Close to $400 million USD raised from initial coin offerings have been lost or stolen, a new research has found. The embezzled funds constitute more than 10% of what had been collected for the projects covered by the study. Meeting fundraising goals is getting harder for companies conducting new ICOs.
300 Grand per Second…
More than 370 ICOs from around the world have been studied by Ernst & Young. The multinational professional services firm explored the “big risks” in the ICO market. The surveyed initial coin offerings raised a total of $3.7 billion USD, a tenth of which has disappeared, including due to hacker attacks.
Flawed token valuations, unclear regulations, heightened hacker attention and congested networks have been mentioned among the risks. According to Ernst & Young, phishing is the most widely used technique by hackers.
Fear of missing out drives token valuations without any connection to market fundamentals, the authors point out. Investors in the 10 shortest lasting ICOs have been contributing capital at an average speed of over $300,000 per second.
Not What It Used to Be
The ability to meet fundraising goals, however, is declining, according to the study. Only a quarter of the ICOs reached their targets in November last year. The share of the successful coin offerings had been 90% in June 2017.
With more than $1.03 billion raised from ICOs, the US is a pronounced leader among host countries. China is second with $452 million, Hong Kong included, and Russia places third with $310 million USD.
More than 70% of the ICOs included in the study were based on Ethereum. Ernst & Young have collaborated with Group IB for the research. Data has been collected through public sources, including cryptocurrency exchanges, ICO reports, news sites and dedicated social media.
“Quantity Begets Quality”, or Does It?
ICOs hit their peak in the summer of last year when hundreds of millions of dollars were raised by several large-scale token sales, as news.Bitcoin.com reported. And in December, when bitcoin prices soared, over $1 billion USD were collected during initial coin offerings.
The difficulties some ICOs had with reaching their targets were due to lower quality of the projects and issues associated with earlier projects, according to Paul Brody, blockchain innovation expert at E&Y, quoted by Reuters. “The volume exploded, people raised their fundraising goals and the quality just dropped”, he said, referring to some of the “white papers”. Actually, many of the projects funded by initial coin offerings don’t need the implementation of blockchain technology or cryptocurrency, according to Ernst & Young.
Brody also mentioned coding errors and conflicts of interest between the companies and their investors. A recent study has concluded that the majority of teams holding initial coin offerings fail to provide critical information to the token buyers.
Different approaches towards ICOs have been employed by governments. Authorities in Russia, for example, have proposed regulation limiting both the capital collected through a single coin offering, and the share of an individual investor. Moscow likes to view the token sales as crowdfunding used by small businesses to attract capital from micro-investors. Belarus, a close partner of Russia, has decided to legalize, but also liberalize the whole sector, including cryptocurrencies, smart contracts, and ICOs.
Chances are that startups and ambitious projects will continue to initiate coin offerings in favorable jurisdictions to attract needed capital. ICOs are also popular with many investors. Irresponsible attitude on the part of companies organizing them, including failure to provide security for funds and coins, may be as big a threat to ICOs as restrictive regulations.
What does the future hold for ICOs? Share your thoughts in the comments section below.
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