Report: More Than $1B Invested in Fraudulent ICOs


Out of 1,450 initial coin offerings (ICO) available publicly, almost a fifth of them looked fraudulent, according to report by The Wall Street Journal (WSJ)

Following the Bitcoin (BTC) hype, in which the cryptocurrency’s value jumped by more than 300 percent in three months, investors and bystanders have entered the crypto market hoping to have a part in what they believe could become the ‘next Bitcoin.’

As people are jumping into the crypto hype train, scammers have exploited the Bitcoin hype and have set up fraudulent ICOs in the hope of luring investors into pumping money to questionable projects. WSJ has detected red flags from documents of 271 digital coin offerings it has reviewed.

The suspicious offerings reviewed by the WSJ have raised more than US$1 billion in investments. While some of them are still raising funds, some have ran away with the money in tow. Since ICOs are mostly unregulated, losses acquired from fraudulent ICOs are least likely to be recovered.

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Red Flags to Watch out For

ICOs are one way cryptocurrency startup projects are getting funded. Projects attract investors by sharing their vision through whitepapers. Then, similar to a Kickstarter fund, projects offer tokens in exchange for investments. These tokens, currently of no value, could be worth something should the project come into fruition.

Investors, in the absence of government regulators, are tasked to be more careful in choosing what ICOs to invest in. The WSJ has identified signs, or red flags, that the investors should be wary of: fake members, plagiarized whitepaper, lack of functioning website, and a guaranteed return on investment.

The Journal has found that at least 124 of the reviewed projects have either faked or hid the identities of their team. One project reviewed by the WSJ—investment startup Premium Trade—used stock photos for all of their five-man executive team. A photo used for their data analyst also appears on 181 different sites.

The report also found 111 of the projects plagiarized their whitepapers from already existing whitepapers. According to the Journal, plagiarized whitepapers copied other white papers’ sections word-for-word, from marketing strategies to the project’s technical features.

The WSJ visited all websites owned by the reviewed ICO documents and found 48 websites were either non-existent or not functioning.

The Journal found 25 of these coin offerings promised investors a guaranteed return on their investment. According to the report, the ICOs documents went as far as offering doubled returns in a span of months. The Securities and Exchange Commission (SEC) has prohibited promises of risk-free financial rewards.

The SEC, in a report back in 2013, warned investors from engaging with fraudulent offers. The report stated:

“Any investment that sounds too good to be true probably is. Any investment opportunity that claims you’ll receive substantially more… could be highly risky, or be an outright fraud. Every investment entails some level of risk, which is reflected in the rate of return you can expect to receive. Most fraudsters spend a lot of time trying to convince investors that extremely high returns are guaranteed or that the investment can’t miss.”

The Commission has stressed that risk-free investments are most likely fraudulent.

ICO Bans Around the World

Countries have outright banned ICOs to protect investors within the jurisdiction from falling to scams.

Chinese state bank People’s Bank of China (PBoC) declared ICOs illegal last September of 2017. The PBoC, putting ICOs in the same area as pyramid schemes, ruled that ICOs cease immediately and return the investors’ money. Also during that month, South Korean regulator Financial Services Commission (FSC) banned all kinds of ICOs.

Just recently, huge websites have banned cryptocurrency-related advertisements. Bing, Facebook, and Google all banned ads about cryptos to protect their clients from the risk of getting scammed.

Crypto analysts have condemned these scams, as these deceitful projects give legitimate ICOs and the whole cryptocurrency market a bad reputation. Potential investors may back out of funding legitimate ICOs because of fraudulent projects showing up in reports.

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