The Rise of Fraud ICO and How to Avoid Them

In this article, we will discuss about the rise of fraud ICO, how to avoid fraud ICO and how to prevent any fraudulent ICO’s from being successful.

Initial Coin Offerings (ICO) are one of today’s  most sought-after ways for Blockchain startups to raise capital for their business. In 2017 alone, the first six months of the year saw ICOs raising a total of USD1.13 billion in capital and is projected to reach over USD 1.7 billion by year end. In one of our previous blogs, we had published an infographic depicting the growth of ICO over the years and how cryptocurrencies like Bitcoin have risen in value tremendously in the last five years. Along with the high growth rate of ICO popularity comes associated 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 the 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 ICOs. The key concern for authorities is that a typical ICO can easily provide 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 do fraud ICO create challenges for Blockchain?

Blockchain technology has been around for a while and is pretty much on the R&D cards at several global tech firms. But 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 these 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 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 limited or 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 for the misdeeds of a few scamsters. Genuine startups that have great potential to succeed may find it difficult to raise further capital as investors would hesitate to pump in more money fearing losses.

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

How to identify a fraud ICO ?

Investors have been tricked into sending money to internet based exchanges that act has funding sites for digital tokens. Ethereum based blockchain systems alone have caused losses to the tune of USD225 million in 2017 itself and affected more than 30,000 people globally. If you are a potential investor then you need to be 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 scamsters go for realistic names that relate well to common real-life challenges or scenarios to make an unsuspecting impact on investors. So, when you hear about an ICO, 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 may keep a closer eye on their activities.

Jurisdiction of the company

To have assurance on your monetary 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 you 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

Get the company’s technology 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. Analyze how their smart contracts are implemented and how able 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

Demand a technical whitepaper from the ICO organizers that details the entire project summary from inception to technical implementation to potential business scope, target market and much more. A documented proof of 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. Check the economic vulnerabilities in their business scope and how market dynamics may impact their business models over time. Get clear 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 not the least, 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 businesses so that you can be aware of the risks involved.

Blockchain technology and the digital token economy will surely grow in the coming years. A little caution needs to be exercised by investors to prevent any fraudulent ICOs from being successful. The tips in this blog will be of great help in identifying such fraud ICO in future. To be on the safe side, it is always advisable 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.