ICO Fraud: Mitigating the Potential Risks

Posted by Kelvin Chandran on 7/22/18 1:00 PM
Kelvin Chandran
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ICO Fraud: Mitigating the Potential Risks

Initial Coin Offerings (ICOs) present one of the biggest changes to capital fundraising we have seen in recent years. While ICOs can be a great way for blockchain projects to raise money and for investors to participate in the cryptocurrency market, many people are weary of the potential for fraud.

Since there are very few comprehensive government regulations in this market as of yet, it’s essential to understand how to mitigate risk as an investor. In this piece, we will highlight some commonalities of ICO fraud to be aware of and also look at how the SingleSource project is aiming to reduce or even eliminate investment risk altogether.

Assessing the Market: How Common Is ICO Fraud?

According to a study conducted by New York-based Satis Group LLC, nearly 80% of ICOs are scams. What exactly is an ICO scam? While some projects don’t achieve the increases in user adoption and coin prices, it’s important to note that these factors don’t specifically make an ICO a scam.

In most cases, ICO scams are intentional from the start. Typically, ICO fraudsters have no intentions of launching any cryptocurrency whatsoever. They simply create a convincing project, attract investment, and don’t send tokens in return. In a lot of cases, the project website just suddenly shuts down one day without warning, and investors are left wondering how this could happen. Even though there are a number of factors to prevent against such scams, this type of fraud remains all too common.

It’s estimated that around $9 million are lost daily in cryptocurrency scams. Of course, these numbers can fluctuate quite a lot depending on the overall market conditions but the amounts are staggering. For example, Bitcoin.com reported that during just the first two months of 2018, $1.36 billion of cryptocurrency funds were stolen. Theft and exit scams accounted for 17% of this total (or around $231,000,200).

Now that you have some perspective on just how common ICO fraud is, let’s look at some common traits of ICO scams.

Common Traits of ICO Scams

  • Team with little or no experience

In many ICO scams, core teams either have no relevant experience or haven’t achieved many results for previous projects. Some fraudsters even use fake profiles that link to the social media accounts of real people with actual experience or celebrities.

  • Guaranteed Profits

Any project that guarantees ICO investors will realise profits smells fishy for good reason. The cryptocurrency market is volatile; therefore, it’s difficult to say whether or not values of certain tokens will increase or decrease after an ICO is over. While legitimate projects do often offer token bonuses for earlier investors; however, these incentives don’t guarantee profit.

  • Not enough project details

If a project is missing a whitepaper or doesn’t have many details listed in its whitepaper, this is not a good sign. Legitimate projects are typically well-detailed and have some explanation of why the project is important and how its solution does or will work.

  • No Clear Project Roadmap

Most projects have an explanation of what the team aims to accomplish within a few years. Even projects that already have working prototypes or mainnets usually have a list of goals to make their technology better and gain new users. Projects looking to launch ICOs should release at least a few details to demonstrate long-term strategy/vision.

  • Centralisation of Token Supply

If a project team owns a majority of the token supply or uses a mining algorithm that favors centralisation of the token supply, it is highly likely to be a fraudulent project. Be aware of how this creates opportunities for pump-and-dump schemes.

SingleSource Solutions

While the five traits of ICO fraud listed above are good indicators for potential investors to consider, there are many other factors to look at as well. The prevalence of fraud makes ICO investing rather difficult for even the most experienced investors. That’s why we need new solutions to mitigate risks. One potential solution is government, which can establish regulations but that itself can take time. Another potential solution is a blockchain project that focuses on risk assessment. The latter option is what SingleSource aims to do.

For both investors and project teams, SingleSource is adding more transparency to ICO investment. We provide comprehensive AML and KYC checks, meaning that investors are able to verify the backgrounds of the project teams running new ICOs. Additionally, project teams are able to ensure that investors are not using illegally sourced funds or using tokens for fraudulent activity, simplifying the process of legal compliance. Investors can also use SingleSource to make sure a project is legitimate instead of having to try to spot minor details of potential ICO fraud or merely hope that a project is not a scam.

Until greater regulations eliminate the possibility of ICO fraud, it’s essential for investors to look at some of the aspects that make projects likely scams. Nonetheless, this judgement process can still be unreliable.

SingleSource is providing the solution that project teams, investors, and the entire cryptocurrency community rely upon to mitigate risk. In turn, we are working to prevent ICO fraud and ensure that the future of cryptocurrency is better for all. If you'd like to learn more about how SingleSource works, download our free whitepaper here.

Download the full whitepaper here

Topics: Fraud prevention, crypo investment

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