2017 was the year that the term Initial Coin Offering (ICO) really became a buzzword in daily conversation among industry analysts, experts, business leaders and the public at large. Many cryptocurrencies experienced astounding growth, and as a result, this new high-tech form of raising capital gained mainstream acceptance.
The story does not end there as we are now seeing a wave of new trends such as security token offerings, security token platforms, stablecoins, and even established financial services institutions that are launching crypto products and services.
To put this into perspective, consider the following statistics:
There is no arguing that the potential and opportunities of cryptocurrencies are limitless, but the obstacles to creating, managing and regulating a proliferating array of these currencies are substantial. Cryptocurrencies are not backed by a central entity, but are created and distributed through a decentralised network of computers-distributed ledgers. In effect, they do not fit into existing regulatory definitions and structures which have seen worldwide regulators maintain caution when it comes to regulating cryptocurrencies.
These regulatory responses have ranged from providing no guidance or regulation, to issuing warnings, advising banks against buying and selling cryptocurrencies, regulating certain actors in the cryptocurrency sector (think wallet providers and exchangers), and banning some cryptocurrencies altogether (think Bangladesh, Bolivia, Ecuador, Kyrgyzstan, and Saudi Arabia).
Through this primer, we aim to demystify cryptocurrencies and share our assessment of the current and future landscape, key impediments (such as fraud) and how you can avoid them.
Regulators from the European Union’s European Securities and Market Authority (ESMA), the SEC in the U.S. and United Kingdom’s Financial Conduct Authority (FCA) have highlighted cryptocurrencies as one of their core priorities. They want to:
Let’s now have a detailed look at some of the advantages of tokenization.
As discussed earlier, cryptocurrencies are based on anonymity and thus token transactions have raised concerns about their use for illegal activities such as money laundering and tax evasion. In the European Union (EU), Member States agreed in December 2017 to include cryptocurrencies within the scope of the Fifth Anti-Money Laundering Directive, which was adopted by the EU Parliament in April 2018. The implication for this is that cryptocurrency exchange platforms and custodian wallet providers will be required to register, apply customer due diligence and Know Your Customer controls when on-boarding new investors.
The vulnerability of cryptocurrency exchanges coupled with the rising number of users and the high value of transactions make these exchanges an attractive target for cyber criminals. As a result, this increasing threat to the financial system has forced regulators to intervene especially as new players start increasing their exposure to cryptocurrency exchanges by providing bank accounts or loans to cryptocurrency platforms.
Most Consumers get to invest in cryptocurrencies and ICOs without necessarily understanding the risks involved. The European Union, UK, U.S. and Belgian regulators have issued warnings to inform investors of the need to check their investments’ viability and protect them against scams. The European Union’s European Securities and Market Authority (ESMA) has even provided a list of platforms that they have received questions or complaints about, and which they have identified signs of fraud. In addition, some of the tech behemoths (such as Twitter, Facebook) have banned adverts for cryptocurrencies and ICOs on their platforms. This only goes to show that regulators from all corners of the globe will want to maintain focus on the education and awareness of investors about the risks posed by cryptocurrencies.
Joseph Borg, president of the North American Securities Administrators Association notes that-“While not every ICO or cryptocurrency-related investment is a fraud, it is important for individuals and firms selling these products to be mindful that they are not doing so in a vacuum; state and provincial laws or regulations may apply, especially securities laws,"
“Be cautious when dealing with promoters who claim their ICO offering is exempt from securities registration but do not ask about your income, net worth or level of investing sophistication,” Borg said. “Do your homework and contact your state or provincial securities regulator with any concerns before parting with your hard-earned money – afterwards may be too late.”
As we wait for a flexible regulatory framework here is a look at detailed steps on how you can avoid fraud in cryptocurrencies.
There are so many unregulated online exchanges and brokerage firms out there that offer cryptocurrencies and cryptocurrency trading products. As a result, consumers or rather investors should avoid these platforms. Some of these platforms as listed by Bitcoin.com include: O1crypto, Btc-cap, Capital-coins, Coinquick, Cryptavenir, Crypto-banque, Crypto-infos, Cryptos.solutions, Cryptos-currency, Ether-invest, Eurocryptopro, Finance-mag, Gme-crypto, Gmtcrypto, Good-crypto, Mycrypto24, Nettocrypto, Patrimoinecrypto, and Ydconsultant.
A Ponzi scheme normally involves a company offering tokens that entitle holders to dividends but uses the investors’ money for non-business purposes. Pyramid schemes, on the other hand, take the same criteria but this time investors are rewarded for recruiting others to join the scheme. A case in point would involve The U.S. Commodity Futures Trading Commission (CFTC) would filed an enforcement action in court in January against My Big Coin (MBC). They alleged that the company personnel misappropriated some $6 million of investors’ funds, according to Inc.com.
A DNS hack occurs when traffic is redirected from the legitimate website to the scam site by modifying DNS records of the legitimate site. This means that a user visits the correct URL, but is unknowingly redirected to a scam site. A case in point involves Etherdelta and MyEtherWallet who were victims of DNS hacks. To avoid DNS hacks, consumers should verify the SSL certificate of the website they are visiting.
Many fake android wallets have been launched on play store thanks to the advent of Bitcoin. Make sure you avoid some of these fake wallets.
Statistics to this end are sobering as data indicates that 80% of the initial coin offerings conducted in 2017 were identified as scams. One of the most popular was Confido as reported by CNBC. In November 2017, the team raised $375, 000 and disappeared shortly after. They erased their website, Facebook page and Twitter account. To avoid this pitfall, investors should adopt the following steps:
Investors should also be aware of other concepts such as malware downloads, phishing, false promises, among other scams that may lead to fraud.
Lake Diamond, a Swiss tech business has set itself a grand target. The company has built two prototype reactors, and now it is planning to construct a total of 50 commercially operational machines – each with the ability to create pure, industrial grade diamonds to serve a base of consumers across at least four industries. To achieve this, the company is planning to raise 60 million Swiss franc through an Initial Coin Offering (ICO) campaign.
The exponential rise in market participants, coins, prices and market capitalization cannot still be compared to traditional asset markets. However, which are more than $300 trillion globally. Nevertheless, cryptocurrencies have a huge potential and that’s why you need a solid foundation to protect them from fraud and that is by following the above steps.