How to protect the rights of investors in cryptocurrency crowdsales
At least $ 374,000 have been lost by contributors from a Dutch startup Confido. The project site has stopped working, accounts in social networks have been deleted, and the project team has ceased to get in touch with investors. As it turned out later, both the photos and the resumes of the project organizers, and perhaps their names were fictitious.
The story of Confido is one of hundreds. On specialized forums, stories about how the project team after placing tokens and attracting funding stop responding to messages are multiplying. Investors often complain about the failure to comply with the deadlines for the development of projects.
So, one of the largest ICO in 2017 - the Tezos project - has postponed the release of Tezzies tokens for several months. Contributors fear that the project may not be launched at all due to the outbreak of conflict within the team, and in a hurry, they unite in groups for filing collective claims to the organizers of the ICO. But the prospects for litigation are vague: the method of raising funds and the cryptocurrency technology itself, in which funds were raised, is too young and does not have a sufficient regulatory base.
The lack of guarantees for the fulfillment of promises, the protection of investors' rights and the audit of ICO projects are the main complaints about the new method of financing regulators and participants in the traditional financial market.
“The high risk of fraud and loss of investment, combined with the current rush around the ICO, create a dangerous cocktail,” said Merel van Wronhoven, Chairman of the Netherlands Financial Markets Administration (AFM).
Criticism of the ICO comes not only from traditional investors and financial authorities, but even from those traders who themselves were accused of fraud. So, Jordan Belford, whose life formed the basis of the film "The Wolf of Wall Street" with Leonardo DiCaprio in the lead role, said that ICO is the largest fraudulent scheme of the present time.
“ICO is the largest fraud in the whole of history, truly enormous, it will hit many people. This is much worse than anything I've ever done, ”Belford is sure. He added:
"Probably, 85% of the people involved in this have no bad intentions, but the problem is that if five or ten percent try to fool everyone, it will end in a global catastrophe."
The ICO market should be regulated, financial authorities of almost all world states agree. The USA, Canada, Singapore and a number of other countries have chosen to regulate ICO as a securities market. But with some reservations: if the project token does not meet the criteria of the security (securities), then the project may not be registered with the financial regulator. Thus, this regulatory method does not fully cover the market.
China took the toughest stance on the ICO, followed by South Korea. There, it was completely forbidden to attract funding through cryptocurrency crowdsales. But such a path can only lead to the fact that financial flows will look for detour paths, and the industry will go to the “gray”, semi-legal zone.
But there is also an alternative opinion, according to which the market for ICO projects does not need centralized regulation, since it can slow down the development of the industry with excessive barriers and bureaucracy.
“In the case of blockchain projects, not external regulation, but market mechanisms are quite capable of solving the problem of poor-quality ICOs,” suggested blockhead-enthusiast Marina Gurieva in an interview with CoinFox.
Another way to deal with fraudsters and unpromising developments can be a procedure for evaluating and rating ICO-projects. Currently, there are numerous portals offering evaluation services for ICO projects. They publish reports indicating investment risk, review the current situation in the sector in which the future platform will operate, assess the competence of the team of creators. But this method also carries risks: services can manipulate ratings, award false estimates in exchange for bribes from projects.
“Often, they give marks to their own, unknown method, and for a fee they agree to increase the score,” wrote German Klimenko, Internet Presidential Advisor to the President of the Russian Federation, in his Telegram channel.
One way to solve the problem of protecting investors from fraud and at the same time avoiding excessive pressure on a new industry can be the transfer of ICO-projects to a decentralized platform on which relations between investors and start-up organizers are governed by smart contracts. One of these solutions was developed by the Descrow team.
The solution she proposes is a decentralized platform on which startups can conduct crowdsales. Both startups and potential contributors register on the platform. After that, the participants choose the project that they want to finance, and determine the amount of investment. Descrow platform with the help of smart contracts will monitor the implementation of project development terms, control the volume of work performed.
The main difference from the usual crowdsale was that the attracted investments are not transferred at the complete disposal of the project team. Project organizers receive only part of the money to start development, and the rest of the funds are frozen. If the participant for any reason decides to stop financing the project, he will receive back the frozen funds.
If developers postpone the completion of one of the stages of development of the project, then they will be charged a penalty of 2% of the amount collected during the ICO.
Investors will be able to insure their risks: investors can refund the amount of investment. The reimbursement amount will be from 30% to 100% depending on the selected risk management program. Funds for reimbursement will come from the reserve fund Descrow, which is formed from several sources, among them - a commission from ICO-projects that are placed on the platform.
The market for ICO-projects is often compared to the bubble around the dot-com at the beginning of zero, when even the most unpromising start-up easily attracted funding without making any efforts to develop the project.
“Then you could make money without doing anything. And if you were trying to create a good company, your employees could simply ask: why should I work, if I can do nothing and also get money, ”Joy Ito, director of the FINTEC laboratory at MIT, recalled those times. If you delegate the task of regulating the industry to smart contracts, then at least the crowdsale organizers will no longer be idle and receive millions.