Initial Coin Offerings Have 10% Of Funds Lost Or Stolen – EY Survey

Blockchain, ICO News, Investing, News, Regulation | January 22, 2018 By:

Accounting giant EY has released new research which looks at the risks of initial coin offerings to market participants, trading networks, and regulators.

The research analyzed more than 372 ICOs and found that roughly $400 million of the total $3.7 billion funds raised to date have been stolen.  Key findings include:

  • Speed and size of market draw hackers’ attention, with 10% of ICO funds lost or stolen
  • “Fear of Missing Out” (FOMO) drives token valuations without any connection to market fundamentals
  • Investor demand for initial coin offering (ICO) projects remains high, but the ability to reach fundraising goals has been declining since mid-2017; down to 25% of projects in November from 90% in June
  • The US is leading the race with the highest volume of ICOs originating from the country (over US$1b). Russia and China follow, with each over US$300m.

The report blames a lack of fundamental valuation and the due diligence process by potential investors as leading to extreme volatility of the initial coin offering (ICO) market. The research also found that, in some cases, ICO investors are contributing capital at an average rate of over US$300,000 per second.

Paul Brody, EY Global Innovation Blockchain Leader, outlined the risks. “As ICOs continue to gain popularity and leading players emerge globally, there is a risk of having the market swamped with quantity over quality of investments. These high-risk investments and the complexity of ICOs need to be managed to ensure their credibility as a means of raising capital for companies, entrepreneurs and investors alike.”

One of the key findings from the EY research is that there may be no business need for many of the utility tokens being offered. Utility tokens are essentially a form of application-specific currency that blend the technology features of blockchains with a speculative component for investors where the tokens’ value will rise as usage increases.

In most cases, EY concluded, there is no need for an application-specific exchange token. Indeed, for companies that record their revenues and expenses in dollars or euros, settling inter-company liabilities with a volatile specialized currency adds complexity and risk without significant benefits. The core technologies and benefits of blockchain technologies can be applied to business operations without having to use proprietary digital currencies.

The research also analyzed more than 110 ICOs that have raised 87% of all funds so far. More than 70% were on the ethereum platform, a public blockchain.

The result has been network congestion, as traders and business operations compete for limited transaction slots. In the long-run, the ethereum road map builds out a greater capacity for trading and transactions, according to the EY research. In the near-term, network congestion could pose an additional risk to investors.

Investors face two other significant risks the research finds. The first is regulatory: different countries have varying levels of regulatory strictness for ICOs, leaving vulnerabilities in the market. As a result, those looking to conduct illegal activity with an offering could move to jurisdictions where regulators take a light touch approach toward ICOs.

The second risk is theft from hacking: more than 10% of ICO funds are lost or stolen in hacker attacks (almost US$400m). Hackers benefit from the hype, irreversibility of blockchain-based transactions and basic coding errors that, had the ICO been carefully reviewed by experienced developers and cybersecurity analysts, could have been avoided.

Funds are misappropriated via substituting project wallet addresses (phishing, site hacking), accessing private keys and stealing funds from wallets, or hacking stock exchanges and wallets; all on top of indirect losses caused by high reputational risks for project founders.