Cryptocurrency ICOs: Caveat Emptor

If you’re like me, you’re sitting here watching Bitcoin sail through the stratosphere and wondering: When will it peak? There are others who are considering cryptocurrencies a viable speculation as an alternative means to raise capital. Others won’t touch them with a 10-foot pole. Are they all right? Perhaps. The recent Confido Initial Coin Offering (ICO) incident, which saw founders take the money and run, is certainly a warning to potential investors.

Confido Sting

Confido established itself on the Ethereum platform and launched its ICO. The group then collected about $400,000 initially, then saw its valuation drive to $10,000,000. What came next? Kerplunk. As Confido went to zero, the company shuttered its websites and social media platforms.

The Confido ICO was hosted on TokenLot, an escrow service that collects and distributes funds once tokens are distributed to investors. TokenLot’s co-founder Eli Lewitt characterized Confido as “very good scammers.”

What Does the SEC Think of ICOs?

Should cryptocurrencies be embraced at all was the question we asked last month, as we discussed the Securities and Exchange Commission (SEC) bringing the hammer down on two ICOs, while a third that used a BitCoin exchange was indicted by the Department of Justice (DoJ) for using the exchange for money laundering.

SEC Chairman Jay Clayton, speaking at the PLI 49th Annual Institute on Securities Regulations Nov. 8, warned of fraudsters that are undeterred by fear of being caught. Clayton cited an SEC-searchable website consisting of individuals banned or suspended due to securities law violations so that investors can identify repeat offenders.

Industry Thoughts?

Charlie Minard, a CPA and cofounder of CryptoCPA, said due diligence starts with reading the ICO’s literature on itself and an examination of the management team. “The average investor should not trust ICOs,” He added. If one is going to invest, than reference sites such as icostats for data on specific ICOs.

Jeffery Stollman, of Rocky Mountain Technical Marketing, said ICOs typically come in three categories:

  1. ICOs with a team, proposed technology and skills to bring their project to the finish line.
  2. ICOs that create a vision, but without clarity of how the technology will make the vision happen. “If they raise enough money, they can hire a real CEO who can pivot the company into doing useful work.”
  3. The frauds: “They are put together by parties that intend to take the money and run. They may not abscond with all the proceeds, but they will reward themselves handsomely until the funds run out.”

Joe DiPasquale of BitBull Capital, a cryptocurrency fund of hedge funds, advised to pay close attention to the role the cryptocurrency token being purchased plays in the company’s strategy. “Does it give you voting rights relative to the amount of coins you hold? Or is it simply a wooden nickel that they’re handing you in exchange for your hard-earned cash? If the token itself serves no purpose, that can often be a red flag,” he said.

Caveat Emptor

There is no doubt: Where there is risk there lays reward. Anyone inclined to embrace cryptocurrencies and the feverish dance of the unregulated ICOs needs to do so with their eyes wide open.

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May 8, 2018

Christopher Burgess

Christopher Burgess (@burgessct) is a writer, speaker and commentator on security issues. He is a former Senior Security Advisor to Cisco and served 30+ years within the CIA which awarded him the Distinguished Career Intelligence Medal upon his retirement. Christopher co-authored the book, “Secrets Stolen, Fortunes Lost, Preventing Intellectual Property Theft and Economic Espionage in the 21st Century”. He also founded the non-profit: Senior Online Safety.

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