Hackers have stealthily taken away as much as $400 million (10%) of the total $4 billion raised by startups all over of the world via initial coin offerings, a report from research firm EY showed.
According to the report, which studied 372 ICOs globally, a lack of fundamental valuation and due diligence process by potential investors is leading to extreme volatility in the ICO market. It also showed that in some cases ICO investors are contributing capital at an average rate of over $300,000 per second.
“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,” said Paul Brody, EY Global Innovation Blockchain Leader.
Interestingly, the study also found that ICOs raised $3.7 billion in funds, twice the volume of VC investments in blockchain projects. Furthermore, the US is leading the race with the highest volume of ICOs originating from the country (over $1 billion). Russia and China follow, with each over $300 million.
Running ICOs is a new favourite among startups or organisations looking to raise money because it allows the company to skirt past the stringent capital raising process otherwise.
Explaining risks faced by investors, the EY report said there can be two significant risks -- regulations and theft. "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 report said.
The second risk is theft from hacking as they can benefit from the hype, irreversibility of blockchain-based transactions and basic coding errors. Funds are misappropriated via substituting project wallet addresses (phishing and 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, said Greg Cudahy, EY global technology head.
“It’s clear that blockchain is already having an impact on many business topics beyond cybercurrency. However, the debate remains with currency usage itself, which began with the rise of blockchain in the first place. Once new standards are in place that are accepted by all participants—allowing for improved transparency, fraud prevention and legitimacy—the protection of investors and users alike has a greater chance of success.”