The rise of fraud ICO and how to avoid them

Initial Coin Offerings (ICO) is one of most sought-after ways for Blockchain startups to raise capital for their business. In 2017 alone, the first half of the year saw ICOs raising a total of USD1.13 billion in the capital and is projected to reach over USD 1.7billion by year end. In one of our previous blogs, we published an infographic depicting the growth of ICO over the years and how the value of cryptocurrencies like Bitcoin has risen in value tremendously in the last five years. Along with the increase in the popularity of the ICO comes challenges that grow with them. The biggest problem is the rise of fraud ICO events globally.

In September, the US Securities and Exchange Commission (SEC) had charged two ICO schemes, one is a real estate platform and the other a diamond trading business platform, for defrauding investors and accepting cash in exchange for crypto-coins for businesses that do not exist or are not viable. Both these companies belonged to the same person and the SEC has filed a criminal charge against him. This is the first criminal charge filed by the SEC against an ICO operator but unfortunately, it will not be the last. Federal authorities have begun to ring the alarm bell against ICOs globally and recently countries like China and South Korea have banned the ICOs completely. The key concern for authorities is that a typical ICO can act as a cover for a large money laundering scam because cryptocurrency trade is still an unregulated process in several countries thereby freeing itself from scrutiny by trade bodies in those countries.

How does fraud ICO create challenges for Blockchain?

Blockchain technology has been around for some time now and is pretty much on the R&D cards at several global tech firms. It has gained tremendous affection from the startup community and new ventures have popped up to take Blockchain to the next level by making it mainstream. ICO is used by startups to raise capital for their business and for potential investors, ICO is a way to gain exposure and early bird advantage for the next big thing in technology. Scamsters use these two aspects to create fraud ICO schemes that can raise capital in exchange for digital crypto-coins that have no real value. This would lead to:

Monetary loss: Investors lose their hard-earned money and have no legal support for receiving refunds since most blockchain financial systems are beyond the control of federal authorities.

Bad reputation: The entire blockchain community gets scrutinized due to the misdeeds of a few scamsters. Genuine startups that have great potential to succeed may find it really hard to raise further capital as investors would hesitate to pump in more money fearing losses.

Tighter Regulations: With the increase in scams related to fraud ICO, governments across the globe may eventually bring in more strict regulations, enforce legal compliance and regulatory fees which would increase the cost for blockchain companies. Countries may even follow the path of China and South Korea and ban ICOs completely which would further make the ecosystem hostile for genuine blockchain startups to prosper.

How to identify a fraud ICO?

In the present scenario, a lot of investors have been tricked into sending money to internet-based exchanges that act as funding sites for digital tokens. Ethereum based blockchain systems alone have caused losses to the tune of USD 225 million in 2017 and it affected more than 30,000 people globally. If you are a serious investor then you need to alert and examine the following aspects of an ICO offering to determine whether it is genuine or fake.

Branding

Fancy branding is not always an indicator of a cool startup with an awesome potential in the market. Most of the scamsters go for realistic names that relate well to common real-life challenges of scenarios to make an unsuspecting impact on investors. So, when you first hear about an ICO, you have to research the company’s name as well as the branding guidelines they follow. If a startup is really committed to their business model, they would go all out in creating a creative branding of their own. So, in the absence of that uniqueness, you can keep a closer eye on their activities.

Jurisdiction of the company

To have assurance on your investments, try to invest in ICOs in countries or geographical regions that have a regulatory watch over the ICO trade. In its absence, make sure to seek the help of legal and economic consultants in the region to gain extra confidence in your investment and to calculate hidden risks.

Feasibility of the technology

The technology of the company should be assessed by professional technology consultants experienced in emerging technologies like Blockchain as well as know how crypto-currencies and tokens work in the digital economy. You have to analyze how their smart contracts are implemented and how capable the medium is to handle the changing dynamics of the industry. Only after such a technology consultation should you invest in an ICO.

Technical whitepaper

You have to ask for a technical whitepaper from the ICO organizers that details the entire project summary from inception, technical implementation to potential business scope. A documented proof their concept can be kept as a record of evidence if any fraudulent practices are discovered at a later stage after investment.

Target Market

Make sure the people who run the ICO for raising capital have a clear strategy and winning formula for their target markets. You have to check economic vulnerabilities in their business scope and how market dynamics may impact their business models over time. You need to get proper answers on how they intend to navigate through difficult and unforeseen scenarios in the business. The entire process, if completed successfully, will tremendously increase the confidence of investors in a project or team that organizes the ICO.

Core personnel behind the project.

Last but also one of the basic thing is to do a thorough background check on the key people behind the project and the ICO. Look up their past experience, their claims of running successful legacy business models, their referrals from former colleagues and so on. It is wise to check with international trade and exchange organizations and regulatory bodies about their past to detect any known history of fraudulent business so that you can be aware of the risks involved.

Blockchain technology and the digital token economy will surely grow in the future years. A little caution needs to be taken by the investors to prevent any fraudulent ICOs from being successful. The tips given in this blog will be of great help in identifying fraud ICO in the future. To be on the safe side, it is always better to partner with a successful blockchain specialist firm like Accubits before making your foray into the token economy. Talk to our consultants today if you wish to invest and we would help you in picking the right choice.