2018 April 23 - Volume.2 Issue.16

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2018 April 23 - Volume.2 Issue.16

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Blatant Exit Scams on Rise, Sums Small in ICO Raise Comparison

The ICO has become synonymous with exit scams, which have become more frequent in 2018. The due diligence in ICOs is shifted from institutions to individuals who have less resources, less knowledge and are easier influenced by marketing techniques and get-rich-quick schemes. Online platforms that review ICOs have also been ineffective. And while the SEC was able to step in and stop three blatant fraudulent ICOs, not all investors were so lucky.


Last Thursday, German startup Savedroid that raised more than $50Mn through an ICO faked an exit scam as a PR stunt in order to promote its new service offering to consult ICOs. For a duration of one day, Savedroid changed its website, stopped communicating on social media- but not without a final message to imprint the companies faked exist as Savedroid’s CEO Yassin Hankir tweeted: “Thanks guys! Over and out”.

According to Mr Hankir, the stunt was pulled to show how easy it is to run off with the money in order to convey “a very serious message that the scamming in the ICO industry really endangers the trustworthy innovative startups”.

Even though the publicity stunt clearly worked as news outlets such as Bloomberg covered the event, Savedroid arguably lost trust of its tokenholders. There have already been talks of filing a class action lawsuit against Savedroid in Germany, the company’s base, where it is illegal for a CEO to intentionally devalue an investment. However, since Savedorid is technically not an investment, the likelihood of winning the case is sparse. The actual consequences, whether positive or negative, remain to be seen.

When compared to a tightly regulated financial market, it is true that in a highly unregulated ICO market, it is fairly easy to run away with the money. The majority of exit scams promise unrealistic future returns and run for a very limited time to capitalize on the fear of missing out.

The largest successful ICO exit scam to date is LoopX, which disappeared in February after raising close to $4.5Mn. The project promised to build an investment platform with a proprietary trading algorithm that generates “profits bigger than 10% paid out to our members on a weekly basis.” LoopX deleted its website and social media profiles post-funding.

One month earlier, another ICO, Benebit, pulled the second largest exit scam in the space. Benebit, which was supposed to build a cryptocurrency ecosystem to unify customer loyalty programs, raised approximately $2.7Mn. The team ran away with all the money after it was found that all the images of team members were taken from the staff of a British High School. It is important to note that prior to the exit scam, Benebit only had positive reviews on ICO review sites but afterwards, all the reviews were changed to be negative. Arguably, ICO review sites are also easily influenced and do not serve as a reliable metric for due diligence.

There are also large scams that failed because of the timely interference of the SEC. In September, the SEC charged a Maksim Zaslavskiy from defrauding people that invested in his two ICOs REcoin and DRC. REcoin and DRC raised funds for investing in real estate and diamonds while promising high returns but SEC stated that no assets were ever bought and there were no company operations. Similarly in December, the SEC charged PlexCoin for fraudulently raising $15Mn. Dominic Lacroix, the man behind PlexCoin, was sentenced to 2 months in prison and all of his assets were frozen.

The number of exit scam ICOs is increasing with already eight in 2018 alone when only three happened in 2017. The total amount of successful exit scam ICOs is only about $11Mn, which is only about 0.1% of the total amount raised through the ICOs.

With that being said, however, with 1000’s of projects and ICOs having kicked off in the past year raising large sums of money, a blatant exit scam wouldn’t actually be necessary. The de facto state of blockchain projects remain at most on testnet, with less than a handful of projects going live. The slow siphoning of funds, while appearing hard at work would be more likely in questionable projects. 

And whilst some ICOs disclose spending allocation of funds, any further insight post-raise is by no means a requirement in an unregulated market. And due to volatility of cryptocurrencies, an immediate fiat conversion would be the most safe approach - one which most projects would correctly opt for.

