Chinese Gov’t Study Detects 421 Fake Cryptos, Outlines Key Features of Fraud

China’s Ministry of Industry and IT says it has detected 421 fake cryptos, identifying key signs of fraudulent tokens in its recent report.

A government-led study in China has detected 421 fake cryptocurrencies, according to a report published today, May 18.

IFCERT, a national committee of internet financial security experts initiated by China’s Ministry of Industry and IT, has warned of the dangers of fraud in the crypto space. The committee’s report notes that as of April, over 60% of the 421 detected fake cryptos are run from overseas servers, making them “difficult to find and to track.”

IFCERT’s ongoing monitoring identified three key features of fraudulent digital currency profiles.

Firstly, their reliance on a so-called ‘pyramid scheme’ operational model, in which investors are first compelled to make a payment, and then promised returns on the basis that they enroll others in the scheme.

The second feature of a fraud crypto, according to IFCERT, is the absence of open-source code of the fake digital asset, allowing its creators to dupe investors into an illusion of skyrocketing growth by artificially splitting the tokens to create an impression of proliferating rewards. The fraudsters claim that the more tokens are generated, the more wealth increases, “only rising without falling.”

Lastly, according to IFCERT, given that bogus coins cannot be traded on legitimate crypto exchanges, they are largely traded through over-the-counter deals, or even on transient phony platforms. With no transparency, scammers can manipulate apparent price surges, while at the same time preventing investors from withdrawing funds in order to benefit from such ‘spikes.’

The report concludes that such virtual currency scams are cases of “illegal fundraising,” with a high risk that their creators will disappear and wreak huge losses for investors, left unable to defend their rights.

The features of a fraud cryptocurrency identified by the IFCERT in their recent study are  strikingly similar to those identified by the U.S. Securities and Exchange Commission’s (SEC). In a recent campaign aimed to educate investors, the U.S. SEC created a website for a fake Initial Coin Offering (ICO) that went live just two days ago. The SEC’s mock HoweyCoins.com lures investors with a “too good to be true investment opportunity” – using the very “red flags” the organization claims to have identified in the majority of fraudulent ICOs – and redirects those who attempt to purchase the ersatz tokens to an educationally-oriented page on the SEC’s own site.

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SEC Launches Mock ICO to Show Investors Warning Signs of Fraud

The SEC Office of Investor Education and Advocacy launched a fake ICO website to illustrate common warning signs of a scam.

Office of Investor Education and Advocacy at the US Securities and Exchange Commission (SEC) has launched a fake initial coin offering (ICO) website,  according to a press release May 16. The goal of the site is to increase awareness of the typical warning signs of scam ICOs and to promote investor education.

The mock website HoweyCoins.com represents a classic example of a fraud ICO website that touts an “all too good to be true investment opportunity.” The website includes such details as a misleading and blurry white paper, guaranteed returns claims, celebrity endorsements, and a countdown clock that is “quickly running out on the deal of a lifetime.”

When a user clicks on “Buy Coins Now,” they are lead to the website Investor.gov, which was established by the SEC to help investors avoid fraud. The site warns that if users would have responded to an investment offer like HoweyCoins, they “could have been scammed.”

ICO - HOWEYCOINS

SEC Chairman Jay Clayton emphasized that the agency supports the adoption of new technologies, but it also encourages investors to educate themselves and understand what fraudulent offers look like:

“We embrace new technologies, but we also want investors to see what fraud looks like, so we built this educational site with many of the classic warning signs of fraud. Distributed ledger technology can add efficiency to the capital raising process, but promoters and issuers need to make sure they follow the securities laws. I encourage investors to do their diligence and ask questions.”

Owen Donley, Chief Counsel of the SEC’s Office of Investor Education and Advocacy, noted that a fraudulent ICO website can be set up in a very little time, which illustrates how easy and fast it can be to launch another scam offer. “Fraudsters can quickly build an attractive website and load it up with convoluted jargon to lure investors into phony deals,” Donley said.

Earlier this week, Cointelegraph reported that three co-founders of cryptocurrency startup Centra Tech have been formally indicted for running a fraudulent ICO. Centra Tech’s ICO raised $32 mln from investors in 2017. The Florida-based founders misled investors by claiming that they had partnered with Visa and Mastercard to issue virtual currency debit cards.

Late last month, SEC Commissioner Robert Jackson expressed criticism of ICOs in general, claiming that investors “are having a hard time telling the difference between investments and fraud.” He further stated that the ICO market is a prime example of what an unregulated securities market would look like.

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