Hackers steal $370M of ICO funds
Cryptocurrencies have lost ten percent of funds to phishing, cyber attacks
Initial coin offerings (ICOs) have been touted as the IPOs of the future for cash-strapped startups, allowing the companies to create cryptocurrencies and sell them to interested buyers around the world to crowdsource funds.
But a new report suggests not all funds that go into the crypto-coffers go straight to the startups themselves. Of the total $3.7 billion raised through ICOs, hackers have stolen more than 10 percent, according to accounting firm Ernst & Young (EY).
Hackers target ICOs because of their anonymous nature, irreversibility of the cryptocurrency transactions and the speed and size of these offerings, which sometimes can raise millions of dollars in a matter of seconds, said Ernst & Young.
The hackers use a variety of methods to steal the ICO-raised money. The most popular method has been an email phishing attack, according to Ernst & Young. At least $1.5 million of ICO funds per month are stolen through phishing attacks.
Other methods include targeting private virtual wallets, or launching a distributed denial-of-service attack that overwhelms the ICO’s servers.
Beyond just initial coin offerings, hackers have stepped up attacks on cryptocurrency exchanges, according to a separate Ernst & Young report from November.
In its new report, EY analyzed
372 ICOs and found that most of the ICOs came from the United States, China and Russia. EY also found that the ICO craze — which drew celebrities such as Paris Hilton to launch their own — has dwindled in the past few months.
ICOs work by selling custom-made cryptocurrency — or “tokens” — at a discount to prospectors, who are betting that the tokens’ value will rise and make them a profit. But unlike an initial public offering in the stock market, the buyers are not getting a share of the company.
Whereas 93 percent of ICOs last June met their fundraising goals, only 23 percent met theirs in November.
Paul Brody, EY’s global innovation leader for blockchain technology, told
Reuters that ICOs have dropped in scale because the quality of many ICOs has considerably dipped. Nearly all companies starting an ICO publish a “white paper,” but Brody noted that many contained basic errors and contradictions.
“We were shocked by the quality of some of the white papers,” said Brody. “We see clear coding errors and we see conflicts of interest between the companies issuing tokens and the community of token holders.”
The EY report noted one reason why investors bought so much cryptocurrency during ICOs was their “fear of missing out.”
“Current token valuation is more like a gold valuation or a fashion item in high season when a limited supply cannot meet high demand,” the report stated.
Governments are beginning to crack down on ICOs.
China and South Korea implemented bans on ICOs last September.
In the United States, the Securities and Exchanges Commission has remained wary of the offerings — but has not banned or added new regulations.
In November, the SEC warned about celebritybacked ICOs, saying the celebrities need to disclose their compensation for advertising their ICO.
“These endorsements may be unlawful if they do not disclose the nature, source, and amount of any compensation paid, directly or indirectly, by the company in exchange for the endorsement,” said the SEC.