3 posts tagged

ICO Scams

Top cryptocurrency deceptions

The cryptocurrency market had its moments of glory last year and that attracted the sharks from all around – hackers, criminals and fraudsters, despite the current shifts, market dips and regulations, are still aim strong on luring the digital assets out of consumer wallets.

Basically, there is no shortage of ways of how to lose money in today’s crypto industry, which includes overestimated predictions, fraud commercials, Ponzi schemes and financial pyramids, an overwhelming number of ICOs made solely on purpose to make their creators rich, weak investment strategies and most importantly – the lack of market understanding.

Moreover, today’s crypto investors highly lack profile education as well as proper strategic thinking and, in turn, the market players capitalize on it big time.

For example, Andrew Smith, the director of the trade watchdog’s Bureau of Consumer Protection, speaking recently during an event focused on cryptocurrency scams and fraud, told that the consumers would lose more than $3 billion by the end of 2018.

Becoming an ICO investor is not so hard and overcomplicated as being the IPO participant due to numerous reason, and the entry barrier into the Blockchain niche is not high at all. However, the statistics show that the lack of knowledge and experience results in high losses and over-the-top revenues for ICO creators.
We need to consider the most known and usable cases of these fraud activities:

1)Overestimated false perspectives

There are numerous examples over the Internet where companies and specific people offer the so-called “investment boosts” or “the new strategies” to lure out trustful investors or enthusiasts.

That start’s at doubtful offers of participation in new Ponzi/Pyramid schemes (of course, they all seem legit and solid at the start) or mining bigt time-solutions and goes further with an invitation to invest in a new shiny fake coin to get huge profits in a long-term perspective.

Thus, an investor should be smart and careful in projects selection and not to overestimate the real possible profits of the industry in 2018 – nowadays, market and it’s returns are not skyrocketing as it had been last year.

Of course, these kinds of commercials visuals appeal to classic good old desires like shiny resorts lor luxurious life, or newly-born teenager millionaire stories or just something new. Anyway, if one’s not eager to lose the money he should not buy this and not participate in giving back to anonymous teams or getting involded in another become-a-millionaire-in-3-days-offers.

2)Simple phishing

So far, it is the oldest and most often used method of cyber fraud and crime – little wonder these things had reached into the crypto world. Phishing itself is the way of intrusion of the malicious programs, viruses or other programs aimed to harm your computer or digital device to your device while pretending to look at usual software. For this to work, things used as website creation to require the password, newsletter with viruses, open wi-fi networks, etc.

Moreover, cryptocurrency wallet prompts are often used for tricking out users to send their original keys to hackers. For example, the fraudsters targeted PCs using this Ethereum browser wallet to hijack the accounts by adding a window requesting users to «confirm» their seed phrase – as a matter of fact, that happened to MetaMask.

So, the phishing is a mass and often used method working on the large-scale, and it is not on the list of the witzy-looking fraud solutions.

3)Risky Crypto Exchanges

Basically, the exchanges at large are used to buy/sell and trade the cryptocurrency. Most people praise Bitcoin, and a few main digital assets only and over time try to people trade the less popular currencies into Bitcoin or transfer it to traditional fiat currencies. Though even the most known and well-established exchanges with good reputation provide specific security options and look solid, holding the substantial amount of money on these accounts during the extended time is still a risky game – nowadays no can tell about the malfunctions, hacks or something worse.

Overtime as the crypto assets popularity rose to the moon, the amount of operating and fake exchanges increased as well. So, losing money had become even easier by participating in those shady exchanges operations and trading there only to find out soon enough that the funds you want to withdraw are no longer available.

4)Mining operations faked

Getting Bitcoins and cryptocurrency through mining operations had been trends years ago and building massive mining farms including numerous machines in the second- and third-world countries are things of one can hardly be surprised nowadays.

Thus, commercial offer for investing in those mining operation had become quite popular with shiny prospects and promises about the more and more improved and vast GPU processing units and power levels. No matter to mention the astronomic revenues from this activity.

Quite often, proofs are not provided and money requested are promised to return usually in a long-time perspective only – these make months if not years. Moreover, the payback never actually comes. Do notice the vital point – chances of getting robbed or lose the money increase the less control over your assets and money you have.