Cryptocurrency Exit Scams 

wdt_ID Name Date Amount
1 Pincoin, Ifan April-2018 -
2 Bitcoiin March-2018 -
3 Miroskii March-2018 $833,000
4 LoopX February-2018 $4,500,000
5 Benebit January-2018 $2,700,000
6 Prodeum January-2018 $3,400
7 PlexCoin* December-2017 $15,000,000
8 Confido November-2017 $375,000
9 Recoin, DRC* October-2017 $300,000
10 Ebitz November-2016 $1,500,000


Notes: Total Sum of Scams Excluding * Projects


Ponzi Schemes

wdt_ID Name Period Total
1 Bitconnect January 2018 -
2 PonziCoin January 2018 $250,000
3 DavorCoin January 2018 -
4 Da Tang Coin October 2017 $13Mn
5 Korean Ponzi July 1905 $25Mn
6 OneCoin - -


Opinion: Vietnamese Exit Scam Feasibility Remarks
A number of news outlets have reported on a recent exit scam by PinCoin that has netted the operators with a whopping $660Mn. Only a little bit of scrutiny would show the extremely little likelihood of anyone raising $660Mn for a project only to be heard of after the fact. Diar, cognizant of this, and that swindling a supposed 33,000 people out of $20K on average each in a project were the website bears the all-mighty “Lambo” in a country whose GDP per capita is $2000 would be bordering on impossible. This publication will remain highly skeptical of figures until more details come to light.

How Are Top ICOs Planning to Distribute Funds?
Bancor:


Tezos:


Top ICO Wallet Drawdown (%)
wdt_ID Name ETH raised ETH balance Drawdown %
1 Bancor 396,720 60,448 85
2 Filecoin 566,715 216,906 62
3 Tezos 361,122 203,468 44
4 Polkadot 485,331 306,276 37
5 Status 299,898 267,419 11
6 EOS 651,902 631,974 3

Coinbase Steadfast in Head Hunting Onslaught

Aurora Harshner, Director of Recruiting at Coinbase has been busy. The popular exchange has hired four Vice Presidents and two Chief Officers to its business this year alone. The company is actively seeking to fill over 90 more positions – mostly engineers. And if it can't hire them, it's most certainly willing to buy them out. Two teams have now merged into Coinbase – Memo and Cipher Browser – the latter of which was most likely folded into the team developing Coinbase's own Ethereum browser, Toshi .

Its biggest acquisition is the company's latest, Earn.com, which remunerated the popular exchange with a new CTO, Balaji Srinivasan. Mr Srinivasan was formerly at Andreessen Horowitz, an investor in both Earn.com and Coinbase. And he also sits on the board for the mega investor. The connection to the venture capital firm now runs deep at Coinbase. Coinbase's President & COO Asiff Hirji, who joined just before Bitcoin's peak in December last year, was also previously at Andreessen Horowitz.

Its hard to pinpoint why Coinbase would spend a purported $100Mn on Earn.com, a business that never revealed earnings potential. But recent writings by Fred Wilson, Co-Founder of Union Square Ventures who has invested in Coinbase might highlight a potential revenue stream that the company may be eyeing.  Mr Wilson said that "my hope is that this becomes something as meaningful as what Amazon has done with Mechanical Turk over the years."

Which begs the question – did Coinbase just spend (supposedly) an eyeballing amount for a domain name?

Key 2018 Coinbase Hires

wdt_ID Date Name Position Previously
1 2.018 Alesia Haas CFO Oz Management
2 2.018 Balaji Srinivasan CTO Earn.com
3 2.018 Rachael Horwitz VP of Communications Spark Capital
4 2.018 Eric Scro VP of Finance NYSE
5 2.018 Emilie Choi VP of Corporate & B.D. LinkedIn
6 2.018 Tina Bhatnagar VP of Operations and Technology Twitter


Andreessen Horowitz Blockchain & Crypto Investments

wdt_ID - --
1 Ripple Harbor
2 Earn.com Basis
3 Axoni Coinbase
4 Orchid OpenBazar
5 dYdX Polychain Capital
6 Dfinity CryptoKitties
7 Metastable Filecoin
8 Blocktower -

Source: CBInsights


New York Attorney General Looks to Score Brownie Points

Because the US Senate, SEC, CFTC, FinCEN, US Treasury, IRS, Bureau of Fiscal Services, among other government agencies weren't poking around enough into Cryptocurrency operations, the New York State Office of the Attorney General (OAG) has now felt the need to weigh-in also.

