Why scam ICOs not only betray investors, but also harm the entire crypto ecosystem

Every scam ICO leaves a lot of dissatisfied people in its wake. Namely, the people who lost their funds to scammers. But the damage caused by scam ICOs is even more critical because it puts the entire crypto ecosystem in a bad light. The only way to prevent scams and thus avert damage to the ecosystem is increased transparency and prevention.

Even if what appears as an exit-scam is nothing more than a bold PR-stunt, as soon as the story is big enough for mainstream media, the damage is non-reversible (as happened with savedroid in April 2018).

Everything is nothing without trust. This is especially true wherever money is involved. When surveying the crypto ecosystem there is no doubt: enormous amounts of money are involved. This is why the crypto ecosystem is especially reliant on trust. First and foremost, promising ICOs need the trust of their investors. But the ecosystem also needs the trust of banks, which hold the funds in escrow, and the trust of public authorities when it comes to regulation.

The extent of trust that investors are currently granting to crypto startups is reflected in the multi-billion valuations of dozens of crypto companies. These valuations have not been inspired by profound profits, but simply by the hope and trust that an ICO can grow from a promising idea into a profitable business in the future. The hype of last year, however, has created a dangerous gold rush in parts of the crypto ecosystem, which has paved the way for scammers who have cheated their investors out of millions — with disastrous consequences for the entire ecosystem.

Bad news trumps good news

Like many other innovations, the crypto ecosystem initially met with public mistrust. The genesis of Bitcoin is one that has been repeatedly associated with shady, sometimes criminal machinations. Even though the crypto market is rapidly developing, and has long since ceased to be niche, it is still mired in structural mistrust. Mistrust from individuals who fear fraud. Mistrust from institutions and companies that have regulatory concerns, or do not believe in the technology behind it.

To overcome existing concerns, the crypto ecosystem would do well to focus on building trust. And indeed, the past few months have shown that the crypto market is growing up and professionalising its operations. There is more and more cooperation between old economy and crypto startups, there are more and more approaches to smart regulation, there are more and more success stories to be told — things that undoubtedly build trust. But one problem remains: bad news trumps good news. A blockchain company releasing a solution ready for the mass market is hardly a mass media headline. A blockchain company, however, that has cheated investors out of millions and settled in the South Seas with its catch will make the front pages for weeks.

We need investor protection through increased transparency

With every scam or exit scam, investors are cheated out of their deposits. This alone is reason enough to do everything possible to stymie fraud. But the damages from a scam are not limited to cheated investors and a loss of capital. Any scams and scandals will ultimately affect the entire ecosystem. And the consequences, such as public mistrust, have negative effects for the many reputable and upright players.

The crypto ecosystem is still in its infancy. It needs to build trust not only among investors, but also within society as a whole since many crypto solutions rely on mass market adoption. This makes building trust and thwarting scams mission critical for the crypto community.

The most essential step towards building trust is increased investor protection through increased market transparency. To date, ICO investors struggle to find independent ratings and analyses of potential investment targets. Most of the existing ICO ratings are centralised and opaque. They breed more confusion rather than shine a light into the darkness. However, building trust requires effective investor protection through a truly decentralised rating of ICOs. One that is fully transparent and independent. Such a decentralised rating system would not only protect investors against fraud, it would also strengthen the crypto ecosystem as a whole by contributing to the sustainable development of public trust.