The cryptocurrency world has been rocked by a team of scammers who made off with roughly $660m of investors’ money. Many, however, believe this moment has been a long time coming, given the lack of regulation over how ICOs are conducted.
The scam occurred in Vietnam, where a company called Modern Tech launched an ICO for a token called Pincoin. The Pincoin website, while expertly made and beautifully presented, offers nothing in the way of clarity over precisely what the token intended to do. Instead, it is filled with obscure catchphrases such as “The Sharing Economy 2.0” and a YouTube video promising that Pincoin is bringing the future to the masses.
Yet these rather obvious, albeit visually attractive, obfuscations did not stop more than 32,000 investors from parting with their cash. Apparently, none of them felt that Pincoin’s promise of a 48% monthly return on initial investment was too good to be true.
Shortly after paying out cash to its investors, Pincoin started paying out those promised returns in a new token called iFan. Then, the company’s seven team members – all Vietnamese nationals – disappeared, leaving only a gaggle of jaded investors outside their former offices.
How Did This Happen?
ICOs are basically security offerings that do not need to comply with securities legislation. Accordingly, alongside project and investment risk, ICO investors are taking on the risk of having no legal recourse should things go awry.
Furthermore, the very term ICO – a riff on the IPO – is slightly misleading. ICOs do not really resemble IPOs at all; instead, tokens are delivered to an often closed set of investors, who can then release the tokens to the open market. ICOs also have hard caps – a limit to how many tokens will be released – much like a crowdfunding campaign.
Moreover, investors need also pay attention to two specific details: the team behind the project and the contractual terms underpinning the ICO, if any exist. In the case of Pincoin, there is virtually no information about the team behind it on either its website or phoney white paper. In hindsight, this is not surprising since they intended to do a runner all along.
Rogue ICOs are one facet of cryptocurrencies that are giving both regulators and investors headaches. Regulators need to balance the importance of innovative projects raising finance freely with the imperative to protect investors.
This is why Marco Santori, a former partner at technology law firm Cooley LLP, developed the Simple Agreement for Future Tokens or SAFT. The agreement basically provides that only accredited investors can participate in ICOs, and they alone will be able to release these tokens on to the public market.
While this might protect those who cannot afford to lose funds from fraudulent ICOs, critics point out that the SAFT essentially kicks the can down the road: what is to stop those initial investors from inflating the token price ahead of the general public release. After all, the value of most tokens is linked to the perceived value of the technology they support, leaving initial stakeholders free to talk up the potential of that technology.
There is presently no silver bullet to the Gordian knot of ICO regulation. An outright ban is unlikely to go down well, particularly since there have been plenty of projects, such as Golem, that have raised funding in this way and developed a project that may never have materialised if not for the ICO model.
Nevertheless, the Pincoin scam highlights the need for regulators to take a more proactive stance on ICO regulation and clearly define some red lines as to what companies can and cannot get away with.
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