Mark Tencaten | Thinking of investing in cryptos: How to decrease the chances of of fraud

Millions of investors in more than 175 countries lost approximately US 4 billion dollars in 2017 after investing in a cryptocurrency named "OneCoin." Ruja Ignatova, the project's mastermind, disappeared along with what is thought to be the entire sum.

This news headline caused a stir in the cryptocurrency community. Even while this situation included a significant amount of fraud, Mark Tencaten explains that the reality is that shady activities are common in the field of crypto-assets, which include cryptocurrencies (like Bitcoin) and non-fungible tokens (NFTs). Investors who possess these tokens are given rights that can take various forms (such as accessibility to goods, such as a piece of art, a service, or something equivalent to stock ownership).

Initial coin offers (ICOs), which include the issue of new cryptocurrencies, were launched in 2017, and according to a 2018 assessment by a crypto-asset firm, approximately 80% of them were fake. Of course, it is only possible to determine the exact number of scams that occur annually, not the minimum of which is that the majority are not reported to the appropriate authorities. Mark Tencaten claims that the subject of how to handle the risks that potential investors are taking should still be on their minds in light of this alarming statistic.

It should be emphasized that there is little to no regulation of crypto-assets worldwide. Although regulatory authorities like the Security and Exchange Commission in the US and Québec's Autorité des marchés financiers have been researching the issue for some time, some aspects of regulation are still lacking. The decentralized and transnational character of these assets, which makes creating and enforcing rules and regulations particularly challenging, is one explanation for this.

Learn about crypto legal documents

Due to the crypto-assets technological nature, new signs of fraud have emerged. It is crucial that investors keep a close eye on the projects they are thinking about investing in because these are different from what investors are accustomed to learning from professionals who are in charge of warning them about dangers, including investment advisors.

It is true that, for the time being, investors are fully responsible for defending themselves against the fraudulent activities that are common in the market due to the lack of regulations.

The ICO's development teams release a document known as a "white paper," much like a conventional investment. When a business raises more cash through a stock offering, it is comparable to a brochure for a public offering. It describes the team behind the project and how it functions.

The similarities to prospectuses end there, though, as white papers are not subject to the same regulations as those latter documents. Therefore, an issuer is free to display only the information it chooses and, conversely, to conceal data that would be pertinent to a prospective buyer.

Signals of fraud for investors

There are new fraud indicators that are specific to digital currency. There are White papers with inconsistencies, contradictions, or even mistakes in the name of the organization responsible for a project have been seen. Some white papers have errors because they are hastily rewritten after being copied from other projects. It should be emphasized that an ICO is typically an original project, and a clone usually denotes a shady project.

A white paper with portions that are too difficult to understand is another sign of potential fraud. This ought to make the potential investor wonder about the project's genuineness. Since a white paper's main goal is to inform an investor, initiatives that are presented as coherently should never employ terminology.

Furthermore, the project's staff is crucial to its success due to the technical intricacy of the job. Therefore, an investor should be concerned if the project documentation—whether in the white paper or on its website—does not provide a description of the team.

In addition, unlike traditional finance, it is typically relatively simple to contact the people behind an ICO in a bid to inquire about the project or learn more about it. Again, there is cause to doubt the project's genuineness if a prospective buyer cannot contact the team.

Mark Tencaten mentions that finding any of the abovementioned fraud indicators does not prove that a project is false. A potential buyer will, however, be better able to handle the fraud-related investment risks that are especially common in the crypto-asset ecosystem if they are aware of these indications.