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ICO, just a synonym for fraud?

Why investors need to be aware of ICO scams

Since the first initial coin offering (ICO), held by Mastercoin in July 2013, there have been numerous entries into the world of tech and cryptocurrencies utilizing this funding method. ICOs are sometimes called "crowdsales" and function similarly to an Initial Public Offering on the stock market, but without the governmental regulation. They typically receive investments in the form of cryptocurrency in exchange for shares known as tokens. But ICOs can be for any sort of startup -- they don't necessarily have to be for cryptocurrency companies.

Most notably, a few have led to substantial success, such as Ethereum, which raised money with a token sale in 2014, raising 3,700 BTC in its first 12 hours, equal to approximately $2.3 million at the time. However, many others I would argue are simply scams to fraud investors out of thousands, and sometimes even millions of dollars.

In the first two months of 2018, there were 22 separate scams involving thefts of $400,000 or more. Put it all together and that equates to an average of $9.1 million a day. Oh, and that doesn’t include 2018’s outliers – Coincheck, Bitconnect, and Bitgrail. Otherwise, the total would actually stand at $23 million a day. The total amount of money stolen by cryptocurrency scammers in just three months stands at $1.5 billion. If that trend were to continue for the remainder of the year, hackers, scammers, and fraudsters would pocket $3.25 billion, which is the GDP of a small African nation.

Take for example a famous case from 2014 involving Homero Josh Garza, who founded the cryptocurrency startups GAW Miners and ZenMiner. In 2014, he acknowledged in a plea agreement that the companies were part of a pyramid scheme, and pleaded guilty to wire fraud in 2015.

The United States Department of Justice stated in that “between approximately May 2014 and January 2016, Garza, through Gaw, Gaw Miners, ZenMiner, and ZenCloud, companies he founded and operated, defrauded victims out of money in connection with the procurement of virtual currency on their behalf. The companies sold miners, access to miners, and the right to purchase a virtual currency called ‘paycoin,’ as well as ‘hashlets’”. The Department of Justice alleges that he was operating a Ponzi scheme by issuing such “hashlets” through Gaw Miners. The company was accused of selling $20 million USD worth of hashlets despite failing to possess the computing power that the hashlets represented.

In April of last year, there was Mumbai-based OneCoin, a once-lauded blockchain startup that was discovered to be a Ponzi scheme—but not before its founders allegedly funneled at least $350 million through Germany. Then there was Confido, which disappeared after raising over $370,000. Don’t forget BitConnect, an anonymous cryptocurrency exchange that was accused of being a Ponzi scheme numerous times before it finally shut down. profiled every major cryptocurrency scam to have been reported in the first two months of 2018. Incidents which occurred last year but were only discovered in 2018 were included, but conservative valuations were taken to avoid over-inflating the figures. Bitconnect, for example, was included, because the exit scam occurred this year, but the scheme was valued at $250 million rather than the maximum possible $1.5 billion, which seems unrealistic.

Not every ICO is a scam, and many cryptocurrency startups are legitimate. But the shady, largely unregulated cryptocurrency investment landscape is littered with dozens of fraudulent ventures. They're also susceptible to hackers; more than 10 percent of the $3.7 billion raised through ICOs has been lost or stolen, according to a recent analysis from the accounting firm Ernst & Young.


For instance, NiceHash, a marketplace for mining digital currencies, said it was temporarily suspending its operations because hackers stole as much as $70 million in cryptocurrency.

Other exchanges have collapsed or disappeared under questionable circumstances, like the infamous Mt. Gox incident of 2014, where a bitcoin exchange in Japan shut down and froze hundreds of millions of dollars in funds. Some of the money was eventually returned from a "forgotten" digital wallet, but the company filed for bankruptcy with $64 million in debt. In 2015, Japanese prosecutors charged Mt. Gox founder Mark Karpelès with embezzlement. He pleaded not guilty and went to trial earlier this year.

Investment Scams

Investors not only need to be aware of ICO scams, but also scams involving people claiming they can handle the trading of your cryptocurrencies to make large returns for you, with some fraudsters claiming a 300% weekly return!

Recently, the U.S. Commodity Futures Trading Commission filed civil charges against two alleged cryptocurrency fraudsters, one in New York and the other in Colorado. The federal agency accuses a New York bitcoin trader, Patrick K. McDonnell of Staten Island, of taking money to conduct trades and impart market tips. He is accused of absconding with the funds instead.

The CFTC said McDonnell and his company convinced customers to give them money and also virtual currency in exchange for conducting trades and providing crypto-market tips. But the CFTC complaint says that McDonnell and his company just took the bitcoin without providing anything in return, wiping clean their Internet and social media presence "in an attempt to conceal the scheme."

The CFTC also accuses a Colorado man, Dillon Michael Dean of Longmont near Boulder, and his British-registered company The Entrepreneurs Headquarters Limited, of fraudulently soliciting bitcoin from customers which it put into a pool described as investment funds, but which was allegedly a "Ponzi scheme."

The CFTC says that starting in April 2017, Dean allegedly solicited more than $1 million in bitcoin from more than 600 people, promising to use their virtual funds as "an investment vehicle for trading commodity interests." But the CFTC says he "misappropriated" the funds, using them to pay other customers "in the manner of a Ponzi scheme."

Action by the SEC and Feds

The Securities and Exchange Commission (SEC) has warned investors to be on the lookout for "potential scams" involving Initial Coin Offerings. To combat such prevalent fraud in this new space, the SEC's newly established Cyber Unit has started to take action on "pump and dump" schemes where fraudsters lure investors, take their money, and run.

On December 4, the SEC said it froze the assets of PlexCorps, a company that was running an ICO for its own cryptocurrency called PlexCoins. It marked the first action from a newly created Cyber Unit inside the SEC that's looking to combat digital fraud.

The agency filed civil charges against Dominic Lacroix, his partner Sabrina Paradis-Royer and PlexCorps, for "misappropriating investor funds illegally raised through the fraudulent and unregistered" offer of PlexCoin. Before they were shut down, the ICO had raised nearly $15 million from thousands of investors since August by allegedlymaking false promises for a 13-fold profit in less than a month.

In November, the FBI charged Brooklyn businessman Maksim Zaslavskiy with securities fraud and conspiracy to commit securities fraud for allegedly bilking investors out of $300,000 through an ICO scam called REcoin which he claimed was "the first-ever cryptocurrency backed by real estate." He was also hit with an SEC civil complaint.

To prevent yourself from being the victim of fraud, the SEC states that cryptocurrency traders should only buy and sell them on exchanges registered with the SEC.

How Can You Detect Fraud?

Investors can run free background checks on ICO providers through BrokerCheck on the Financial Industry Regulatory Authority's website.

There are other clues for detecting questionable ICOs, like amateurish websites, a lack of coverage on news sites and industry blogs, a lack of official documentation, and a puffed-up sales technique that fails to warn of potential risks.

Most important, always do your homework and always research where you are investing your money!

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