They may rhyme well but changing the alphabets does not change some fundamental inadequacies on transparency or the propensity for scams that ICOs struggled with. Or does it?





What happens when Initial Coin Offerings (ICOs) start getting banned by some regulators? What shifts when strict Know-Your-Client (KYC) requirements enter crypto-finance table-talks? Where does the sun rise from next when sneaky alternatives like Initial Exchange Offerings (IEOs) or Security Token Offerings (STOs) find their cracks in ICOs’ debris?



Indeed, the last quarter of 2018 was replete with indications of failure of ICOs and the reasons were many. But lack of transparency from teams and the absence of sturdy ideas were sitting top on this list.



Siddharth Sogani, Founder, CEO, CREBACO may have some explanation here. “There have been reports about many ICO companies which we discovered during our research registering themselves in more than one country (like HQ in one country and branch offices in others) so that a company can exploit the jurisdictional boundaries when the time for legal notices comes. That is why we are working hard on developing, and encouraging the use of, a global standard. If the United Nations or the World Economic Forum (WEF) can help us in establishing some foundation for this intervention, the industry would be scared of a lot of scams.”



So when a next wave arrives – a new alphabet and, supposedly, a new regime where investor trust is not glossed over; the question is – can such switches work in bringing in the desired level of transparency?



Security tokens, as described by Sherwin Dowlat in a Satis Group Report, July 2018 ‘CryptoAsset Market Coverage Initiation: Network Creation’, aim to achieve some sort of financial return for the investor, and are slightly more straightforward. “The contributors purchase the token because of conveyed financial incentive; the tokens could be tied to the performance of an investment fund or a crypto-return yielding asset.”



The report mentioned that the velocity of tokens was about 4x that of coins. It, by the way, had also reminded that over 70 per cent of ICO funding (by $ volume) to-date had gone to higher quality projects, and yet over 80 per cent of projects (by # share) were identified as scams.

The ICO market had raised almost 20 per cent of the total US IPO market YTD, compared to being nearly non-existent a few years ago – Satis Group Report

Sogani has just unveiled CREBACO 50 in Singapore at an industry conclave. Incidentally, this research journal is made for High Net-worth Individuals (HNI) Investors, Venture Capitalists (VCs) and Regulatory authorities. The organization and this team – with competencies that straddle across many areas like law, audit, project evaluation – was set with the idea of helping investors, users and even the founders themselves to understand the project better with a systematic approach to analyze a technology project by keeping in mind all the aspects related to it such as the feasibility of the project, promoters background, technology, user interface, audits for security, etc.

The scenario on transparency and project assessment is that bad, one may wonder? Let us get a knife and a comb to suss this out a bit more.

ICOs – one rotten apple, already?

The Satis Group report slices the scam- mould from various angles and phases of the lifecycle of an ICO.



We, thus, have three main types. First, an ‘Identified Scam’ or pre-trading scam wherein a project that expressed availability of ICO had no intention of fulfilling project development duties with the funds. Second, there is the ‘failed’ or pre-trading variety where a project succeeded to raise funding but did not complete the entire process and was abandoned. There is also a third one, similar to this. The ‘Gone Dead’ type where a project could raise funding and completed the process but was not listed on exchanges for trading.



By contrast, a successful ICO happens to be one that was successful in raising funding and completed the process. It was listed on an exchange and had begun trading. It had ticks in all the right boxes. Like – Deployment (in test/beta, at minimum) of a chain/distributed ledger if it was the case of a base-layer protocol. Or a product/platform in the case of an app/utility token. Such ICOs also typically had a transparent project roadmap posted on their websites. Another indicator was a Github code contribution activity in a surrounding three-month period. Based on these checks some 78 per cent of ICO’s were ‘Identified Scams’, and some four per cent came in the ‘failed’ category. There was about three per cent that dived into the ‘Gone Dead’ bucket and almost 15 per cent that went on to trade on an exchange.



The carnage could continue in future too. Sogani contends that a lot of genuine and scam ICOs are waiting for the next bull. “We have come across so many projects in our experience of doing credibility-checks on these ICO companies, that it is indeed an appalling situation.”



He lets on some gleanings from the first edition of CREBACO50 that covers 40 ICOs and 10 Digital Assets. “We are publishing only 20 per cent of the research information which we have which is enough for eye-opening. The remaining 80 per cent information is too sensitive to publish in public but we are glad that we managed to find it out, I’m sure the governments and VCs would really appreciate the information which has been collected.”



