Earlier this week, the North American Securities Administrators Association (NASAA) announced one of the largest sweeps by state and provincial securities regulators in the United States and Canada to crack down on fraudulent ICOs, cryptocurrency-related investment products, and those behind them. Yo Kwon, CEO and co-founder of the leading blockchain cybersecurity firm, Hosho, works extensively with companies going through ICOs and comments on how we may distinguish between legitimate and fraudulent ICO projects.
Yo Kwon, CEO and co-founder at Hosho:
“It is in the best interest of the crypto industry as a whole for regulators to crack down on fraud and for investors to become better acquainted with risk factors associated with potential investments. It is no secret in the space that there is a plethora of scams and nefarious actors.
"In many instances, it can be difficult to discern a scam from a legitimate ICO because so many of the steps they take are similar. A bad actor will grasp onto whatever legitimacy they can, whether that is from advisors or partnerships, and leverage that to increase their reputation, which is awfully similar to what a legitimate entity may also do. With the NASAA organizing a task force to investigate and take enforcement action against potentially fraudulent projects, hopefully more companies will put a greater level of effort toward doing things the right way, separating themselves from the bad actors, and fewer investors will be scammed.
"Actions from projects that signal long-term vision are often good signs. Someone that has an exit scam in mind doesn't care about the long term health of their token or project and isn't going to be pushing for — for example, strong security measures. In fact, part of their scam may rely on poor security in order to obfuscate who is at fault when something happens. When investigating projects, one factor the NASAA could hone in on is what kind of security measures are put in place. The responses and attitude from those leading the project can be very telling of the motivations behind the project. A legitimate company will want processes to be as secure as possible to protect their reputation and capital and would be aligned with making opportunities for bad actors more difficult. It’s very easy to investigate whether an ICO has had their smart contracts audited by a credible vendor and a penetration test done of their web applications.”