Crypto ICO Scams [A Comprehensive Guide]

An Initial Coin Offering (ICO) is a fundraising mechanism used primarily by startups in the cryptocurrency and blockchain, akin to Initial Public Offerings (IPOs) in the traditional financial world.

Unlike IPOs, which offer investors shares in a company’s ownership, ICOs involve selling a stake in a new cryptocurrency or token to early backers to raise capital for development projects. This innovative approach leverages blockchain technology’s decentralized and borderless nature, allowing entrepreneurs to bypass the rigorous and regulated capital-raising processes that venture capitalists or banks require.

The purpose of ICOs within the cryptocurrency ecosystem is twofold: they provide a direct pathway for innovative projects to obtain the funding necessary to launch and grow while offering investors and enthusiasts early access to potentially valuable tokens before they hit the broader market. As such, ICOs play a crucial role in developing and expanding the blockchain industry, facilitating the birth of new technologies and applications.

Crypto ICO Scams

The Rise of ICOs

July, 2013. Relatively obscure crypto project Mastercoin holds a token sale, raising Bitcoin worth $500,000 from investors.
Mastercoin’s token sale was the first ICO (Initial Coin Offering).

In 2014, Vitalik Buterin launched Ethereum through an ICO. The token sale lasted from July 22, 2014, to September 2, 2014, raising 31,500 BTC, amounting to $18.4 million. Wildly successful, Ethereum’s ICO raised eyebrows and opened eyes everywhere. By 2017, the ICO craze was in full bloom. Left and right, legitimate projects and crypto criminals raised money and fleeced greed-struck investors with wild abandon.

At one point, the Brave browser’s ICO accrued $35 million in half a minute. The gloves were off as the ICO craze peaked.

Initially intended as a legitimate method for crypto projects to raise funds, ICOs degenerated into criminal schemes, losing luster and legitimacy as quickly as they had shot to prominence.

Belonging to crypto’s legal grey area, ICOs allowed organizations to raise funds without observing the regulations that are part and parcel of initial public offerings.

The Legal Status of ICOs

Digital coins distributed through ICOs are akin to digital security certificates. They attest ownership in an enterprise similarly to how shares work. While shares are subject to securities laws, ICO-issued digital tokens are unregulated. Some regulators, like the US SEC, may argue that ICO-issued tokens are unregistered securities and, therefore, illegal. Many of these digital assets do, indeed, pass the Howey test, qualifying as securities.

Provided they are securities, digital assets issued through an ICO should be illegal. They do not fulfill the legal obligations securities must fulfill. The jury is still out on this matter.

Digital assets that represent regulated securities registered with the appropriate authorities and issued under the existing legal framework are STOs or Security Token Offerings. The legal status of STOs is theoretically unquestionable.

Given their legally ambiguous status and lack of accountability, ICOs lend themselves well to pump-and-dump scams. Many online platforms and financial authorities have moved to limit ICO advertising and availability.

  • The US. The SEC has indicated that it may apply securities laws to ICO-issued digital tokens. The Commission’s latest moves against ETH represent yet another indication of its stance on the matter. The SEC has also classified several ICO-distributed tokens as securities and may expand its definitions to all ICO-based and proof-of-stake tokens in the future.
  • China. In September 2017, the country’s financial regulator outlawed ICOs, compelling organizations that had raised funds through ICOs to return the proceeds to investors. Later, the regulator specified that the ICO ban would only last until a regulatory framework was established.
  • France. The local AMF started work on regulating ICO-based fundraising in 2017. In 2018, it issued a voluntary visa that provides investors with some financial guarantees.
  • Australia. ASIC has called into question the legality of ICOs, stating that the fundraising method was only legal under specific circumstances.
  • Canada. The country has recognized the need to corral ICOs into a regulatory framework. It is currently working on it.
  • Switzerland. Swiss financial authorities commenced a sweeping investigation of ICOs in the country to determine their legality.
  • Hong Kong. The Hong Kong financial regulator has deemed ICO-issued digital assets securities and subject to local securities laws.
  • Turkey. ICOs are illegal in the country.

ICO Scams

The power of ICO-based fundraising instantly captivated scammers’ imaginations. Exploiting the lack of legal oversight, criminals quickly morphed ICOs into a range of scams that defrauded people of billions of dollars worldwide. Here’s a look at some of the more widespread forms of ICO scams.

