As of 16 May 2019, BTC reached approximately 8000 USD, signaling a rally in the crypto markets, brief though it may be. The IEO is the new ICO, and projects that missed out on the ICO fever of late 2017 and 2018 may have another shot at reaching their fundraising goals. The rally in BTC and the new focus on IEO will inevitably open up the opportunity for fraudsters to play fast and loose with the funds they raise, with little or no consequences for incompetence, failure, or outright fraud.
A friend of mine Mario Nawfal consults founders of crypto projects regarding their fundraising strategies. He shared an interesting post on spotting a scammy IEO on LinkedIn:
The short answer is, unfortunately, yes. This still occurs despite the rampant theft, massive failure rate (topping 90%), incompetence, and outright fraud. A 2018 survey conducted by the Global Blockchain Business Council found that over 40% of polled investors expect to invest in ICOs in the next five years.
Data and image provided by ICO Bench
I recently exposed what was an obvious scam of an ICO. I confronted their founders with their false claims and provided evidence to investors in the community that the company was a fraud, the founders were lying, and the "product" they claimed to offer went against basic physics. The response was amazing: nothing happened at all. Investors were not deterred from participating in the ICO. The company in this case raised somewhere in the neighborhood of $240 million, an incredulous amount considering how obviously fraudulent their company was.
You might be wondering, how can a company that is obviously fraudulent raise that level of capital on ICO? The simple fact is that ICO investors are not actually invested in the success of the company. They do not own equity, they have no legal claim over profits or assets, and they are heavily insulated against the bad actions of the company’s agents. They don’t care whether their investment will yield stable, consistent dividends over time. Instead, they care more about their token hitting an exchange so that they can get out quick as soon as there is a price spike.
Unfortunately, ICO investors are in it for the lottery ticket. They are hoping to get rich quick from volatile financial instruments with totally subjective value. Companies that run ICOs with no intent of bringing a project to fruition are only in it to enrich themselves. They are capitalizing off the hopes and dreams of naïve token buyers. This is tantamount to theft and is only allowed to continue due to the lack of regulation in the utility token markets. One can only hope that governments will catch up to technology and implement regulations that will combat this fundamental problem with ICOs. Unfortunately, IEOs do nothing to solve these problems. Expect to hear news of IEO scams and theft in the near future.
The words "blockchain", "cryptocurrency", and "token" have become inseparable. This is extremely unfortunate for businesses that have legitimate uses for blockchain that have nothing to do with cryptocurrency and that actually solve real business problems. This also makes it extremely difficult for these legitimate businesses to present themselves in a legitimate light. These companies are automatically viewed as attempting to print digital money through the use of an ICO, even though they may not use or need tokens.
In summary, if your company is thinking about using or creating tokens for use with your blockchain solution, then you will have to deal with the negative connotation that tokens carry. There is a 99.9999% chance that you don’t actually need a token. Going further, your token will probably make your product more difficult to use for your target market, especially if your target market does not use or trust cryptocurrencies.