Cryptocurrency ventures have now been financed by more than 1600 Initial Coin Offerings (ICOs). The cryptocurrency coins are also known as tokens. The unregulated nature of cryptocurrencies means that some are not legitimate, and the number of ICO scams is rising.
The shocking reports that emerged in 2017 point towards the gravity of this issue. The analysis of around 1,450 tokens showed that 271 of those tokens showed all the features of deceptive ponzi-schemes. Investigators discovered that some of the coin offerings used “plagiarized investor documents, promises of guaranteed returns and missing or fake executive teams.”
When researchers reviewed the statements and online transaction records, they found 25 of the ICOs claimed guaranteed returns on investments. The SEC prohibits guaranteed returns, because this is a common fraud tactic designed to encourage investors.
Investigation into the executive teams associated with the 1,450 ICO discovered 124 of the offerings had fake executive teams. Some used the photographs of unrelated people, without their permission.
These alarming numbers have lead to calls for the urgent arrest of perpetrators of these illegal activities.
According to the Satis Group, the ICO advisory firm, about 81% of the scams are a result of charlatans, swindlers, and con artists, who are always on the hunt for the chance to grab the money and run. Ignoring all the scams, still only 8% of cryptocurrencies actually get involved in trading. This shows a high failure rate for ICOs.
In conventional businesses, shareholders or lenders receive legal rights to protect their money. There are certain laws that preserve the interests of the people involved in the business. Furthermore, the KYC (know-your-customer) and the AML (anti-money-laundering) regulations help prevent criminal activities such as tax evasion, financing of terrorism, and concealment of ill-gotten gains.
Coming to cryptocurrencies, laws and regulations literally take a backseat. ICOs do not confer legal rights on the involved parties. The issuers in many cases are anonymous and cannot be traced. The involvement of criminal investors is not known or not frowned upon.
According to Jay Clayton, chairman of the US Securities and Exchange Commission, Bitcoin is a commodity, whereas, the other cryptocurrencies are securities. He further added that the other large crypto-assets, Ethereum and Ripple are also unregistered securities. Former chairman of the Commodities and Futures Trading Commission, Gary Gensler, also shares the same opinion.
Experts in the field suggest a few ways to avoid ICO scams. They have an eye for what is genuine and what is not. The are ways to evaluate offerings to identify the scams from real projects.
According to the experts, scam projects almost always present unrealistic goals. On the other hand, professional developers believe in keeping the projects crystal clear. Investors need to recognize realistic promises and look for clear statements of future goals for the project and prospects for success.
Another factor that hints towards the fraudulent intentions of some developers is the use of buzzwords. Experts say that some buzzwords may look pleasing, but often make no sense. The presence of the same buzzwords in the whitepaper is also a red alert. Whitepapers with charts, specifications, and calculations that make no sense are obvious scams.
One way to avoid ICO scams is to review the company’s target or prospective goals. If the project starts with promising everything positive to clients, with no risks, it probably cannot be fully trusted. Another way is to check for reviews of the coin by experts. One website that provides this kind of service is the ICObuffer website, which reviews ICOs. This website reviews Initial Coin Offerings giving them a score, as well as providing a comparison platform.
ICO experts say they put a great amount of emphasis on the team behind the project. For them, the team is one of the most important factors that determines the truthfulness of a project. For them, a team comprising of the important members of the cryptocurrency community is a team worth acknowledging.
Unfortunately, many ICOs have managed to make fortunes for developers at the expense of investors by technically illegal means.
