ICO Scams

Due to an unregulated industry, the ICO market can be suspect to scams. Whilst there are some revolutionary ideas being pursued, there are also schemes designed to simply take the users money and offer nothing in return. Due diligence is required when investing in an ICO.

What is an ICO Scam?

Unfortunately, the success of the ICO fundraising model serves as an invitation for fraudsters. These individuals or groups seek to create the appearance of a legitimate company or service in the blockchain space. ICO fraudsters advertise aggressively within blockchain and ICO media, trying to portray their coin as a tantalizing investment opportunity. As ICOs have already raised more than $6 Billion in 2018, ICO fraud has become something of a feeding frenzy.

What Does an ICO Scam Look Like?

A fraudulent ICO will go to great lengths to appear legitimate. Investors may be presented with a whitepaper, a list of leadership and developers, partnership claims, and other promising information.

In many cases, these claims will not bear up to scrutiny. The whitepaper (an academic presentation of a blockchain company’s technology) may contain spelling, structural, or factual errors. It may be vague, or clearly written to confuse or impress the unwitting public. Individual who lead fraudulent ICOs may not have much information available about them online or elsewhere. Some of these leaders may be pseudonymous, invented, or unlisted. There are other telling signs which experienced investors are likely to spot with experience.

Sometimes a fraudulent ICO may have every appearance of legitimacy. In these cases, the company behind the ICO may conduct a “pump and dump”, where a coin’s price is manipulated to a high price after it goes to market, through advertising and other means. Many coins are then sold by the ICO team, earning them great profits and saddling investors with coins that may go on to be useless.

Pump and dump

The companies behind fraudulent ICOs typically reserve large percentages of a coin’s supply during ICO. This way, they have a large amount of coins to sell after the price rises. In general, companies which retain too much control of a coin’s supply threaten to take advantage of investors in this manner.

How Common are ICO Scams?

ICO scams are sadly very common. High quality, legitimate ICOs tend to differentiate themselves through transparency and demonstration of the utility of their product. Low quality ICOs are more common that these. Many of them may be scams, or could effectively become scams if the parent blockchain product were to be abandoned or misused.

How are ICOs Legal and Regulated?

In the United States, ICOs are regulated by the SEC, IRS, and other agencies. In Europe, the ESMA oversees (to a limited degree) ICOs. Other countries have financial bodies which issue statements and regulations for ICOs, but in general ICOs are allowed to progress as company administrators please. Most ICOs don’t have to seek approval from a government regulatory body. In most cases, these agencies operate as “police”, identifying and punishing ICO scams’ worst offenders.

Investors and consumers should not assume that this oversight prevents ICO scams. Due to the decentralized nature of blockchain technology, individuals may conduct an ICO without ever truly identifying themselves or exposing themselves to regulatory scrutiny.

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