Thanks to blockchain technology, the first coin offerings have become an alternative way to obtain financing for companies that use the new and emerging digital financial market for tokens. Unlike initial public offerings, which are subject to strict legal regulations, ICOs require only a white paper and some interesting features such as no barriers to entry, opportunities for exponential growth, no geographical barriers and easy verification.
So it comes as no surprise that the ICO market has had extraordinary growth lately. Research shows that from January 2016 to August 2019, ICOs raised around $ 13 billion worldwide.
Despite the attractive benefits of ICOs, investors interested in it as an alternative investment face major risks. In this regard, according to a 2018 report from Satis Research Group, there have been around 1,500 ICOs. Of the sample, 78% of the projects were identified as fraud, a total of $ 1.3 billion.
Related: Crypto Crimes by Category: From Twitter Hackers to Not Your Key, Not Your Coins
My colleagues Niranjan Sapkota and Josephine Duvetinema conducted research aimed at investigating and answering the following questions: what are the different types of ICO scams and what are the expected financial losses from an average ICO scam? To investigate this issue, we used web scraping and created a comprehensive data library covering all ICOs launched from August 2014 to December 2019. A unique hand-collected dataset spanning 5036 ICOs.
We found data collected for 1,014 ICO funds, of which 576 were found to be counterfeit, with a total cumulative loss of $ 10.12 billion dollars. The biggest loss from fraud was the so-called “Petro fraud”, in which investors lost a total of $ 735 million.
ICO fraud categories
Dead or fake or both
We have selected ICOs that are classified as “listed” by the DeadCoins and Coinopsy project aggregates and analyzed them to identify 13 different ways fraudsters can cheat investors. If a Bitcointalk forum member identifies an ICO as a fake team, fake project, fake wallet, fake social media or fake trade, we classify the ICO as “fake”.
Classic cashier scam
If the ICO does not pay organizers who are promised monetary rewards (often in the form of tokens) for PR events, such as promoting the project on forums, Telegram channels, journalists, translating and locating documents, as well as posting on social networks or on blogs we classify this as a “bonus knit”. If the developers and organizers who raised money for the ICO suddenly disappear and leave investors without information, we classify these offers as “exit scams”.
Challenging stunts and air explosion
We noticed several allegations of ICO fraud, since the same development group was actively involved in fraudulent activities on other projects. In our study, this type of scam was classified as “ex-scammers”. We then defined an “airdrop” for cases where fraudsters steal private keys from users. This can happen if scammers create a trap and users expect to receive free tokens and then click on links, thus giving away personal information and eventually losing their coins.
Share scams and copy
Furthermore, it seems that developers who intend to defraud investors, prefer to launch their ICOs on a fraudulent exchange. This type of fraud is classified as “stock fraud”. We also noticed that copying and running a white paper for a promising ICO with a similar or different name is another trick used by scammers. This type of scam is classified as a “White Paper Plagiarism Scam”. In this regard, we have noticed that users are fortunately familiar with this type of scam and report it on the Bitcointalk forum.
Pump and drain
Pump and Dump is another strategy used by scammers, but it is not always possible to spot it right at the beginning of the ICO. With this type of scam, investors and traders rush to buy a token at an early stage when the price is still low, and some even buy it at a high price for fear of losing the opportunity to easily make money. As soon as the scammers complete the sale, the price drops suddenly and sharply.
Crypto Ponzi schemes
“Ponzi scam” is another type of scam that has been noticed. This type of fraud usually requires victims to invest in some ICO-related product or service and promise to return at a later date.
URL scams and phishing scams
We also saw new tactics to deceive investors, which include launching websites with similar names and designs as existing projects. Naive investors who are not aware of the originals may be fooled by these sites and lose their coins. In our research, this category of scams was defined as “website scams”.
We know what you did last night
We have also noticed what we call “porn scams”, which seem to be becoming more and more popular among scams as the ICO develops.