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As cryptocurrencies boom, it is becoming increasingly important to exercise care and due diligence before investing in a market which is booming with values rising on a daily basis. Monte Friesner Financial Crime Analyst looks at the risks, particularly if values plummet, but more in discovering that many of the CryptoCurrency companies lack in conducting "Enhanced Due Diligence Intel" on opening up of accounts and the account holders. This is a direct invitation for criminals, terrorist financing and money launderers to become involved.

With the initial launch of Bitcoin in January 2009 and the following boom of interest in cryptocurrencies in 2013, Initial Coin Offerings (ICO) has become a natural next step in the evolution of raising capital.

An ICO is where companies create a digital coin or token and offer these items in an initial offering, similar to a more traditional Initial Public Offerings (IPOs). Some companies have successfully raised millions of dollars, sometimes within minutes, using the token crowd sales rather than traditional IPOs. One example of this is Gnosis, the decentralised prediction market application company, that raised approximately $12m (£9m) in less than 15 minutes by raising funds from individual investors. 

The potential issue for investors is that ICOs are unregulated and therefore susceptible to fraudulent activity.  While these types of investments offer more freedom to both sellers and investors they should be approached only after sufficient due diligence is conducted. ICOs have been found to have raised funds for products that will never be viable, lack the proper security to defend against cyber-attacks, or were downright fraudulent from their inception.

In other cases, the purported founders behind these projects are created for the very purpose of defrauding investors. Even though the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has issued guidance on cryptocurrencies in March 2013 and subsequent updates, there is still no clear guidance on ICOs. Due to the publicity surrounding these frauds and emerging regulatory security, due diligence of the parties managing the ICO is crucial to ensure that all red flags are revealed before an investment is made.

Lack of Fraud Protections

The general newness of this market, the lack of due diligence combined with the large potential profits from making the right ICO investment has led to widespread fraudulent activity. Nearly $150 million was stolen in the case of the ICO launched by The Decentralized Autonomous Organization.

However, the US Securities and Exchange Commission (SEC) has not made a general characterization of ICOs as securities sales, meaning that they remain relatively unregulated.

Additionally, the FinCEN made a recent foray into the cryptocurrency space with an enforcement action of $110 million against BTC-e, an internet-based money exchange service handling various cryptocurrencies, for violating anti-money laundering laws.

Most recently, in September 2017, the People’s Bank of China, a Chinese monetary and financial regulator, issued a ban on ICOs and promised to bring enforcement actions against future offerings.

The regulator mandated that the capital raised through completed offerings must be returned to investors. This ban was in part spurred by the widespread fraud that has been associated with ICOs and the threat the offerings pose to China’s economic and financial order.

Furthermore, South Korean regulators such as the Financial Supervisory Commission, Korea Fair Trade Commission, and the National Tax Service, among others, have also planned to bring enforcement actions against those holding ICOs for violating the capital market activities.

Due Diligence

For many investors, evaluating the practicality and scalability of products and services offered is the sole way to determine whether an ICO is a worthy investment. Many of the fraudulent ICOs could have been rooted out with a fuller understanding of reputational risks, and by thoroughly verifying the founder’s credentials. Even basic due diligence by the investor would have flagged warning signs in the following investments. There are several reputable companies who can conduct due diligence on an ICO; such as, Eddi Iq Inc. incorporated in the State of Delaware and has over 40 agents around the globe.


OneCoin, a digital currency competing with BitCoin, was promoted as a guaranteed way to earn large returns. However, the investors were encouraged to purchase the ‘tokens,’ which can be exchanged for OneCoins, and sell them to others in what was widely acknowledged by international law enforcement and regulators as a Ponzi scheme.

In Kazakhstan, India, and Germany, the company behind OneCoin allegedly acquired close to $15m from investors by promising guaranteed returns. The company is currently under investigation by law enforcement and regulators in multiple international jurisdictions.


PlexCorp, which aimed to develop the next top cryptocurrency, made claims of large, guaranteed returns with their ICO. Unfortunately, in June 2017, their ICO attracted the attention of Québec’s regulatory and oversight body for the financial sector, for failure to comply with the Quebec Securities Act. The regulatory body issued orders against PlexCorp and its supposed founder, Dominic Lacroix, in August 2017.

The thorough due diligence of companies and its founders has been noticeably absent from the ICO market. Many investors rely on unaudited whitepapers from companies holding ICOs, which can contain unverified, false, or plagiarised information. Regulators are beginning to take note of cryptocurrency services and ICOs, but enforcement is not consistent across the board and many of the traditional protections associated with IPOs are practically non-existent regarding ICO investments.

With the many potentially lucrative investment opportunities available through ICOs, taking the time to conduct effective due diligence is key to fully understanding one’s investment. By verifying claims made in ICO whitepapers as well as confirming the backgrounds of the founders involved in the investment target, investors can help root out bad actors. With ongoing monitoring of the investment, they can also increase the likelihood of a successful investment. 

Chronicles of Monte Friesner - Financial Crime Analyst  

Contributed by Andrei Slavenkov - Investigating Financial Consultant