOs, they need to find out the latest notorious cases of
cryptocurrency theft.
The South Korean Ponzi Scheme
A special South Korean investigative agency in Seoul successfully used Artificial Intelligence (AI) to unravel a cryptocurrency Ponzi scheme that defrauded 56,000 people of over $18.7 million. The fraudsters identified only as Lee and Bae targeted mostly senior citizens between the ages of 60 to 70 years.
The individuals had
little to no idea of how cryptocurrency works. The victims had been promised
that the M-token that they purchased would grow 600 per cent in value. The
fraud was uncovered by South Korean authorities after the agency created an AI
to track keywords related to Ponzi schemes and internet fraud.
ICO Fraud in Canada
Kevin Hobbs and Lisa
Chang both defrauded their investors of $30 million. The duo launched the FUEL
token, convincing their investors that their cryptocurrency would grow
substantially in value. They are facing civil asset forfeiture in British
Colombia and are accused of using investor funds to gamble, purchasing vehicles
and buying a townhouse.
$114 million stolen in Sofia-based scam
A criminal organization operating within the Czech Republic and Bulgaria were engaged in the illegal operation of binary options and crypto trading platforms. Investors had been promised huge returns but instead, the fraudsters managed to launder $114 million into their accounts.
Bulgarian authorities
seized cryptocurrencies from the team as well as equipment allegedly used to
facilitate the theft process, including computers, flash drives, and a hardware
portfolio for storage of crypto data
$51 million stolen in Taiwan
Several Taiwanese men
have been accused of operating a sham crypto investment scheme defrauding 1,000
investors of $51 million. The investors were promised 335 per cent returns;
however, they did not receive a coin.
The ring leader was a
47-year-old man referred to as Lin was arrested together with his team and were
charged with multiple violations of Taiwanese banking and business laws. Those
responsible are facing several years in prison. After this Ponzi scheme, the
Taiwanese government introduced amendments to the Mony Laundering Control Act
and the Terrorism Financing Prevention Act.
Is investing in ICO safe?
No investment is really
safe. There is always the risk of capital being lost. Even if ICO is considered
legitimate the return on investment appears to be pretty slim and the space in
which they operate presents a host of new dilemmas that investors must always
be aware of.
Invest in Blockchain
revealed, 60 out of
the top 100 cryptocurrencies by market share are yet to release a tangible
product or service to the public. This is despite raising millions of dollars
from different investors in their ICO campaigns.
Let’s face it, there is
always a calculated risk when investing in ICO campaigns, even the legitimate
ones. ICOs are generally high risk/ high reward. Cryptocurrency and blockchain
technology is here to stay, but the amount of fear and uncertainty surrounding
ICOs still continues to spread.
The Blockchain technology
is still in its infancy, finding its feet before it firmly establishes itself
with some form of stability; and the regulations around ICOs are far from
comprehensive.
It is advisable to invest
only after you have studied and learned about what should be in a successful
ICO. While learning there are so many different ways of earning cryptocurrencies.
Jumping in and throwing capital into a sphere that you do not understand will
raise your chance of losing your investment.
Even after learning and
investing in legitimate and promising projects, no one can guarantee that your
tokens will ever be worth anything. Blockchain startups struggle to succeed as
the practical adoption of blockchain technology still remains low. They are
simply an ambitious idea.
ICOs
can be a very good investment idea. As you invest in ICO, keep your eye out for
red flags to minimize the risk of losing your investment.
This is a guest post by a popular blog Techwarn founded in March 2014 by a team of passionate bloggers as a website featuring the latest tech news from around the world.