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Feb 25, 2021

How to Spot a Fraudulent ICO

Initial Coin Offerings (ICOs) remain a popular way for blockchain-based startups to raise money, offering tokens to investors in exchange for fiat money or cryptocurrency. Companies have gravitated toward ICOs as a method to crowdfund their businesses without losing control to VC firms over operations and decision-making.

But ICOs have also drawn scrutiny from both federal officials and stakeholders for a lack of regulation that can lead to fraudulent offerings and fleeced investors. The SEC has taken steps to mitigate these threats, but the risk still exists in the absence of comprehensive regulations. What distinguishes a fraudulent ICO from a legitimate one?

Even in crypto’s wild west, the old adage still applies – if the return on investment (ROI) seems too good to be true, it probably is. Bitconnect offered investors a 120% annual ROI before disappearing with their investors’ money, while LoopX stole $4.5 million in a February exit scam. Some companies have even managed the feat more than once: Shenzhen Puyin Blockchain has pulled off successful thefts from three ventures – ACChain, Puyin, and BioLifeChain – to the tune of $60 million.

Legitimate startups will use a trusted escrow service to hold coins until particular conditions for the sale are met. These relationships will be clear and verifiable. If an ICO foregoes escrow or asks investors to send funds to a personal crypto wallet, it is likely that the sale is a scam.

It is important not to take shiny, professional-looking websites at face value in the ICO world. While somewhat counterintuitive on the surface, closer inspection reveals why – it is easy for those with malicious intent to promote trust via a nice website and fleshed-out whitepaper. Would-be investors more interested in massive returns than substance might miss the underlying signs – buzzword-heavy descriptors, a distinct lack of substance – that characterize fraudulent ICOs.

Equally vital is to look for real, substantial evidence of blockchain development to back up any claims made. No sample code on a repository like GitHub is a warning sign; if the code exists, it is important to have someone with technical know-how evaluate it for legitimacy. Message boards are also useful to see what crypto enthusiasts have to say about a project – while not necessarily the final word, it is important to take those opinions into account before investing.

Researching project timelines, patents, and other evidence is imperative for spotting a fraudulent ICO. This does not need to be an investigative reporter-worthy deep dive (though more research never hurt anyone) – a basic online search can reveal along with their resume. Little or no experience with blockchain projects is a red flag; legitimate project associates will also have contact information for potential investors to reach out with questions.

No amount of research can eliminate the risks that come with investing. But potential ICO investors will benefit from taking a good, hard look at what’s on offer. A clear, transparent project backed by technical expertise is a safe bet – a fluffy, codeless, information-deficient ICO is not.

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