Market Research

Warning Fired About Theft Risk As Digital Currency Fund-Raising Takes Off

Josh O'Neill, Assistant Editor, August 24, 2017

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As initial coin offerings continue to gather momentum and generate market and media buzz, a New York-based firm has issued a stern warning to potential investors.

Investors must approach initial coin offerings (ICOs) with caution as there is a one-in-10 chance you will end up a victim of cyber-theft.

Criminal losses related to the controversial fundraisers are at around $225 million this year, according to Chainalysis, a New York-based anti-money laundering software developer that analyzes transactions. In phishing scams, investors are tricked into sending money to internet addresses that are a guise for funding sites for ICOs.

More than 30,000 people have fallen victim to ethereum-related cyber-crime since January, losing an average of $7,500 each, Chainalysis estimates. Ethereum is a rival crypto-currency to bitcoin, the first and most well-known digital coin. 

“It’s a huge amount of money to generate in such a short period of time,” said Jonathan Levin, co-founder of Chainalysis, whose software and database are used by some of the largest bitcoin companies and US law enforcement agencies. “The crypto-currency phishers are doing pretty good against all the other types of criminals that are out there.”

The $225 million figure logged by Chainalysis is rapidly approaching the losses incurred by robberies in the US in 2015, which stood at $390 million, according to statistics provided by the Federal Bureau of Investigation. 

ICOs have gained momentum in recent years as digital currency entrepreneurs increasingly use them to raise millions quickly by creating and selling digital tokens with no regulatory oversight. Similar to an initial public offering, blockchain start-ups looking to build their business will create and list a new crypto-currency, which investors can buy using fiat currency. 

By mid-July this year, technology firms had already raised around $1.1 billion through 89 coin sales, roughly 10 times more than that in the whole of 2016, according to Reuters.

There are 110 upcoming ICOs still to come this year, according to tokendat.io, an online token sales tracker. Some ICOs have faced criticism as they failed to accurately disclose token distribution, such as what proportion of tokens would be help by founders.

Because many tokens are listed and traded on crypto-currency exchanges, large holders could gain more price-controlling powers.

Last month, Wall Street's main watchdog said that ICOs should be subject to the same regulations as traditional securities sales, and consequently may need to be registered unless a valid exemption applies.

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