ICO Scam Check: Guide To Identifying An ICO Scam

We have decided to write this blog in response to a few suspicious ICO submissions we have received recently.

On one hand, we have witnessed some outrageous claims of returns that do not make economic sense and will never be realised, on the other, there are blatant scams where the ICO has stolen team photos or copied and pasted the whitepaper.

This blog is aimed at educating investors that use CoinRating and assisting them in determining some of the distinguishing factors for identifying a scam ICO.

What Is An ICO Scam?

Due to the lucrative returns investors have been making in the cryptocurrency world, there has been an enormous rise in the amount of people looking to invest in ICO’s. Unfortunately, what comes with this surge in popularity, is scammers looking to benefit from vulnerable investors.

Before we get into outlining how to tell if an ICO is fake, we must define the word scam.

Scam
A dishonest project, carried out by untrustworthy people, that is completed in an attempt to steal something of value from another person

Using this definition, one could make an assumption that an ICO is deemed a scam if:

  • The ICO has a lack of trust – for example, the team appears fake or non-existent
  • The ICO comes across as a dishonest project – for example, the sole purpose of the ICO is to steal an investors money

According to ICO quality research by Satis Group, a scam ICO is:

“Any project that expressed availability of ICO investment (through a website publishing, ANN thread, or social media posting with a contribution address), did not have/had no intention of fulfilling project development duties with the funds, and/or was deemed by the community (message boards, website or other online information) to be a scam.”

Absence Of ICO Regulatory Oversight

Another discovery made by the Satis Group is that 81% of ICO’s were scams, this highlights the actual fact of how rampant ICO scams currently are. The main reason for this is the lack of rules or regulations in place to identify a level of legitimacy amongst ICO’s.

Some countries however, have begun to tackle this issue and started creating or ideating rules and regulations to cover the space. The United States is a clear example of how ICO regulation is changing within their country. This can be seen in the SEC’s recent public statement on cryptocurrencies and ICO’s.

This public statement by the SEC has recently been backed up with the ICO scam arrest of Centra founders – Sohrab “Sam” Sharma and Robert Farkas, after their Floyd Mayweather backed ICO was charged with fraud.

How To Identify A Scam ICO

So, what are the distinguishing features of an ICO scam? To answer this question, we felt it was necessary to ask our followers. So, we held an ICO scam poll on Bitcointalk and a quick poll on Twitter.


Type Of ICO Scam

At CoinRating, we tend to find that ICO Scams come in two forms.

  • Intentional scam – An ICO created with the sole purpose of raising money as quickly as possible, without attempting to complete ICO objectives or the project in its entirety.
  • Unintentional scam – An ICO that is (unknowingly) attempting to complete an ICO that is fundamentally flawed (from technical, business and economic point of views). As a result, investors are fooled into believing the ICO will be successful and lose their investment.

How To Spot A Scam ICO

Misleading Information

  • Plagiarism: check privacy policies, KYC policies or whitepapers with a free plagiarism checker to identify duplicated (and therefore) misleading content.
  • Take note of typing errors throughout the ICO landing page/whitepaper and spelling mistakes within domain names.
  • Crooked investment techniques: ICO’s falsely claiming that the presale has already sold out, but there’s still one final chance to invest (For a limited time only). This is a genuine marketing tactic, but should only be used legitimately, i.e. when something is genuinely sold out and there’s a limited time left to buy.

Ponzi Schemes

  • These fraudulent projects will promise investors high return and little risk. If something seems too good to be true, it probably is and you should investigate further.
  • Ponzi scheme exampleBitConnect is probably one of the most famous ponzi schemes within the ICO space. They claimed it was possible to make a 1% return in dividends every day for inviting others to join BitConnect.

Escrow Account

  • The escrow is used in ICO’s to keep investors funds protected during an ICO and assist in the process of guaranteeing a project isn’t a scam.
  • It is important to make sure that an ICO project you are looking to invest in has an escrow account in place.
    • The escrow in the case of an ICO is generally a three key multi sig wallet. For example, a team member cannot move funds from the escrow account without the multi sig wallet members permission.
    • You can check multi sig wallet authenticity using Etherscan.io

Token Distribution Disproportionately Favours Management Team

  • There is no set rule to the amount of tokens that the management team receive, however, an investor should be wary if this amount is pushing 30% or beyond.
    • The ICO costs breakdown should be very transparent which will give a good idea to how much each sector should receive.
  • One final thing you should identify in token distribution is whether the management team are required to hold their tokens for a set amount if time. In traditional finance this is known as the cooling off period and if there is no holding requirement, the ICO could be part of an exit scam, whereby the team simply disappears once the ICO is completed.

