The most innovative ICO scams didn’t make any money from the ICO at all. The secondary market, the stock exchanges, was where the real money making began.
Up until recently, blockchain projects mainly consisted of various cryptocurrencies and looked more like speculative mania than a financial revolution. A recent transition from speculative utility tokens to asset-backed and regulated security tokens looks ready to make a big change.
The nascent but rapidly-growing security token economy, in which Israel is poised to be a major player, offers a host of advantages for securities trading, including enhanced liquidity, speed, divisibility, and scalability. And yet, in order for these promises to be fulfilled, the blockchain ecosystem first needs to solve some major problems.
While it might not seem like the most significant problem to the general public, tax evasion is one of the biggest problems hampering global adoption of blockchain technology. Using cryptocurrency for tax evasion is child’s play to those familiar with masking cryptocurrency transactions. A potential evader can get paid into a private digital wallet and then liquidate those funds on an unregulated exchange and have it transferred into cash into whatever banana republic with banks willing to take money without asking too many questions.
Perhaps what this latest crypto frenzy was most known for, however, was the birth of the ICO, and the ICO-related fraud, which regrettably Israel now has a reputation for. The ways in which the market can be defrauded go from exaggerating the amount raised to inventing entire businesses.
In an ICO, a new token is launched and given to investors in return for an established and liquid coin such as Bitcoin. Early ICOs offered huge returns for these investors, with some going up by a factor of 100 once on exchanges. For a potential fraudster, there couldn’t be a better opportunity, with billions of dollars running around and no oversight or regulation. Speculative money began pouring into ICOs that promised everything and delivered nothing.
Among the biggest and most famous scams is Bitconnect, a Ponzi scheme famous for its brazen, beyond parody videos, which at one point had over $3 billion market cap; and Centra, which pretended to sell cryptocurrency-compatible credit cards and claimed deals with Visa and Mastercard, using boxing legend Floyd Mayweather as a presenter to instill investor confidence. The most innovative ICO scams, however, didn’t make any money from the ICO at all.
They simply pretended to have made an ICO that raised a lot of money, mostly by using fake transactions that came entirely from in-house, in order to get listed as having a high market cap. The secondary market, the stock exchanges, was where the real money making began. These scams targeted people as well as trading bots. Since they never actually sold any tokens, they controlled the entire supply and could set the price leading to huge pump and dumps, and enormous volume, leaving investors with a worthless token they’ll have no hope of liquidating.
Finally, the simplest blockchain fraud is a good old-fashioned impersonation. We get so used to people pretending to be from exchanges, service providers, or news outlets, that making an occasional mistake has just become a cost of doing business in the industry.
Anonymity is at the core of all of these problems. A common misconception of cryptocurrency is that it was created in order to be anonymous and avoid the law. In fact, cryptocurrency’s development was more about a mechanism to avoid a central authority such as a national government or central bank having sovereignty over the printing and distribution of money. The industry will not be able to break its current glass ceiling without finding solutions to the ease of anonymity, as large investment institutions simply cannot interact with assets unless they are regulated and overseen, which by default cannot be anonymous.
I am the CEO of Trusti, a company trying to solve those issues by creating mechanisms for large financial institutions, government agencies, and regulators to tackle the problems described. While many in the industry may dislike our approach because we are taking away their utopian dream of financial revolution, the reality is that without such solutions, cryptocurrency, and its ability to bank the unbanked and decentralize assets, will become obsolete.
The blockchain and cryptocurrency space is far from being fully realized. For the true promise of this industry is to be realized, global regulators and baking institutions will need faith that this infrastructure can support their requirements.
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