Cryptocurrencies and How to Avoid Fraud

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:

  • The total market capitalization of cryptocurrencies is estimated at $211 billion.
  • Bitcoin- the largest crypto by market capitalization has experienced an exponential increase in value since 2009, trading around $6,583 per Bitcoin as of September 30, 2018.
  • In terms of retail participation, Coinbase users grew by 100,000 during the 2017 Thanksgiving weekend alone. Interesting to note is that the number of users on crypto exchange platforms is estimated to be greater than 30 million.
  • In terms of institutional participation, major financial services institutions, such as Fidelity, are launching crypto products and services.
  • Data shows that there are now more than 2,000 crypto-assets, which include newer types of assets, such as stablecoins.
  • Initial coin offerings (ICOs) have raised $5.4 billion in 2017. In 2018, ICOs have already raised a staggering $14.2 billion as of 29th August, 2018.
  • Venture capitalists have already invested $3.9 billion in blockchain and crypto companies in 2018
  • On the new Fintech trend-security tokens, tZero obtained a letter of intent for sale of $160 million worth of tZero security tokens while data from security token platform- Polymath shows that security token offerings will prevail on the market by 2020 and will be more than $10 trillion.

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).

  • These obstacles raise questions that will be difficult to answer until the new reality of cryptocurrencies dawns – questions that will reshape the role of the regulator, and, potentially, how ICOs and STOs can be the new imperative in how start-up companies raise funds.

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.

Cryptocurrencies’ Outlook

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:

  • First, assess whether cryptocurrencies and tokens fall within the definition of traditional financial instruments, and should be subject to the existing regulatory framework.
  • And secondly, they want to evaluate the risks that these activities present for consumer protection and market integrity as they gain mainstream acceptance.

Let’s now have a detailed look at some of the advantages of tokenization.

Here is a detailed look at some of the risks that cryptocurrencies pose according to regulators:

Avenues for Money Laundering

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.

  • In the UK, the FCA recently stated the best practices it expects from bank offering services to clients who derive revenues or business activities from cryptocurrency-based activities. In the U.S., if a token falls under the definition of a security or financial instrument, therefore, it will be subject to federal securities laws enforced by the SEC.

Increase in cybercrime and financial instability

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.

Lack of transparency

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.

  • But all in all, regulators know of the great opportunities that cryptocurrencies can present to the entire financial system. Under proper regulations, ICOs and STOs could be an alternative yet revolutionary way for small start-up companies to raise capital or for bigger business organizations to raise smaller sums of money at a lower cost.

How to avoid fraud in 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,"

How can you protect yourself? Here's what Borg recommends:

  • If these products qualify as securities, they should be registered with the appropriate regulatory agencies or qualify for an exemption from registration.
  • The securities registration process provides some protection for investors by subjecting the offering to regulatory review. But even registered offerings can be fraudulent.
  • Investors should perform their own thorough due diligence before investing in any ICO or cryptocurrency-related product.

“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.

1. Avoid unregulated brokers and exchanges

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 include: O1crypto, Btc-cap, Capital-coins, Coinquick, Cryptavenir, Crypto-banque, Crypto-infos,, Cryptos-currency, Ether-invest, Eurocryptopro, Finance-mag, Gme-crypto, Gmtcrypto, Good-crypto, Mycrypto24, Nettocrypto, Patrimoinecrypto, and Ydconsultant.

2. Understand Ponzi and pyramid schemes

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

  • The court filing alleged that MBC moved funds into team members’ personal bank accounts and company employees used the funds to pay for personal expenses and to buy luxury goods. On the other hand, the court filing alleged that MBC falsely told investors that MBC’s cryptocurrency was being traded on multiple exchanges. The company posted fake trading prices, made false statements about an agreement with Mastercard and made pay-outs to early investors by using other investors’ money.

3. Understand how DNS hacks work

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.

4. Avoid Fake Wallets

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.

5. Avoid fake ICOs

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:

  • Know the Team fully- The cryptocurrency world comprises of top players like Ethereum founder Vitalik Buterin and other big tech players who are capable of making or breaking new projects by simply having their names listed on a development team. As a result, this has seen some fake ICOs invent fake founders and biographies for their projects. According to Business Insider, Prodeum attempted to raise $6.5 million through an ICO in January by falsely listing blockchain experts as team members before disappearing. Investors should research in deep the individual team members of a given project that is planning an ICO. You can leverage platforms such as LinkedIn or other social media outlets.
  • Read the Whitepaper carefully- An ICO whitepaper is a core document for any particular project. A proper whitepaper should be able to outline the background, goals, strategy, concerns, and timeline for implementation for any blockchain-based project. Investors should avoid start-up companies that don’t have a whitepaper. However, this is not always a viable scale, as fraudulent companies can put forward a solid whitepaper. This is highlighted by the case with PlexCoin which managed to raise over $15 million before the U.S. Securities and Exchange Commission (SEC) intervened and shut it down. Just make sure that you understand the whole concept of the project as presented in the whitepaper.
  • Stick with start-up companies that demonstrate transparency- Start-up companies that have outstanding concepts and models will always be ready to demonstrate transparency to the broader community. Transparent companies normally keep potential investors up to date with regular and detailed reports on a company website or on social media platforms.

Investors should also be aware of other concepts such as malware downloads, phishing, false promises, among other scams that may lead to fraud.

Looking Ahead

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.

  • This only goes to show that cryptocurrencies/ICOs/STOs are at an inflection point, with momentum shifting from “cryptocurrency/ICO/STO tourism” and exploration to the building of practical financial applications. In 2017, we saw how cryptocurrencies competed against financial products for investment dollars across the traditional asset classes of stocks, bonds, commodities, and derivatives.

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.

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