Co-founder of venture-backed startup Xangle — bringing disclosure and information aggregation services to crypto.
As any new technology or innovation evolves, there will always be credible companies working towards expanding the industry, and there will always be fraudulent companies looking to take advantage of new enthusiasts who do not yet know enough about the space. This is unfortunately what we've seen in the crypto industry, where scammers posing as legitimate crypto companies have defrauded investors out of more than $16 billion since 2012.
Our new research project entitled "Crypto Investor Scam Report" details the impact of crypto scams over the past decade to show how massive the losses were, and how few people were brought to justice. $16 billion in lost funds has an incredibly negative impact not just on the people who were scammed, but it tarnishes the reputation of credible projects and could stagnate the industry as a whole. By closely examining these scams, however, we can find ways to recognize what scams look like and how investors and the industry can protect themselves against these threats going forward.
According to the report, the first big fraud in the crypto space was the Bitcoin Savings and Trust scam. Launched in 2012, the investment scheme, run by founder Trenton Shavers, promised high returns to investors and eventually defrauded them of $97 million. More schemes and bigger losses followed, with the top five largest frauds being the following:
OneCoin relied on big promises and flashy presentations to promote their token, yet no substance — not even a blockchain — existed underneath. OneCoin collected $4.4 billion of investor money, and while one founder was arrested, the other disappeared.
BitConnect was an investment scheme that promised high yields — up to 1% per day — for investors who bought in at different returns levels. Legal pressure eventually led founder John Bigatton to shut BitConnect down, but not before he defrauded investors out of $2.5 billion.
PlusToken was a Chinese coin that also promised high returns on investment. It gained the following of more than 2 million investors and rose to a valuation of $17 billion before the founders posted a note reading "Sorry we have run" on the ledger and disappeared.
WoToken was another scam that promised high yields, a proprietary trading software that didn't exist, and rewards for member referrals. The founders, who were also associated with PlusToken, took over $1 billion from investors.
Arbistar 2.0, run by Santiago Fuentes of Spain, again promised high yields generated by a proprietary arbitrage bot, but "computer errors" continued to block investors from accessing their funds. Fuentes was eventually arrested after collecting $1 billion from investors.
These are just a few of the 136 crypto projects that have defrauded their investors out of $16 billion, according to the report.
Have there been consequences for those scams, though? Of the 136 projects we found, criminal charges have been filed against the only 71 of the teams. Additionally, only 15 projects have had members of their team convicted and sentenced for fraud, money laundering, or other investment scheme charges. The rest of the crypto projects on our list have had no recourse taken against them.
Obviously this can damage the crypto industry at large, including legitimate projects and investors who want to push the industry forward. Therefore, it's crucial that investors know how to look for red flags around new crypto projects and that the industry itself begins to build checks and balances to help purge bad actors.
Investors who know what to watch for will be able to avoid any schemes that look dubious, but they need to know what to evaluate. When looking at a new crypto project, investors can do the following:
Read the white paper: Any good company starts with a solid proof of concept. A well-constructed white paper that establishes the concept and how it will be executed can help show the project is credible. Avoid projects with white papers that are confusing, plagiarized, or that don't exist.
Look for a working business model: Has the company tested their plan through a viable business model? An investor should check to see if the proof of concept from the white paper actually works, and a trustworthy team should be happy to show it.
Find out more about the team: Having a good team behind the project will help give it credibility. First, make sure there are more than just one or two people working on the project. Look to see if they have professional bios with a portfolio of work in other areas and that they can be found elsewhere on the internet.
Is the team creating value: A good start-up wants to create value for their investors and their customers, not just hype. If the team is simply promoting their project with buzzwords and fancy events, but there's nothing of substance behind it, move on.
It shouldn't just be up to the investor to do their due diligence. The industry should put safeguards in place to help investors learn more about crypto projects, and make sure scammers don't have the ability to defraud without any check to their operations.
For example, have a disclosures registry where teams can provide info about their project, their history, their team members, and their business plan. Those who have nothing to hide will be willing to provide information about their business to attract new investors. And a registry could hold the industry to greater transparency that can weed out illegitimate schemes sooner, or surface scams that are trying to stay anonymous.
Once the industry begins to develop and adopt better investor relationship practices — including communication, disclosures, calls, and more — it'll set a precedent for project teams around transparency. It'll also encourage investors to ask questions around the project and build a relationship with the founders. Those founders unwilling to commit send the message that they might be a scam.
As we saw above, some scammers are being held accountable. But once the money's gone, it's too late. The industry needs to find ways to hold itself accountable and flag fraudulent projects early through transparency and education.
The good news is that the crypto industry has rocketed past the threshold of intolerance for these scams to put a stop to crypto’s growth. But while the report details the damage done, if improvements aren't made and checks and balances aren’t put into place, the real damage may yet come.
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