The Attorney General, Eric Schneiderman, has sent 13 cryptocurrency exchanges a 3-page questionnaire which he hopes will be completed by May 1st as part of what the OAG has dubbed the "Virtual Markets Integrity Initiative."

New York has been one of the most difficult states to operate a cryptocurrency operation with the introduction of the BitLicense in 2015 . The regulatory hurdle of the BitLicense lead to the exodus of Kraken and Genesis Mining from the Big Apple.

Kraken's CEO Jesse Powell took the opportunity to scathe the state's outlook on cryptocurrency operations saying that "we made a wise decision getting the hell out of New York." But Mr Scheiderman's power is over-reaching should New York residents be trading on US based platforms. And the Attorney General has requested how exchanges have attempted to stop any residents from circumventing their jurisdiction laws.

|| A TAD ARBITRARY, NO?

Mr Scheiderman seem's to want answers though from non-US based Cryptocurrency operations too. And not in much thought order either. UpBit, OKEx, Bithumb, LBank and Bit-Z who are in the top 10 exchanges by volume traded, are for some reason or another, missing from the "Lucky-13."

IMF Christine Lagarde Chimes in on Crypto-Asset Positives

International Monetary Fund (IMF) Managing Director Christine Lagarde has taken an attempt at addressing regulator fears regarding cryptoassets, a term that seems to have caught on since last month's speech by Bank of England (BoE) governor Mark Carney (Diar, 5 March).

In her latest article, Ms Lagarde chose to take an "even-handed approach" at assessing the crypto market. The as ever diplomatic Ms Lagarde discussed, again, the benefits of Distributed Ledger Technology (DLT) and how it might benefit the financial system as a whole in terms of efficiency. The article highlighted some applications too – BitLand which hold records on the blockchain for the land registry in Ghana, the possibilities in Healthcare, as well as recent plans for adoption of DLT by the Australian Securities Exchange for clearing and settlement.

In her attempt to put Central Banks and banks at rest, Ms Lagarde said that "the fintech revolution will not eliminate the need for trusted intermediaries, such as brokers and bankers."

|| IMF SUPERVISION GOALS?

Ofcourse, Ms Lagarde also has ambitious goals – "the IMF, with a membership of 189 countries, can play a key role by offering advice and serving as a forum for discussion and collaboration in the development of a consistent regulatory approach." A sentiment voiced by French President Emmanuel Macron earlier this year in Davos saying that " I am in favor of the IMF having the mandate to monitor the entire international financial system, of which some areas escape regulation, like bitcoin, cryptocurrencies or shadow banking, which can trigger crises."

Kraken To Exit Japan
San-Fransisco based cryptocurrency exchange Kraken has announced that it will be closing its Japanese arm. The exchange was operating in Japan without a license, and would seem, that jumping through the regulator hoops would be a costly time-waster as the Japanese market accounts for less than 0.5% of the exchange's trading volume, at least in Crypto/Yen Pairings.
Barclays Trading Desk
Barclays Bank has bended its ears and is listening to client's demand for a digital asset offering. The bank has completed a prelmimarny assessment on demand and feasibility, and looks to join the ranks of Goldman Sachs, who is also said to be opening a cryptocurrency trading desk sometime mid-year. While details scant, Barclays did give Coinbase banking facilities earlier this year.
Immutability of Ethereum Tested with Parity Save Proposal
Last November, Parity multi-sig wallet was hacked and 500,000 ether were irrecoverably frozen. If a newly proposed Ethereum Improvement Proposal (EIP) is implemented, the lost wallet library would be restored allowing users to access their funds while also protecting from similar exploits in the future.
Chile Bans Crypto
In early April, Chilean cryptocurrency exchanges were unexpectedly cut off from banking without any explanation. The exchanges have sought to appeal and even though the appeals court agreed to hear them, the bank accounts remain closed. Some exchanges are also looking to sue the banks that denied them service. Chile now joins other developing countries in their crypto blockade.

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