Five latest ICO scams and hacks (and how to protect invested money). Guest post by DEScrow team.
In times when hype around initial coin offering crowdfunding escalates, the concern rockets too. The ICO market is at its early stage of development and is, indeed, a high risk investment. But despite the big scandals with huge losses of investor funds, initial coin offerings continue to raise substantial funds. A growing number of funds and private investors conclude that the return on ICO investments is incredible in comparison with traditional tools of investments, and the game is definitely worth a candle. Needless to say, scammers didn’t wait too long to join the market.
In our “hit list” we are bringing light to five most recent and vibrant ICO fraud cases, presenting the stories in the ?hronological order. As you will notice, not every project was intended to be a scam, but in all cases investors funds, and consequently, nerves suffered quite a loss.
Summer 2017 security breaches
Strictly speaking, the following case can’t be called a scam, because their problems were initiated not by the project team but by hackers. Nevertheless, these incident is related to the topic – the losses could have been avoided with the help of decentralized escrow.
On July 16, 2017 the Israeli startup CoinDash ICO campaign was rapidly stopped right after the beginning, as it became apparent that the money had proceeded to the fake digital wallet address. In the first 3 seconds of the ICO campaign malicious actors managed to hack into the CoinDash web page and replace the digital wallet data. The breach was discovered almost immediately and token offering was paused. But at these few seconds since the ICO opening, the hackers managed to collect 8 million dollars, with which they left.
ICO CoinDash breach is a vivid reminder of the epic DAO breach, when on July 16 in 2016 50 million dollars have been stolen during the ICO in the same way.
Almost the same has happened on August 21 in 2017 during the Enigma ICO. In this case the fraudulent cashout schema for half a million dollars was the following: by taking control over the web page and the admin account, the hackers had smoothly turned around the ICO pre-sale. Just short of 1500 Ether upon the arrival to the Enigma fake wallet have been withdrawn by scammers.
The fake bookshop
Autorship ICO, which was conducted at the beginning of September 2017 is a clear example of strange projects, which receive substantial funds. According to the project announcements, the product was aimed to become a decentralized platform for writers, journalists and translators. As marketed, the platform intended to unite creative specialists with a goal to assist with the sales of their writings and provide the fair distribution of royalties, paid in project tokens.
Authorship white paper claimed that the project idea appeared after gaining substantial experience of bookshop management and communication with authors. If investors were to make effort to examine the essence of that “substantial” experience, most probably, they would have been puzzled, as in fact the shop was basically a web page without any relation to books except for the name “I read books” and exiguous stock of just 3 items: notebook, pen and mousemat. As was brought to light later, the mentioned address was fake, occupied by another company with no connection to this project.
Despite all these “gaps”, Autorship managed to collect a total of million dollars. The fact that neither investors nor bounty program participants have received their tokens gives us a ground to classify the project as a mere hard-core scam.
Diamonds and real estate
On September 29, 2017 the United States Securities and Exchange Commission (SEC) publicly announced charges against the businessman Maksim Zaslavsky and two his companies, RECoin and DRC World. According to SEC, the companies were scam, as they misinformed investors with the promises of high returns when in fact they did not even carry on any business operations.
Zaslavsky and his company launched ICO claiming that the liquidity of Recoin tokens was backed up by “hard” assets – real estate and diamonds. Diamond Reserve Club World company was said to be a co-owner of the diamond mining company. But despite the fact the ICO was open and the money were being collected, not a single diamond was actually acquired. According to the web page, the project team included their own lawyers, accountants and brokers, when in fact none of these specialists were in-house or among advisors.
After the company account freeze, Zaslavsky claimed that he had no bad intentions and in fact just was not quite on time with starting the workflow. He promised to file lawsuit against SEC and return the collected funds to anybody who claims it. Although it is not clear what sum Maksim wanted to return. The ICO team reported that the collected funds were close to 4 million dollars, but in reality only 300 000 were collected.
What happened with the funds will remain a mystery but the case of diamond baron Zaslavsky is noteworthy as it was actually the first scam in the ICO world.
“When partners can’t agree their dealings come to nought”
The Tezos ICO which collected 400 million dollars has become one of the most discussed and controversial subjects in the crypto world. When interested parties started to exchange information on Tezos, three separate lawsuits were submitted with a demand to return the invested money.
The last one was the P.C. and Lite DePalma Greenberg legal firm that issued legal proceedings on the similar to previous plaintiffs’ grounds: Tezos tokens were issued as securities but have never been registered as such.
