2017 was the year of the Bitcoin, Blockchain and the year that everyone could become rich by investing in crypto currencies. 'Experts' had high expectations and price rises of thousands of euros per day were no exception. Unfortunately, crypto currencies also have a downside: it lends itself perfectly to all kinds of different forms of fraud. In this five-part series, the various forms of crypto currency related fraud are highlighted, including the dark exchange offices, market manipulation, money laundering, crypto currency as a means of payment for criminal activities and the Initial Coin Offering (ICO). As a final subject: the Initial Coin Offering (ICO).
2017 was the year of the Bitcoin, Blockchain and the year that everyone could make a fortune by investing in crypto currencies. 'Experts' had high expectations and price increases of thousands of euros per day were no exception. Crypto currencies also have a downside, though: they lend themselves perfectly to all kinds of fraud. This five-part series highlights the various forms of crypto currency related fraud, including shady exchange offices, market manipulation, money laundering, crypto currency as a means of payment for criminal activities and Initial Coin Offering (ICO). As our final topic we will discuss: the Initial Coin Offering (ICO).
An Initial Coin Offering (ICO) is a kind of crowdfunding action by a company or group that wants to raise money for a new crypto coin. You can be among the first to buy the new coin, which you pay for in another crypto currency like Bitcoin or Ethereum. Sometimes this new currency represents a share in a project, a right to a service, or part of a software package to be developed. To promote the ICO, white papers and business plans are prepared. Because the more well-known crypto currencies have shown huge increases in value, participants in an ICO hope that the new coin will show a similar increase and therefore wish to invest in the currency as early as possible (when it's still relatively cheap). But creating a new coin is not very difficult and therefore an ideal opportunity for fraudsters to strike.
It is difficult to determine the value of a new crypto coin. Contrary to an Initial Public Offering (IPO), where shares are sold, there are no strict requirements or supervision with regard to the business plans and statements of underlying values. Fraudsters can make grand promises, such as distributing large future company profits (SEC Emergency Action Halts ICO Scam). Moreover, the layer of anonymity and the cross-border nature of the crypto coins provide the fraudster with the option to take off with the money and never keep the promises they made.
This is possible because a new coin can easily be hyped by using the newest techniques in the coin and naming them elaborately on familiar forums, platforms and social media. 'Influential' accounts on social media/fora may be bought and used to further stimulate the hype, for instance. There are examples of complete teams releasing the coins being faked, with fake LinkedIn accounts, personal data and backgrounds (Scammers At It Again! Cryptocurrency Investors Scammed Out Of $2 Million In A Fake ICO). As a result, those who are releasing the coin seem very credible, whereas in reality they know nothing about the underlying technique. This way, even more people are persuaded to invest money, while future promises will not be kept.
In addition to the above-mentioned ways of committing fraud, new crypto coins are sensitive to Ponzi and pyramid-like fraud schemes. A good example is OneCoin. In this scheme, the number of coins bought by investors doubles when they obtain a specific quota of new investors. This doubling is actually paid for by the new investments. OneCoin was raided in Hungary at the beginning of this year. Servers were seized and several people were arrested in India.
ICOs can also be used by fraudsters to launder their own Bitcoins. In the current situation, ICOs are poorly supervised investments. This makes it relatively easy to invest money from criminal sources without the investigative authorities being aware. By using these 'dirty' Bitcoins to buy new coins and then selling these new coins, criminal proceeds can be converted into the profit of an apparently legitimate investment.
But although investing in crypto currencies is certainly not without its risk, it does not mean that consumers are left unprotected. Depending on the way crypto currencies are interpreted, there are indeed bodies that can monitor them. The problem is that different regulatory bodies see crypto currencies in different ways and try to incorporate them into their own scope of supervision. In the United States, the Securities and Exchange Commission (SEC) sees a crypto coin as a share, the Financial Crimes Enforcement Network (FinCEN) sees it as money and the Commodity Futures Trading Commission (CFTC) as a commodity. The crypto currency must therefore adhere to the rules of all three supervisors.
An American judge decided in 2015 that Bitcoin is a commodity, which means that it can be regulated by the CFTC. At the same time, FinCEN, whose activities include monitoring money laundering, distributed several fines pertaining to crypto currencies. So enforcement does take place, but each regulatory body maintains control within the framework of its own area. There is no holistic approach and the cross-border nature of the crypto currency is an additional complicating factor.