Two companies, a real-estate and diamond ICO, run by businessman Maksim Zaslavskiy blew up in smoke as SEC exposed fraudulent claims and unregistered Securities. But, why does this keep happening?
REcoin and DRC World
Zaslavskiy provided investors with the world’s “First Ever Cryptocurrency Backed by Real Estate” in which he allegedly reinvested investor’s contributions into different properties. The SEC reported that statements made by the CEO about the company having “a team of lawyers, professionals, brokers, and accountants” were entirely false.
The company also claimed that REcoin had raised between $2-4 million, when in fact roughly $300,000 was the actual figure.
DRC World, or Diamond Reserve Club, similarly promised investors access to discounted diamonds if they bought a “membership.” When the SEC reviewed the company, there was no evidence of diamonds being purchased or business operations with diamond dealers record. Despite this, he has continued to generate funds from investors through open solicitations on the subject.
After freezing Zaslavskiy’s assets and companies, the SEC charged him with violations of the antifraud and registration provisions of the federal securities laws. They have also pressed for a complete barring from participation in any future participation in initial coin offerings.
Prime Example: Fraudulent Activity Is Rampant
The case of Zaslavskiy is critical in that it is easy to understand. The owner of two companies offered services for a product, accepted investments for these services and products, and literally had nothing to show for them. Not one diamond, zero real-estate lawyers, nothing. And though this may have been the first time US authorities have filed such charges for an initial coin offering, this variety of fraudulence is absolutely rampant.
It isn’t just the SEC that is circulating signs of concern, even prominent members in the market are concerned that the lack of regulation is going to lead to a massive crash. Despite his best attempts to satirize the staggering value accrued to something taken from a meme, Dogecoin creator Jackson Palmer became a rich man.
With Dogecoin’s market value touching nearly $400 million in 2014, “it became a magnet for greed and attracted a group of scammers and hackers who defrauded investors, hyped fake products, and left many of the currency’s original backers empty-handed.”
The reasoning for China and South Korea’s ban begins making a little bit more sense from this perspective. In an industry that generated $2.1 billion via 140 different ICOs this year and figures showing no sign of stopping (China and Jamie Dimon actually seemed like minor hiccups in hindsight), wouldn’t any fraudulent behavior describe the formation of a bubble reminiscent of 2008? Maybe too extreme, probably not.
Here is a real problem.
Imagine, Zaslavsky takes those funds he earned from DRC World and REcoin and reinvested them in another ICO. Imagine this next ICO is just as shady as the former and shady CEO number two dumps these funds into the next ICO. So on and so forth these funds move down the chain,and none of the respective investors are given any disclosure. Tim Swanson, founder and director of research at Post Oak Labs, calls this “ICO Inception.”
A Call For Due Diligence, Not Regulation
The middle ground between all of this is ultimately simple, common sense. Read the entire white paper a CEO presents, ask critical questions about whether or not an offering is registered (A little hint; it probably isn’t), and ask what the rights are once you own some the companies tokens. In the wild west, kingdoms are erected in a day and lost that very night.
Without even the most basic of safeguards to navigate more than just a few bad apples, it becomes a question of whether you want to learn things the hard way or not. All of the barriers that ICO’s are running into have mostly already existed. They exist so that people like Zaslavskiy can’t run off with your money. So, why let him?