ICO Scams on the Rise, Chinese Investors Turn to WeChat to Bypass Ban

A recent study conducted by Satis Group LLC found that 80% of ICO’s are scams, with only 8% trading on an exchange. The data looked at initial coin offerings (ICO’s) with a market capitalization of a minimum of 50 million USD.

The group breaks their study into six categories: failed, successful, gone dead, dwindling, promising and scam. The group found that 81% of the ICO’s in their criteria were scam, 5% were gone dead, 5% failed and 8% were trading on an exchange.

ICO’s, start with an ICO white paper writer, move on to the fundraising stage and eventually trade online.

Scams in this sense are classified as ICO’s that do not or had no intention of fulfilling the development duties with the funds provided. Failed ICOs were successful in raising funding, but the entire process was not completed. The ICO either refunded money to investors, or abandoned the project completed. The result of these failed ICOs is often a lack of funding.

The findings contradict another ICO study that was conducted at MIT. The MIT study suggests that only 5% – 25% of ICOs are fraudulent. Commitments from founders and development teams as well as a lack of funding seem to be the main contributing factors for ICO failure or fraud.

China has banned ICOs, which has led to man residents choosing to use WeChat to bypass the country’s regulations. The use of WeChat allows residents to use middle-men agencies that are ICO token brokerages that allow ICO offerings at a steep premium.

These middlemen have been known to promote their services on the app, and some brokers charge as much as a 10% premium to invest in ICOs using their services. Clients are made to make payments via virtual currencies upfront, and Ethereum is typically the currency requested by brokerages.

Marketing firms are also devoting resources to WeChat to create “communities” that promote ICOs.

The use of unregulated dealers is a difficult one to ban. Investors seeking to make a profit fuel the industry in which regulators banning one dealer will quickly find another dealer taking their place.

ICOs have come under scrutiny in the last year, as more investors are losing money in fraudulent ICOs. The rise of bitcoin to just under $20,000 helped fuel the growth of ICOs at the end of 2017 before the currency underwent a massive correction, falling to $7,050 at the start of April 2018.

Massachusetts regulators have also cracked down on ICOs, with a major ruling last week that halted five ICO sales. The sales were associated with “unregistered” ICOs. The ICOs failed to registered their securities, instead selling unregistered securities to investors.

The ruling forced five firms to close down the sale of tokens in the state. The firms forced to close down their operations are: 18 Moons, Across Platforms, Pink Ribbon ICO, Mattevest and Sparkco.

The firms have also been told to refund investors and send rescission letters within 45 days of the March 27, 2018 orders. ICOs, in the United States, must register their tokens or face potential violations from the SEC.

Melissa Thompson writes about a wide range of topics, revealing interesting things we didn't know before. She is a freelance USA Today producer, and a Technorati contributor.