Stubborn and stealthy scams! What exactly is going amiss here? Before we jump on to that hoop, it would be fascinating to pick a new way that Dowlat brought in to look at the scenario. As a percentage of the US dollars raised to-date (some $12 billion) only approx. $1.3 billion (about 11 per cent) of ICO funding went to ‘Identified Scams’.

Around $1.7 billion went to the ‘Failed’ category

Approx. $624 million went to the ‘Gone Dead’ category

Almost 1/10th of all ICO fundraising went to ‘Identified Scams’, but a good chunk of this $1.3 billion was from just three projects, as was shown in the Satis Group Report. These were also all relatively old-school frauds and not unique to ICOs, as further analysed. These were subject to extensive regulatory action, Dowlat noted. Like – Arisebank by Securities and Exchange Commission (SEC), Savedroid by the public prosecutor in Frankfurt4; and Pincoin that confronted an investigation by Vietnamese authorities. So, if we consider the damage outside these three projects, ‘Identified Scam’ only got away with $30 million in fundraising (i.e. about 0.3 per cent of all time ICO fundraising).

What comes out in this report is reassuring – “We hypothesize this is because the community is relatively adept at discovering scams and adding them to lists.” The majority of ICO fundraising to date (almost 54 per cent) going to the ‘Successful’ category is a very positive story. This is a different perspective than the one we usually see when looking at the overall percentage of ‘Successful’ (four per cent) and ‘Scam’ (81 per cent) projects on a per numbers basis, Dowlat reasons well.

Sharper Teeth or Sharper Nose?

Does that mean that we do not need to worry about better scrutiny? Does that hint that Security Token Offerings (STOs) would be a new basket of fresh fruits? Especially, as they are supposed to have more muscle on legal security, and the ease of discontinuity if they fail on compliance issues. Does a small, individual, low-brow investor have any power or tool-kit at all?



Let us take a quick moment to look at what we can learn from projects like Substratum and Factom that were mentioned in a TokenInsight ‘IT Services’ report. We can also ask here – if platform projects fare better than application ones.



As an expert from TokenInsight translates it, for decentralised blockchain projects, the risk of project self-regulation alone is quite high due to the lack of mandatory supervision. “Investors need to combine the project with the consideration of whether there’re internal control mechanisms (such as independent foundations, third-party audits and ratings), whether the economic design of the token economy is reasonable, whether there are perfect disclosure channels and mechanisms for interacting with the community, etc. The case of Substratum accused of illegal ICO illustrates the importance of power restriction mechanisms and information disclosure.”



Here, what is also worrisome is that often, even Chartered Accountants (CAs) and legal lawyers also do not understand this space enough to deal with this challenge confidently.

“An IPO requires the company to be three years old, should have a decent paid-up capital, should generate profit continuously for three years, have certifications at place, should own assets, the directors, Credit Scores should be clear, and underwriters must agree to undertake etc. only then the green flag of an IPO is allowed. But for STO there is nothing like that which is surprising. It is clear that the current regulation must be worked upon.” Sogani questions.



For platforms and applications, different types of projects are incomparable, they just choose different directions – weighs in a TokenInsight analyst. “The platform project aims to build a blockchain network infrastructure, and the application projects are committed to building a landing scenario based on the blockchain network. The two types of projects can promote the development mutually and they belong to different parties in the same ecology.”



From the perspective of market value, platform projects dominate the market, TokenInsight spells out. “Currently, there are more platform-based projects in the industry and their average market value is higher. The overall ecological construction is still actively constructing the initial stage of infrastructure development. The market for the platform is broader and more ecological. Of course, the market competition is also more intense.”

The Salad Days Are Not Over



Scams have the tendency to return, re-incarnate and propagate. A lot of serious scammers who have left a trail of bad loans in the past are easily coming for ICOs today, Sogani warns. “STOs, too, leverage the lack of clarity on regulations available at present. Education needs to be given huge importance and we need more fintech lawyers and CAs than we have today (an unbelievable wafer-thin number of 9500 to 10,000 proper blockchain professionals across the globe).”

Recall another strong Dowlat’s observation in the Satis Group report. When faced with a regulatory regime, projects have migrated outside of the U.S to launch ICO’s. That means market share loss was seen shifting to countries like Switzerland, Singapore, and the Cayman Islands. A company can get listed with tokens without the necessary credit assessments that an IPO, for example, needs to have in place first, Sogani aptly notes here.

Lack of awareness, transparency and glasses – scams, like mould, do not need a lot to stay alive. Do we keep letting them spoil crypto-industry’s health? Too soon to say. Because as Sogani susurrates –



“STO scams are the next thing to watch out for.”