Ernst and Young Report: Around $400 million Worth Funds Stolen or Lost in ICOs

Last year in 2017 we saw how the ICO markets were quite heated up during the first half of the year. ICO or Initial Coin Offerings is a popular decentralized manner of fundraising used by new startups and companies. In ICOs, companies give their new digital tokens in exchange for Bitcoin to investors betting on their ideas, products and services.

In 2017, the combined funds raised by all ICOs launched in the market were around $3.7 billion of which 10 percent i.e. approximately $400 million are said to have been either lost or stolen, as per the latest report by Ernst and Young. This figures were derived by E&Y in its study of the risks of investing in such scantily regulated markets.

The research team of EY managed to gather data from “public sources across exchanges, data aggregators, ICO reports, ICO trackers, news sites, blockchain network scanners/platforms and dedicated blockchain social media.”

Developers call the ICO method of fund raising as one which bypasses or circumvents the bureaucratic process of venture capital investments. As per the estimates by Ernst & Young, investments by venture capital firms in blockchain process is much less than what Initial Coin Offerings (ICOs) have overall managed to raise.

The report says that many of the ICO projects have turned to be outright scams while many have just not moved beyond existing on whitepaper. The EY report says "Phishing is the most common form of funds theft during ICOs, hackers steal ... up to US$1.5 million in ICO proceeds per month.”

Online phishing attacks are the most common way of tracking users to share their personal information while appearing to be very genuine and legitimate. The report says that scammers tricked investors by creating a look-alike page of the projects and managed to steal around $1.4 million in August 2017 alone.

EY in its report says that cryptocurrency hacks can even be more dangerous than attacks on the digital platform of banking institutions. The report compares some of the very interesting figure of crypto hack vis-a-vis a normal hack. In a normal hack the average loss to banks has been around $1.5 million, wherein the funds remain mostly insured. While the average hacking losses reported by exchanges in November 2017 are a whopping $2 billion. Note that as cryptos operate on decentralized blockchain technology, the transaction also cannot be reversed.

Additional concern remains about the loss of personal data from the hack. The report says "Most exchanges do not disclose policies and controls over personal data storage and use. This represents great value on the black market and chances of its misuse are high even without a breach.”

Over and above it seems that complete decentralization of financial transactions is a bit risks as without government involvement or in absence of any concrete laws, an investor will be left financially and legally bankrupt in case of hacks.