The anatomy of an Initial Coin Offering (ICO) fraud

ICO fraud

Cryptocurrency articles proliferate the headlines these days, but more often than not, the subject matter deals with victims and the losses they have sustained at the hands of clever conmen. Per one insider: “As fascinating as the crypto-sphere might be, it’s definitely not a place for the faint-hearted. Sure, cryptocurrencies have taken the world by storm, [but] in the midst of all this, there are scams, frauds, attacks, hacks, and other, similarly shady ventures.” One particular area has a greater propensity for fraud than all others in the crypto world, and it happens to be with Initial Coin Offerings (ICOs).

ICOs had their beginnings back in 2013, but their popularity as a new “crowdfunding” type scheme to raise capital did not take off until 2017, when over $7 billion was raised. Venture capital firms were wondering what had hit them. The primary issue with these fundraisings is that they are unregulated, and their “tokens” have been likened to “securities” by the regulatory establishment, their way of combating the rampant fraud within this space. The SEC and others have come down hard with hefty fines, court filings, and incarcerations. The uncertainty of the situation has slowed momentum, too.

Threats from law enforcement officials, however, have not thwarted organized crime from preying upon unsuspecting victims. One report recently posited that as many as 85% of all ICOs are fraud-based and that billions of dollars have been lost to date. In case you are curious as to how one of these charades can gain traction and trick investors from the start, let’s take a deeper look into this storyline: “Blockchain CEO faces 120 years in prison for $4M cryptocurrency scam.”

Jared Rice, the alleged criminal and CEO facing lengthy jail time, misled investors into believing that his blockchain startup, “AriseBank”, would be “the first decentralized bank to offer the first and largest cryptocurrency banking platform in the world.” His banking services would be FDIC-insured, and the bank would also issue Visa cards tied to cryptocurrency services. With little more than an idea and no formal registrations, Rice was off and running, soliciting funds from investors. Within weeks, he claimed to have raised $600 million, as opposed to $4 million in actuality, which Rice “allegedly spent on hotels, food, clothing, and other costly legal services for his family.”

Did investors complete any due diligence before paying over their Bitcoins, Ether, Litecoin, or cash? A few phone calls would have revealed that no registration had ever been filed or authorized in Texas, the base of operations for AriseBank. Anyone familiar with banking in the U.S. could have told investors that a charter must be obtained to do anything in Rice’s prospectus, if he had one at all, and that, at a minimum, he would have had to have gone through an extensive background check, if he wanted to buy an existing “de novo” charter in the marketplace.

Without a charter, there could never be FDIC insurance, nor would Visa personnel even consider doing business with his startup bank. The U.S. Department of Justice’s portal says as much. Rice has been indicted for securities and wire fraud, making fraudulent claims, and failing to disclose a previous felony conviction. The SEC shut him down in March, and Rice has pleaded guilty. Mark that down as “One” for the good guys.

Read Also: