The Securities and Exchange Commission recently charged the owner of two ICOs with defrauding investors. Maksim Zaslavskiy was charged with selling unregistered securities for ICO tokens backed by real estate and diamonds that did not exist. The companies owned by Zaslavskiy include REcoin Group and DRC World.
This announcement is a stark reminder that investors need to stay vigilant when evaluating ICOs. Looking at the REcoin website in August shows the company did not have components that are crucial for a successful ICO. Under close examination, REcoin had only one team member—Maksim Zaslavskiy. Additionally, the company had zero board members.
The website for DRC World was even worse. No team, no board. The entire site reeked of scam, including the tagline The Business Club with multilevel membership and unique benefits.
Avoiding fraud with ICOs, much like with other investments, requires doing your homework and taking precautions to avoid putting hard-earned money at risk. With the ever-increasing number of ICOs launching daily, it is important to look for ROI, trust, and efficacy.
SEC Actions Against Public Companies
Aside from the action against Zaslavskiy, the SEC has issued common stock trading suspensions for companies that have made claims regarding ICO investments. Sunshine Capital, CIAO Group, First Bitcoin Capital Corp and Strategic Global have all faced trading suspensions from the SEC for promoting ICOs to boost the corporate stock value.
Most of the other warnings advise broadly about understanding the risks and potential pitfalls to watch for before investing. The SEC also reminds investors that ICOs are unregulated and caution should be exercised when considering purchasing ICO tokens.
Foreign Government Warnings
Singapore’s version of the SEC, Monetary Authority of Singapore (MAS), issued a warning similar to the SEC’s warning in August. The warning states digital tokens “represent ownership or a security interest over an issuer’s assets or property. Such tokens may therefore be considered an offer of shares or units in a collective investment scheme under the [Securities and Futures Act].” As a result, requirements for token sales include licensing and a submitted prospectus with Singapore’s central bank.
A warning issued by Dubai Financial Services Authority (DFSA) reportedly reminds investors of the inherent risks involved with ICO investments. The public announcement did not mention any possible regulation of ICOs.
Other warnings have also been issued by government authorities in New Zealand, Sweden, Hong Kong, China and Dubai. The message is almost the same in every case: 1) this is an unregulated technology; therefore, we cannot protect your investment, and 2) there are no requirements regarding what information must be shared with investors.
Tips for Protecting Your Investment
Read the content on the company’s website and thoroughly examine the whitepaper. The whitepaper is a business plan that explains the details of the initial coin offering. Understand how your financial investment will be used and what rights you are given for holding such tokens. Seek answers to questions about selling your tokens at a future time or asking about refund policies.
Trust your gut. Fraudsters can easily make something seem too good to be true, especially where technology is involved. Jargon used by the company can be more advanced than what the average investor can understand. Be wary of hard sells and watch for unrealistic returns. Remember, the average person usually does not get a $100,000 return on a $1,000 investment.
Because cryptocurrency is held and traded on virtual currency exchanges, there is a risk of theft through hacking or malware. Using credible exchanges and utilizing 2-factor authentication will help reduce the risk involved with trading cryptocurrency.
Limitations To Recovery
Due to the limited regulations involving cryptocurrency, it can be very difficult for law enforcement to recover stolen funds. Blockchain technology prevents a paper trail, making it impossible to follow the path back to the hacker responsible for the theft. Also, most transactions occur on a global scale. Information shared with the SEC by foreign officials is limited, even with cross-border agreements in place.
Banks are not involved with ICOs; therefore, it can be much easier for fraudsters to run Ponzi schemes using new virtual currencies. Selling traditional investments requires compliance with state and federal licensing. Fraudsters can exchange conventional currency for virtual currency online. These currencies are not insured by the FDIC like bank deposits.
Although ICOs are a new type of investment, there is little reason to think they are any riskier than IPOs or VC investments. There can be big rewards for those willing to take higher risks. Just be careful and watch for warning signs along the way.