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“Swindle, swindle, everywhere,
Every shape and size, 
Take a swindle out of a man 
And you have nothing left but lies.
Philanthropy is made to cover a fraud,
Charity keeps humbugs in tows!
And we are swindled at home, swindled abroad
And swindled wherever we go.”

I came across this Apoth. E. Carry extreme view on honesty while reading a brilliant book called “The Honest Truth About Lies”. Trying to drill deep into the science behind financial scandals in the US (like Bernie Madoff’s ponzi scheme, the housing bubble in 2008, or the Enron collapse in 2001), Dan Ariely eloquently reveals the psychological component that makes cheating so abundant in our lives. It’s the human mental flexibility that empowers people to rationalize cheating and still think of themselves as honest.

Even with the promise of Blockchain to create a fairer and more inclusive economy, scams and fraud doesn’t seem to disappear. A whole new cybercrime took shape killing many projects in their seedfunding stage: it’s ICO scams.

This reminds me of a great quote by Mr. Ethereum himself, Vitalik Buterin that goes:

«If crypto succeeds, it’s not because it empowers better people, it’s because it empowers better organizations.»

The reasons behind cybercrime are numerous and go further than the Simple Model of Rational Crime(SMORC) (e.g., ICO scams are a result of a cost-benefit analysis taking advantage from absent regulations). There is a lot at stake. As it turns out, ICO fraud largely erodes investors’ confidence in the entire crypto scene: it’s the “tragedy of the commons” at play!

The good news is, many firms are taking it upon themselves to redefine ICOs from a way around VC funding to an inclusive way of leveraging contributions. In our case, TrustUnion firmly believes that regulating ICOs starts in each Blockchain project’s office before hitting officials’ hammers. The startup that is currently calling for private investors takes the ICO fraud problem seriously. It wants to build a successful project from the ground up: from the “organized chaos of ideation” all the way to “adoption”and “product scalability”. Let’s start with a bit of context.

IPO, ICO and beyond

Traditionally, the typical way for businesses and startups to raise “capital” was either from private investors or through an Initial Public Offering (“IPO”). Then, methods of raising capital started to change, whether through institutional investors or crowdfunding rounds.

This was before the birth of Blockchain. The method of raising capital using Blockchain was named Initial Coin Offering (“ICO”). Any entity, whether in the traditional physical sense or in the virtual Decentralized Autonomous Organization (“DAO”) sense can launch an ICO. However, if IPOs reward the investors using equity incentives, ICO started off as mere cryptocurrency fundraisers often for just ideas. Well, that was before 2018…

The ICO Party

It’s startling how the year 2017 spread the ICO fever like shockwaves through the Internet. Suddenly, all startups needed were an idea, a “whitepaper”, and an aggressive marketing campaign to leverage tremendous amounts of money.

Fairly, it was unthinkable for huge VC firms and upstreet banks to suddenly see billions of dollars floating around with not a single bank note involved. Startups rushed to join the ICO party by the day and numbers can’t be more telling.
Companies raising 150 Million+ using ICO, as of press time. Note that most of them happened in 2017. Source:
These hundreds of millions were often raised in the matter of days or weeks at the most with an average of 2 months per ICO.

For instance, Tezos and FileCoin raised in a matter of days close to a quarter Billion USD each. This ultimately attracted more entrepreneurs to the space and created a “Fear-Of-Missing-Out” general sense among eager crypto-enthusiasts and classic investors alike.

As far as funding concerned, ICOs collectively raised 9.3 Billion USD in 2018 so far against 6.2 Billion USD in 2017 (data from ICO Rating).
Raised funds using ICOs and completed projects as of August 20th, 2018 – Data compiled from ICO ratings.

However, there is a darker side to the picture: most projects fail to deliver their promise for a valid reason. In fact, according to a recent study published by Bloomberg, 80% of ICOs are nothing but scams with no other intent to build a project.

Notice the presence of the infamous DAO project. It was the first widely publicized ICO scam to bring to attention the “wild west” nature of ICOs. In fact, in this particular project, the team scammed 150 Million USD worth of Ether ($ETH) before a fork was applied to the Ethereum Blockchain to refund investors.

Regulations Weighing In

With the crypto realm entering 2018, intense scrutiny from lawmakers and financial regulators bubbled to surface to counter the fraud threat.