Lack Of Key Information In WhitePaper

  • Scam alarm bells should be ringing if the ICO has:
    • No white paper
    • A poor quality white paper, or
    • As previously mentioned, a plagiarized white paper
  • A white paper that is overloaded with cryptocurrency jargon or words the ICO is creating themselves, should raise a few red flags also.
  • Finally, take note if the white paper (and website) is focused on informing ICO advisors on how to buy the token instead of what the project is about.

No KYC (Know Your Customer) or AML (Anti-Money Laundering) Solution:

  • To prevent money laundering, organisations are required to carry out KYC and AML checks. If there is no KYC policy in place, be sure to find out why.

Team Identity Theft or Lack Of Credentials

  • An anonymous team or a team with little experience is a dead giveaway to identifying a scam ICO.
    ICO scam example

    • Recently, CoinRating received an ICO submission from Trade Bull Coin.
    • Team profiles for Trade Bull Coin, produced a high level of suspicion to our ICO rating team.
    • Their team members did not provide any further credentials and a quick google image search found their pictures to be stock photos.

      TradeBullCoin Scam
      Do not invest into an ICO with an unverified team.

Poor Online Presence

A few easy to spot problems could be:

  • Inconsistent content posting across social channels.
  • Social handles across all channels don’t match.
  • Inactive posting on social and avoiding answering investor questions.
  • CEO/founder or social admin delays or avoids answering key questions.
  • Using fake followers or subscribers to create an artificial buzz. This is carried out with the intention of increasing FOMO buying. Often characterized by low engagement rates.

Empty GitHub Repositories

Cryptocurrencies are decentralised, which means the code for ICO’s is generally open source. Commonly, the code is then stored on GitHub

  • If an ICO’s github account is empty or non existent, query it. Reach out to the ICO and find out their reasoning for it.
  • You should not think about investing into an ICO if their code isn’t available for all to see.

Fake Wallets & Private Keys

  • Scam protection 101 – Do NOT tell anyone your private key. Some scam ICO’s have been known to ask for private keys to verify information. Please keep your private key to yourself. If someone knows your private key, they will be able to steal the contents of your wallet.

Unrealistic Claims

Like a ponzi scheme, scam ICO’s are prone to offering unrealistic ‘double your money’ projects. It is really about trusting your own judgement and verifying the ICO’s claims, but other unrealistic claims could include:

  • Cryptocurrency investment packages
  • Multi-level marketing (pyramid schemes)
  • Excessive use of multinational company logos without their permission. E.g. Visa, Mastercard, PayPal, McAfee and Microsoft..

ICO Scam Examples

Still wondering what a scam ICO looks like? For some light-hearted scam ICO content (definitely not advice) which describe scam ICO’s pretty well, be sure to visit the useless token (fake ICO website) and the blog which informs readers “how to create an ICO scam in 5 simple steps

Also, in addition to the previously mentioned scam examples, be sure to visit yetanotherICO, the fake ICO generator.

What To Do With A Scam ICO?

In our experience, who to report scam ICO’s to is usually given little thought or just ignored entirely by investors. So who is responsible for scam ICO’s and if you encounter one,where do you report an ico scam? Feel free to email us at scam@coinrating.co and continue reading below.

Internationally Recognised Reports

As ICO’s are a part of such a new emerging space, there is no properly enforced or established regulations around ICO’s. Examples of some of the more established bodies which deal with securities fraud are:

  • The securities and exchange commission the United States. The SEC have a section on their website which allows people to report suspected securities fraud or wrongdoing.
  • The European Securities and Markets Authority (ESMA). ESMA have a whistleblowers corner which is used to report infringements around
    • Undertakings for Collective Investment in Transferable Securities (UCITS)
    • Credit Rating Agencies
    • Trade Repositories

Share Within The Community

Bitcointalk

Within the trading discussion section of Bitcointalk, there is a child board called scam accusations. Within this board, the community report crypto/ICO scams and provide links and images as proof. This is a great way of spreading awareness and preventing the scammers from succeeding.
Check out this example https://bitcointalk.org/index.php?topic=3314512.msg34604173#msg34604173

Twitter

One thing you can do is tweet about it on your own channel using hashtags like #ICOScam or #FakeICO, or alternatively, contact a channel which actively posts about scam ICO’s. As previously mentioned, CoinRating recently received a highly suspicious ICO submission which we immediately posted to our Twitter community


What To Do When You Get ICO Scammed?

Wallow in self pity

Happy Investing 😉

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