The Wall Street Journal analyzed 1,450 Initial Coin Offerings (ICOs) and found that nearly 19 percent of them had fraudulent elements. Non-existent team members, plagiarized white papers, and promises of guaranteed returns were repeatedly discovered among crypto-funded projects, giving credence to the many warnings about investing in what has been a mostly unregulated space.
Invest With Caution: Many ICOs Have Warning Signs
The research revealed some alarming numbers: 124 of the projects studied had either no or fake team members; 111 used the same language as other projects, suggesting plagiarism; 48 had no website; and 25 offered a guaranteed return on investment.
Bradley Bennett, a former employee at the Financial Industry Regulatory Authority, told the WSJ that these are all “warning signs for investors”.
The paper believes the ICOs analyzed in the study include most of the projects directed at English-speaking audiences since 2014, and that the 271 flagged projects have raised more than $1 billion USD. Already, losses of $273 million have been claimed in various legal actions.
In its piece, the WSJ used the investment startup Premium Trade as an example of a particularly obvious scam. The startup, which claimed to be an investment platform based in Israel, used faked stock photographs for images of its five-member management team.
The Facebook page of the company said it expected to raise $50 million in its ICO. The website remains active, with the same photographs of its fake team. Bitsonline reached out to them for comment, but they have yet to respond.
ICO startups have a rich history of duping their investors. Last month, the founders of Centra Tech were arrested and charged by the U.S. Securities and Exchange Commission (SEC) for making misrepresentations about their business. Other recent frauds include Bitconnect, Prodeum, Giza, and LoopX, which the WSJ notes had copied sections of its white paper from another startup before pulling an exit scam back in February.
And direct theft or fraud isn’t the only danger that ICO investors have to worry about. After its ICO, the Bezop Network left its database of some 25,000 investors unsecured publicly on the internet for 24 hours, exposing copies of passports and other personal information.
The WSJ isn’t the only publication to determine that many ICOs have serious problems; another report by the Satis Group found that only eight percent of ICO projects ended up trading on exchanges, with the vast majority failing before achieving their stated goals.
What Does the Future Hold for ICOs?
While ICOs have been a phenomenon since at least 2014, it was in 2017 that the crowdfunding method surged in popularity. The uneven track record of ICO-funded startups thus far shouldn’t be too surprising, as they were almost completely unregulated until the second half of last year.
Even today, the treatment of ICOs varies wildly by jurisdiction. China has already banned them. In the United States, the SEC is investigating them, having already issued subpoenas in March of this year to ICO operators and advisors. Australian authorities also said this month said they are taking action against ICOs.
Other jurisdictions have been more welcoming, with Switzerland leading the world in its flexible approach. Last month, Japan released guidelines to make ICOs legal. Malta has also become receptive to ICOs, and recently proposed new rules around them. France has indicated it wants to take a laissez-faire approach. And Russia is currently working on new regulations for ICOs and cryptocurrencies generally.
However, the poor performance thus far of ICOs could push governments to create more stringent regulations in order to prevent fraud. And though some in crypto bristle at government interference, properly regulated ICOs could help legitimize the space while providing a secure method for blockchain startups to raise money.
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