Niall Ferguson, author of ‘The Ascent of Money: A Financial History of the World’, has spoken out against initial coin offerings (ICO) because of the associated potential for fraud and scams.
Rooting out Bad Actors in ICO Market
Ferguson’s comments were said at a seminar recently held by the Bank of England, where he shared his support for Bitcoin, but spoke out against the associated, often unregulated fundraising method of ICOs.
“I wish I had a Bitcoin for every phony white paper I’ve been shown the last six months, by people trying to raise money before the SEC clamps down,” Ferguson, a senior fellow of the Hoover Institution at Stanford University, said according to Quartz. “When there’s no regulation, then the rogues are very quickly on the scene.”
ICOs have been increasingly making headlines — especially following the astronomic rise in the value of cryptocurrencies that was seen toward the end of 2017. Just last week, the Wall Street Journal (WSJ) released an analysis of the fundraising method, but Ferguson believes the organization might just be scratching the surface.
ICO Red Flags
To research the industry, the WSJ combed the white papers — documents outlining the specifics of a company’s ICO — of 1,450 ICOs, finding 271 ‘red flags.’ These red flags include things like celebrity endorsements, promises of exceptionally high returns, and (false) claims of regulatory compliance.
Of the projects that the WSJ singled out as suspicious, most were uncovered because of plagiarized texts, images of team members and/or investors taken from stock photography banks. In 111 cases, entire sections of company white papers were simply copied and pasted from competitors websites.
Even more scary is that, put together, the 271 ICOs identified as having red flags they have garnered a combined sum of over $1 billion from investors. This is according to a review of company statements and online transaction records performed by the WSJ.
Regulators Strike Back
While some of the projects are still raising money, others have shut down or have been frozen by the U.S. Securities Exchange Commission (SEC), the federal regulatory authority that has been tasked with investigating ICOs and other potentially fraudulent activities in the cryptocurrency space.
On the site, HoweyCoin — which takes its name from the 1946 four-part Howey test, created to determine what qualifies as a security — is presented as a way to invest in the luxury travel market. But it’s all a ruse, created to show potential investors just how easy it can be to fall victim to such scams.
The WSJ is not alone in its scrutiny of ICOs. In fact, other reports signal even deeper problems in the market. For example, according to news organization Izvestia, who cited the Russian Association of Cryptocurrency and Blockchain, half of the $300 million raised by ICOs in Russia in 2017 were pyramid schemes.
Another source, Bloomberg’s Matt Levine, was asked what the percentage of ICO fraud is, to which he answered: ‘Somewhere north of 50?’
While the numbers here are clearly hard to properly grasp, and although they may vary, they’re still indicative of a large problem. Moving forward, if regulators want retail investors to stop being scammed by unregulated schemes, they have to demonstrate the value of oversight, promote fairness, and emphasize the common adage that if something seems too good to be true, then it probably is.