Why do so many people hate ICOs?
On January 28th, 2018, investors and ordinary visitors of Prodeum.io – a website of an ICO executed by Lithuanian team, noticed that the website shut down, later that day, there was only one thing displayed on the page – the word ‘penis’ put in the top-left section of the page. The project has raised 5,400 Ethereum (around $6,5 mln at that time) before exitscamming (this verb was already coined by people engaged in the field). It promised to revolutionize the fruit and vegetable industry but ended up getting away with effectively stealing investors’ funds.
In case you think that such events happen rarely and this is an outrageous instance of startupers’ impudence, I’d have to prove you wrong. In early 2018 another blockchain startup which turned out to be a textbook Ponzi scheme shut down leaving all the investors’ commitments vain. This project was called BitConnect. The project promised its investors nothing short of what Russian fraudster Mavrodi’s MMM financial pyramid venture promised Russian citizens back in 90’s – constant and stable profit on their investments. It’s just that in that case the investments were made in cryptocurrency. The Temporary Restraining Order was issued by Chief District Judge Joseph McKinley, Jr. at the U.S. District Court, Western District of Kentucky which required the parties of the lawsuit filed by American citizens to disclose cryptocurrency wallet and trading account addresses, as well as the identities of anyone to whom BitConnect has sent digital currencies within the last 90 days. The plaintiff, Kentucky resident Brian Paige, filed the lawsuit on behalf of every investor in BitConnect, noting that bitcoin and other cryptocurrency assets had been converted into BitConnect Coin (BCC) when the company announced it was shutting down its exchange. BCC, which was trading at more than $300 at the time, had crashed to about $6 at press time. The court found that the plaintiffs stood to lose any chance of recovering their funds if BitConnect's assets were not frozen and that enforcing a TRO "is in the public interest because the public is interested in preventing massive consumer fraud and other securities violations."
Back in late 2017, Confido exit scam provided one more reason for all diligent people to hate ICO concept itself. The startup simply vanished after raising more than $350k of investors’ funds.
Initially, ICOs were thought to upend the industry of crowdfunding – they allowed projects to attract money from all over the world in all possible dimensions and all scales. Even Ethereum (world’s second largest cryptocurrency with $5,5 bln daily trade volume) once was issued for the first time in frameworks of an ICO where it was sold for $0,29 apiece – now it is traded at around $1k.. What made Ethereum and other legit ICOs stand out is that the people who stood behind those ICOs actually carried out their plans and in some cases really disrupted the industries. Ethereum, for one, claimed to substitute Bitcoin itself as a world’s number one cryptocurrency and is effectively doing it, since most of t crypto enthusiasts benefit from its transactions efficiency, low fees and handiness. Unfortunately, the number of ICOs which actually changed something can be counted with one hand’s fingers.
After comprehending what I’ve said above the reader might naturally wonder why don’t all ICO investors complain about the tokensales and file lawsuits against their organizers if there are so many of those going on every day and they are all scamming. The truth is, there are two types of scams – first, those who are explicitly flee with investors’ money; and second – those which don’t even bother getting their tokens listed on exchanges. But the vast majority of the ICOs somehow manage to get listed – and this is the crucial moment.
The truth is, most ICO investors don’t really care about the projects themselves and, respectively, the ideas behind them. It works exactly the same as with traditional stocks – most investors don’t buy those because they really want a part of the company or its products, they want to profit it from future sale of those stocks. ICO investors crave that same goal – profit. So, when they buy ICO tokens, everything they’re really waiting for is listing of those tokens on exchanges and consequent selling of their tokens with margins compared to ICO price. Therefore, if a project gets its tokens listed on some exchange and thus allows its investors to trade them, it’ll most likely avoid any scrutiny and crackdown because investors will satisfy their needs. What happens to the project afterwards is subject to ICO organizers’ own diligence and desire to bring their idea to reality.
Are these new investment tools good from an ordinary investor’s standpoint? Sure, they are. The volatility is high and this attracts more than it deters investors from that market. The liquidity is high: there are dozens of tokens that currently have more than $1 mln of 24h trading volume, which means that one won’t have the hard time selling it into fiat (traditional money, i.e. USD, EUR, etc) unless the amounts at issue are exceeding millions.
Are these new investment tools good from regulators’ standpoint? So far, they aren’t. Firstly, they present significant concerns in respect to Anti-money laundering and Counter-terrorism financing matters. Thanks to the confidentiality which is embedded into the very concept of cryptocurrencies, it is usually next to impossible to identify a real beneficiary of cryptocurrency-related transactions. One more important issue is the absence of financial regulating authorities’ overview which entails two major problems – no taxation and no practically applied protection of investors. At the same time, finding a middle-ground consensus between resolving the issues and keeping investors satisfied is, again, next to impossible.