So, by attracting the funds to these companies and investing in their hardware one can only make rich the wrong people.

5)Lack of assurance

As the digital age advances, more and more fraudsters activities appear over time. However, the technologies like social engineering are still strong. In case one keeps little attention on what’s going on with his wallet and it’s actives, he’s surely making a perfect target and prey out of his himself.

Actually, the now-popular Initial Coin Offerings (ICOs) at large can as well be regarded as scam activities, and they even are getting banned in certain countries. However, before the industry boom in 2017, a lot of ICOs had made many people become millionaires.

ICOs rather represent a fundraising tool for innovative technology startups in the world of blockchain made to receive funding directly from the crypto enthusiasts and investors as well as future users. As it often happens, this became a convenient method for a lot of quick-thinking fraudsters to get their hands on a new shiny Lamborghini or a full-stacked island with a condo in the Pacific.

Of course, even right now one can still earn fat X’s for investing into the right project with decent team and perspective idea, or you can just accidentally invest into some joke coin and hit an unexpected price growth which makes you a millionaire.

How to get scammed?

So, what is the surest way of losing your money?

To invest in ICOs that without any innovative ideas, no website or media presence or advisors who are the developers. Whitepaper full of wordiness and no actual business model/tokenomics is another point to look out. Of course, the less you know about the people involved in the project and their plans, the better is for its scammy developers. What happens next? The coin’s price usually goes down in an instant as it hits exchanges. Its team disappears with profits leaving you empty-pocketed.

One part of the problem is a lack of care on the part of investors. This was an issue highlighted by Joe Rotunda, enforcement director for the Texas State Securities Board. Also, it’s an especially acute one set against the backdrop of a huge rise – and subsequent fall – in the value of cryptocurrencies over the past six months.
Coin Center director of research Peter Van Valkenburgh said that people get sucked into fraud – from exit scams to pump-and-dump schemes – merely because they’re looking to see a higher return on their investment.

“I think nobody should ever buy any more cryptocurrency, put anymore [into] cryptocurrency than what they are completely willing to lose … if you are willing to participate at all,” Van Valkenburgh remarked.

However, at all times the best strategy is to take any actions with a clear mind and always think in advance where your desires to get rich instantly can get you in the end.

2018   2018   Crypto currency   Fraud projects   ICO   ICO Scams

USA ICO Regulation

One of the world’s leading countries, the US, has specific issues regarding the ICO startups. As the world startup projects market is developing despite the severe regulation measures in certain countries, United States supports the Initial Coin Offering model of fundraising so far. However, the Securities and Exchange Commission (SEC) often changes the strict regulation rules which need to be applied when conducting ICO.
Simply put, this model is allowed, but is already under heavy legal regulation.

As of Q1 2018 data– most of the ICOs were conducted under the United States jurisdiction – 59 projects totaled about $ 583.8 million.

ICO rules vary widely from state to state – from an absence of regulations at all in some states to the ones present that require deposits in equal to or more than all local transactions. Sometimes, a license for businesses to engage in the cryptocurrency activities is required. On the federal level, no current regulations are banning ICOs specifically, although ICOs are expected to be registered and licensed the same as if they were another fundraising models. This includes registering with the SEC if the ICO is to sell or trade securities. The SEC has recently found that some altcoins may be a security, and as such, may be subject to SEC’s ruling in the future. Some SEC commissioners hold the position that most ICOs are securities and should be treated as such. ICOs are expected to adhere to AML/KYC practices. Failure to adhere to these practices may leave an ICO open to legal action or possible seizure.

The United States has also moved to recognize celebrity endorsements of ICOs to be illegal unless all compensation involved is disclosed.

The Role of the SEC

As stated in the SEC mission statement, “The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” Congress created the SEC in 1934 as the first federal regulator of securities markets following the stock market crash of 1929, when it became clear that many companies had provided false or misleading information about their performance and prospects to investors. Since then, the SEC’s primary functions have been verifying statements from corporations and ensuring that securities institutions (like brokers, dealers, and exchanges) treat investors fairly and honestly.

What is a Security?