For the US Securities and Exchange commission, grey is not the new black to say the least. They needed a clear legal framework that sheds light on the entire ICO Process. The problem is, an ICO doesn’t quite fall under a venture equity investment category since most ICOs offer a mere discount on a cryptocurrency before hitting exchanges. Fundraisers are not investors since they have no equity incentive but acquire tokens with a fluctuating value based largely upon speculation.

Moreover, the pseudo-anonymity of fundraisers makes it complicated to draft a legal framework. In fact, most ICOs are no classic investment instrument: “contributors” use potentially untraceable money to fund stateless projects with no central authority or banks oversight whatsoever.

Should governments simply ban ICOs? Well to quote H. L. Mencken:

“For every complex problem there is an answer that is clear, simple, and wrong.”

Luckily for Blockchain enthusiasts, Malta –The Mediterranean Crypto Island- has just opened the gate of governmental regulation. It became the first country to have officially passed laws intended to approve and regulate digital currencies, open ledger technology and ICOs earlier this summer.

Full Measures From Independent Parties
Various stakeholders across the ICOs value chain are putting in great effort to eliminate potential ICO pain points, develop good practices and self-regulate their process.

For instance, Tokenmarket, a market place for has teamed up with the Stock market of Gibraltar to offer Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) compliant ICOs leading the path for other projects to fully comply with Stock Market like regulations.

Estonia-based legal startup Agrello praises itself for being amongst the first projects to require full KYC and AML processes in their ICO. By requiring prospective token holders to provide copies of their passports and prove their residency, it already proved as safe as most traditional financial institutions.

Polymath, the “bridge” between financial securities and blockchain followed Agrello steps early on this year. The start-up operates in full compliance with the SEC. Its business model is built to offer entrepreneurs a venue on which tokens can be issued and traded as actual securities.

The TrustUnion metaproject Approach – Best Practices Matter

In many areas, defining “rules of thumb” has always catalyzed regulations long before any bill passes into law.

When it comes to ICOs, we can vaguely encounter some rules – like reviewing the business model, the Github code if applicable, the team credentials, the assigned softcap, the proceed of funds and the allocation of tokens (generally to remain below a total of 10% for the team members) As more ICOs shared their hindsight, we started to see dedicated organizations establishing the “morals” of the field.

For instance, the Fintech Association of Hong Kong issued a comprehensive guide to token sale events listing some core principles that include:

Transparency (pricing, ICO Structure, token distribution, token allocation, utility, risk)
Legal compliance
Due diligence and technical development
Fairness (defined by distance from incentives for greed and FOMO schemes)
Long term plans
The TrustUnion metaproject takes this a level further by strictly following its ICO Best Practices developed as part of its upcoming token sales events. Leaning on its advisors expertise, TrustUnion aims to be the next reference for ICOs bridging the trustless nature of Blockchain to the needed stringent regulations.

The team behind the project commits to full transparency when it comes to engaging the community. From thorough documentation, a detailed and constantly updated roadmap, to a proven team track record, TrustUnion chose to put forth all viable information for its prospective investors. It also aims to enforce the transparency rule through third-party audits.

From a legal standpoint, TrustUnion’s ICO sticks to stringent AML/KYC procedures. This comes on top of being a signatory of the European Charter of Self Regulation. The startup also requires all team members to invest in the project and lock their investment for 5 years. It clearly defines their contracts and key accountabilities and relies on legal partners for regular audits and assessment.

As far as security is concerned, the team is designing an ICO that curbs all scam, fraud, phishing and hacking risks. TrustUnion puts forth a secure platform with multi signature wallets for its investors. Furthermore, the startup will assign experts to systems and network supervisory duties.

Pending a successful ICO event (past the 30 Millions USD softcap), the proceeds will be locked in an independent escrow. They then will be released congruently with milestones delivery and technological advances.

And you, what do you think ICO Good Practices should be in 2018-2019?

This article is neither a legal opinion nor a legal advice.

16 Oct 2018 BlockchainICOSTOTechnologycryptocurrenciesregulationfintech
The views and opinions expressed in blogs are those of the authors and are not the official policy or position of ICObench. Any content provided by our bloggers or experts is of their opinion and they are fully responsible for it. ICObench is not legally responsible for the blog's content.

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