ICO: Scams highlight issues beyond crypto

16 April 2019 at 10:08 pm | Posted in Economy

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At the core of the malaise for ICO, in my opinion, are scams. Three types of activities may be considered “scammy”: (i) the token issuer has no intention of fulfilling the promises made at token sale, (ii) the token issuer cannot fulfill these promises, and (iii) the token issuer fully imitates or mocks the practices and plans of another project. In this third article in the 4-piece series, I will briefly cover these activities; then, I will argue that they highlight what is wrong in financing beyond cryptocurrency.

The first type is the archetypical scam. Without doubt, token issuers who follow this practice are criminals. Some early perpetrators have been brought to justice. However, it appears that many are still attempting to follow this path. Common signs include when the token issuers use fake identities (on social media), have gibberish as their white paper, and uses bots on social media. They tend to present a large number of unverified “partnerships” on their website. They may also falsely announce that certain “venture capital” firms have already invested in their ICO or that their ICO presale has raised XYZ amounts. Moreover, they may highlight that they already have a working product, a claim that they do not substantiate.

The second type is the ill-fated project. Here is where things get complicated: The token issuers / project leaders may truly believe that they have the best strategy in place to bring their project to financial success. There is no simple rule to confirm this. Moreover, business venturing is inherently risky. The investment of venture capital firms has an 80% failure rate despite VCs investing only after significant traction — this statistic points to a key argument that I will make later. For would-be ICO investors, they should study the materials offered by the project team and make their own decisions. “Tips”, whether found freely on the internet or paid, are most definitely useless.

The third type is another form of scam. Just because the issuer is “not serious” in getting investors’ money does not exonerate him/her from this practice. Worse, when launched in “mockery” of another project, this practice damages the reputation of the said project and robs funding and interests from it. It is therefore a malicious business practice, too.

These activities underscore what is wrong in financing in different ways.

Archetypical scams point to the lack of international coordination to combat non-violent crimes. Many jurisdictions are known as safe havens for money launderers and corrupt officials. The list goes beyond small islands that are also tax havens — real estate in Canada, for example, is a favorite vehicle among these individuals. Such circumstance presents the opportunity for ICO scams to go unpunished, and it is unlikely to change anytime soon for political and economic reasons.

Archetypical scams also point to the prevalence of opportunism. Many participants in ICOs fail to conduct the simplest due diligence and act irresponsibly with their own money. They are easily swayed by “shills” and “bots” on social media. The frequency of “what to buy” posts in crypto “groups” attests to this phenomenon. At the same time, and without a shadow of doubt, scammers are all too willing to take advantage of this weakness.

Ill-fated projects point to the inherent risks in venture financing. Studies have shown that the overwhelming majority of “unicorn” startups succeed without ever taking in VC investment; at the same time, 80% of VC investments end up in failure. What is interesting is that statistics also show that overall just over 60% of businesses fail. This means that professional venture capitalists do not have a compelling record. Before things unfold completely, it is virtually impossible to be sure about one’s venture investment.

That the majority of ICO’ed projects end up in failure, therefore, is not a valid argument that scams overrun ICOs — they are not scams.

Ill-fated projects also point to the futility of seeking “tips”. By now, it is common knowledge that hedge funds on average underperform the market. We also know that whoever that promises guaranteed returns in investment are fraudulent. While these professional sources are “not good”, tips freely available on the internet are straight-up bad. Not only is it usually impossible to verify the credentials that tipsters present, but it is also completely impossible to confirm their motives in offering these tips. I say this with a certain amount of caution, because I also draw share some charts on the internet, although I do not offer any advice and am not interested (nor qualified) in doing so.

Lastly, “not serious” scams point to the difficulty in dealing with malicious competition. If the competitor does not intend to succeed but only works in damaging the competition, how could a business respond? This is perhaps the most difficult question, and I personally do not think more regulation is the answer because each case is so different and legislation will only bring unforeseen complications. Further, that these ICOs never intend to succeed and are scams to begin with means these responds are perhaps unnecessary. We simply need to ensure that financial crimes are punished.

With so many problems, why invest in business ventures, let alone ICOs?

The simple answer is that returns from successful projects can easily outweigh losses from unsuccessful ones. Some of the issues that I highlight above can be addressed by the community and regulators in the coming years; some are just the nature of the beast.

If it was not sufficiently clear — I do not consider ill-fated projects “scams”.

This article is written by the CEO of IdeaFeX, Dr Jiulin Teng. You can follow him on Twitter or LinkedIn.