To determine if an offering is a security, the SEC employs the Howey Test, which classifies an offering as security if it meets all four of the following conditions:

1)It is an investment of money

2)There is an expectation of profits from the investment

3)The investment of money is in a collective enterprise

4)Any profit comes from the efforts of a promoter or third party

Since being included in 1946, the Howey Test has been the default assessment for determining if an offering is a security, and there have been few exceptions made.

Securities Requirements

As explained by FindLaw, “The Securities Act and Securities Exchange Act have broad definitions of the term security. Under these Acts, a security includes many familiar investment instruments such as notes, stocks, bonds, and investment contracts.” Whether or not an investment is a security is important because securities are subject to meeting regulatory requirements. All securities must be registered with the SEC, with few exceptions. Along with registering with the SEC, a company offering securities must disclose:

1)A description of the company’s properties and business purpose

2)A description of the security being offered

3)Information about the company’s management

4)Financial statements about the company, certified by independent accountants

The requirements are in place to ensure that investors receive accurate information and that management teams enforce proper governance. Failure to register with the SEC and comply with securities requirements leads to legal action.
Are Initial Coin Offerings (ICOs) Securities?

Almost all ICOs are security offerings, at least as the laws are written currently. As explained by Kirk, Caiazza, and Rosenblum from WSGR, “There apparently has been significant shock and surprise over recent reports that the Securities and Exchange Commission (SEC) has issued a large number of subpoenas to initial coin offering (ICO) issuers and to ICO gatekeepers who may have been involved in token transactions that potentially did not comply with the federal securities laws. To a large extent, this shock and surprise is shocking and surprising. The SEC has been as clear as it knows how to be that it believes virtually all tokens (and simple agreements for future tokens, or SAFTs) are securities for purposes of the federal securities laws.” Of the major law firms that have issued opinions in the space, WSGR is considered to be amongst the more conservative and traditional. However, as the laws are written and how they have been historically interpreted, this must be regarded as correct. Many ICOs do pass the Howey Test because they “represent an investment of money in a common enterprise with an expectation of profits coming from the work or influence of a third party.”

Implications for Past and Future ICOs

For ICOs that have already been issued, the group from WSGR offers the following advice: “Fix the problem before the SEC fixes it for you. If you have sold tokens to unaccredited investors, or if you have otherwise not complied with the federal securities laws, strongly consider fixing the problem before the SEC finds you. Potential approaches include making a rescission offer, forking or burning certain tokens, and self-reporting to the SEC. All of these are unpalatable, to be sure. Having the SEC show up at your doorstep likely will be even more unpalatable, especially if you have not taken steps to address known securities law violations.” This will be very difficult for past projects that have issued a significant number of tokens that have gone on to trade on exchanges. If this is what is needed, it is likely the case that projects can make the best effort but not truly remedy the problem.
It is to be seen what the outcome of the subpoenas issued by the SEC to ICOs will be. This week (March 14th & 15th, 2018), the House Financial Services Committee has been holding hearings with members of the cryptocurrency industry to better understand regulatory concerns. From the regulatory perspective, the most significant concerns have been related to how cryptocurrencies may enable money laundering and the funding of terrorist groups through near-anonymous transmission of funds.

In the same, the group from WSGR concludes with a slightly optimistic outlook for the potential to adapt current laws to accommodate cryptocurrencies: “In the short term, ICO issuers and their legal counsel can work with the SEC to attempt to tailor existing registration, reporting, trading, and exchange rules to better reflect the nature of tokens and token platforms. In the longer term, the crypto industry perhaps can work with the SEC, other regulators, and Congress to develop a modified registration, reporting, and trading system that is designed specifically for the cryptocurrency.” This process of collaboration with industry has been ongoing and the hearings this week may lead to positive regulatory developments that allow innovation to take place while preventing investors from being defrauded.