The primary lawsuit was initiated on the October 25, just several days after the Tezos negative press coverage, resulting from the public conflict between co-founders and the head of Tezos Foundation. The claim was issued by Taylor-Copeland legal firm, where the Mrs. & Mr. Breitman were accused of selling unregistered securities, committing securities fraud, false advertising and unfair competition (“by making material misrepresentations and omissions”).
In the middle of November David Silver, Silver Miller partner in Florida mounted a second action against Tezos. The second claim in no certain terms accuses the Breitmans of outright forgery:
“Notwithstanding Defendants’ attempts to avoid governmental and private scrutiny, it is clear that the financiers were indeed profit-seeking investors and that Defendants promoted and conducted an unregistered offering of securities, not a charitable fundraiser,” the suit reads.
The charity is mentioned because during the ICO campaign investments were described as “charitable contributions”. Now it is widely spoken in discussion threads that investors with that kind of wording should not expect returns at all because, as it appears, their investments were classified as donations.
The declared Tezos goal was to create a network protocol of secure smart contacts, leaving behind the Ethereum blockchain platform. The core principle of the project were trust, strong verification and control. But, as experience has shown us, these principles apparently did not apply to founders and their relationships with investors.
Tezos drama includes several main characters. First of all, Kathleen and Arthur Breitman, owners and co-founders of blockchain project Tezos. At the opposite corner stands Johann Gevers, who founded the swiss non profit Tezos Depositary Foundation. The story tells that after ICO launch Kathleen and Arthur have decided to claim Tezos intellectual rights against Tezos Foundation. This act allowed them to receive a 20 million dollars payment “without getting hands dirty in Switzerland” (Finews report).
The misfortune hit, when Kathleen and Arthur Breitman accused the head of Tezos Foundation, Johann Gevers, of the deceptive act of appropriating an additional bonus of 1.5 million dollars. Furthermore, Breitmans publicly expressed their dissatisfaction by saying that Johann was an incompetent employee and did not perform his employment duties. The accusations appeared in 9 page letter with a statement that Gevers is guilty of “self-dealing, self-promotion and conflicts of interest”. In turn Gevers gave an to interview to Reuters and discredited Breitmans by accusing them of “illegal coup” organization that aimed to cut him out. Gevers said, “this is attempted character assassination. It’s a long laundry list of misleading statements and outright lies.”
This drama led to Tezos tokens hitting a low. As a result of these accusation, the diminutively named “Tezzies” dropped 60%. At this moment due to the litigation process, the tokens have not reached the investors, but Kathreen told Fortune, that the plan to transfer “Tezzies” to ICO investors in February remains unchanged.
Last in the succession of recent scam project is Confido startup that disappeared on November 22 which collected during it’s ICO 375 000 dollars. As soon as the ICO was closed, the Confido web page as well as social network accounts were shut down. The money contributed by investors were retrieved.
Confido promised to create an innovative decentralized solution, which could have provided internet shops with secure infrastructure for seamless payments. Yet, as was figured out during the investigation, initiated by deceived token holders, the team was in fact anonymous. All Linkedin profiles of the team turned out to be fake.
What conclusion can we build after considering all these cases? Needless to say, the ICO market legal framework requires expert arrangements. This question is on the agenda for all developed countries. What will come out of it, we are yet to discover. But even today we have an instrument, which solves the problem seamlessly – decentralized escrow. This tool is offered by Descrow startup, which will be a platform for secure ICO.
Decentralized escrow implies that money collected during the ICO aren’t transferred to the startup or to the third independent party but remains in the investor account in a frozen state. The decision to transfer the money is not made by a centralized organization with all the associated risks The decision is made by investors, which make payments in tranches as the startup delivers on promises.
By using such tool as decentralized escrow, there is no room for described above outcomes. To use the collected during ICO funds the team has to put in a lot of effort in line with the designed road map. Moreover, the funds given as a result of investor majority voting are transferred not at once but in tranches, in equal shares. Thus, scammers just can not disappear with the money.
Advantageous conditions being created by Descrow team, allow building trust-based relations between the startup and investors, and consequently influence positively the crypto investing field in general.
Descrow and cryptocommunity
On December 6, Descrow team attended the meeting with the agenda “Cryptocurrency and other blockchain products as intellectual property objects”. Among other key people in blockchain industry there was an entrepreneur, investor and “Ethereum Foundation” supervisory board member Vladimir Martynov, who appreciated the value of the Descrow project and expressed approval of this endeavour.
— Descrow (@Descrow3) November 29, 2017