  • Exit scams occur when the people behind an ICO disappear with the funds they raise, leaving everyone involved high and dry.
  • Bounty scams. Scammers convince people to promote their ICOs through social media, Telegram channels, blogs, etc., and do not pay them for their efforts.
  • Compound scams. Some criminals find ICO scams so lucrative that they keep returning to them and refining their methods.
  • Airdrop scams. ICO scammers promise free coins to people in exchange for their private information. They never give them anything.
  • Exchange scams. Criminals use fraudulent exchanges to launch their ICOs. Eventually, they make off with the funds they raise.
  • Plagiarism scams. Scammers aren’t creators. They’re takers. Often, they copy-paste the whitepapers of promising crypto projects to launch ICOs that attract attention and interest.
  • Pump-and-dumps. Pump-and-dumps are more subtle and dangerous forms of ICO scams. They are difficult to read as they seem legitimate in the beginning. Once the scammers sell enough tokens to accumulate significant amounts of money, they pull the rug and disappear.
  • Ponzi schemes. Investing in something hoping for exponentially greater returns never goes out of style.
  • Phishing scams. Some criminals run websites for their ICOs that resemble legitimate projects’ sites to mislead people into investing.
  • Premium service scams. Some crypto projects offer would-be investors access to erotic sites. They hope people are less likely to report their scams if they involve them in potentially shameful activities.
  • Pre-mine scams. Unsavory crypto developers may keep a disproportionately large share of tokens following an ICO instead of burning them. By inflating the supply, they steal value from other token holders.

How to Assess ICOs

How can you tell that you’re dealing with an ICO scam? How can you assess the potential of an ICO, legitimate or otherwise? This guide helps you appraise ICOs objectively.

Run a Check on the Developers

The crypto scene has its superstars and trusted actors. ICO scammers like to create impressive-sounding fake biographies and add them to the roster of developers. They hope to impress people into investing and allay their concerns.

You can defeat this practice by running thorough background checks on all names involved. Social media profiles can tell relevant tales about the people behind them. Check for follower numbers and engagement. Users who never or rarely engage with followers, even on relevant issues, are likelier to be fake.

Study the Whitepaper

Whitepapers contain vital information about crypto projects, and we cannot overstate their relevance. They provide an insight into the goals, raison d’etre, and strategies of projects. They tell us what concerns developers aim to address and how.

Genuine, honest whitepapers can reveal scam practices and impossible business models. Avoid crypto projects without a whitepaper.

Establish Feasibility

Only feasible projects have a chance to survive in the future. Look into the whitepaper to establish feasibility and see if things add up. Some ICO scams claim unrealistic goals and technologies that do not work. Others detail mechanisms that betray their pyramidal natures.

Establish whether the goals of the project are sustainable and achievable. By looking into such details, you’ll be able to tell whether the goals are indeed something the developers want to pursue or something they only use to impress would-be investors.

Caution, Caution, Caution

The lure of easy profits and the idea of getting rich quickly can numb your senses and blind your eyes to red flags. Always be cautious. Projects that seem too good to be true are likely scams. The devil is always in the details. Spare no effort to pore through the whitepaper and scrutinize every aspect of the project.

Do not ignore any red flags. Our dreams of riches may blind us to these red flags, but their presence allows objective truth to shine through.

ICO Red Flags

A red flag is a clue or indication that an ICO is fraudulent. The truth isn’t easy to hide. It tends to rear its head through the most unexpected ways, and scammers often overlook details in which it emerges.

Some red flags that can warn you to stay away from an ICO are:

  • Lack of developer information. ICOs not keen on providing background information on all team members are suspicious.
  • Unrealistic claims. If something is too good to be true, it is a scam, especially in the realm of crypto ICOs.
  • Unclear whitepaper. A whitepaper should contain all the information needed to assess an ICO. When a whitepaper lacks details and seems plagiarized, the project is likely a scam.
  • Lack of a clear breakdown of how funds are used. ICOs raise funds to support and develop the project. When the people behind the ICO don’t paint a clear picture of how they’ll use the funds, they probably know how they’ll use them, and it won’t be for project development.
  • Lack of interaction. Projects that do not interact with their communities, lack transparency, and fail to deliver updates are suspicious at best.
  • Negative community reviews. People are eager to warn others if they suspect something is a scam. Read reviews and look for feedback on the projects you analyze. Stay away from ICOs that accrue negative feedback.
  • Unnecessary urgency. Scammers like to infuse their traps with urgency. When you sense pressure to invest as quickly as possible, consider it a red flag. The goal of limited-time offers is to deny you the opportunity to pore through the project’s white paper and spot potential red flags.

Education is the Key to Avoiding ICO Scams

As the crypto industry and the criminal activities that comprise its unwanted baggage continue to evolve, the stock of crypto education continues to rise. Only by educating yourself can you avoid scams and crypto theft.

If you fall victim to a scam, it is essential to secure timely expert intervention. CNC Intelligence Inc. can assist you by providing a wide range of services.

  • Cyber intelligence
  • Asset tracing
  • Cryptocurrency tracing
  • Due diligence
  • Cyber tools
  • Litigation support
  • Private investigations
  • Retrocession fee recovery

When you resort to our services, we give you a complimentary consultation to guide you through the initial steps. Our dedicated team of experts, thorough and always up-to-date industry knowledge, and cutting-edge techniques mean we can help you.

In addition to tracing and recovering digital assets, we also focus on education. We work with law enforcement agencies worldwide and educate individuals through our regular posts and insights.

Let us help you out of your predicament using the experience and expertise that allow us to navigate the cryptocurrency landscape confidently.

We offer complimentary consultations to determine whether our Asset Tracing and Intelligence Services suit your case.

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