2018   2018   ICO Regulations   ICO Risks   ICO Scams   Regulations

Why so serious? The reasons behind governments worldwide ICO regulations

As more and more entrepreneurs do engage in worldwide ICO boom, the more extensive growth the popularity, which, of course, increase the governmental suspiciousness and alert level. As Initial Coin Offering model itself present a new way of attracting investments, which has been free of any legal rules at first place, the needed measures were to be taken in order to establish control.
Instead of shares in traditional IPO financial model, an ICO investor receives project tokens, that may one day present certain substantial value. The unmatched liberty of this market in recent years had caused the incredible rise in start-ups numbers, which had moved beyond the 1,500 figures as for Q2 2018.

Of course, such major market increase had attracted not only the initiative and smart entrepreneurs but the ones willing to succeed on the overall worldwide hype. The fraudsters’ actions on the creation of ICO bubbles and Ponzi schemes caused the rise of so-called scam project to the level of 90% by the end of the 2017 year, and in 2018 the situation ain’t much better.

As for Q2 2018, the total amount of funds attracted using the ICO model stands at more than $3 Billion which indicates a steady market growth – for example; this number had risen from $26 million in 2014 to $225 million in 2016 and to $5,4 Billion in 2017. That undoubtedly high number still doesn’t include some significant future projects as Telegram’s planned $1 Billion ICO, or Overstock’s ICO and fewer perspective ones, so this year will undoubtedly show new record heights.
Bold statistics show a visible increase in specific segments of business – Internet of Things and People, Financial Markets, Investments, Banking & Payments and Cryptocurrency sectors are the most popular in the current state of market.
In total, there are 225 crypto funds across seven strategy types and see assets in the space being between $3.5 billion and $5 billion.
More and more individuals and private companies became to recognize the convenience and perceptiveness of fundraising possibility of ICO.

The absolute absence of investment regulations and attractiveness of certain opportunities went hand to hand with no safeguard options for investors. The project documentation most of the time went on describing the promises in a white paper to solve the specific issue using the Blockchain as the most innovative and influential tool, and these promises quite often proved to be empty. However, holding them to those promises have not always worked.

At such circumstances, the political moves directed on ICO market were the matter of time. There are a lot of reason behind specific rules applied by different countries, so specific main reasons behind specific strict rules are worth mentioning below:

1)Fraud activities/SCAM project level rise

The percentage of scam project within the ICO fundraising models’ boundaries had risen drastically. For example, In June 2017, only 7% of total projects failed or turned out to be a scam, while in August-September this number had risen to 54%, and to 67% later in the following month. Financial reports indicated the rise up of SCAM-level up to 90% as of late 2017 and early 2018.

2)Pyramid/Ponzi schemes

The creation of more complex ventures explicitly made with one aim – to lure the investors’ money, had become a reality in ICO market quite a long time ago.
We can remember the infamous One Coin project – an actually MLM Ponzi scheme exposed worldwide. This project turned out to be much more sinister and ambitious as well as long-playing. Truth be told, the well known now Ponzi scheme of the OneCoin project should have met its demise many years ago. The amount of evidence contributing to One Coin’s status as a pyramid scheme is much more than considerable – its directors have previously been involved in other known scam operations, its resources contain no verifiable evidence for any of its business claims and documentation uploaded to support claims often conflicts with the claims themselves. Certain steps have been made by the many countries’ governmental organizations to put this project under the legal heat and stop it forever.

3) Fever ICO market nature

Some financial analysts had come up with the idea that the ICO market has specific indicators of a gold-rush feverish mentality, which harms both individual investors that follow the crypto market hype trends and both the companies.

4) Funding the terror organization cells

The absence of regulative and overwatch tools raised talks about the real danger of ICO model being used to support different worldwide terrorist groups and large organization even, although confirmations are hard to prove.

5) Manipulation

The United States SEC commission made the official statement alerting the public community that many companies can use the so-called “pump-and-dump” schemes with the goal to influence and fluctuate the market indicators and prices.

6) Money laundering

Last, but not the least point of justifiable governmental anxiety, is that the ICO model structure makes it perfect use for the good old way of money laundering.

Anyway, as ICOs itself present quite a new world phenomenon, regulators are about to formulate and create the new rules of tackling the incoming issues – in fact, most of the strict rules or official public statements had been done quite recently.
The legal base development is quite a time-consuming process as many governments try not to react on first notice but research the impact of the ICO on their economy as well as the country developments and effect causing ICO popularity growth on its citizens.