The biggest cryptocurrency scandals of 2018 & what they mean for due diligence

Posted by Andrew Borowiec on Sep 4, 2018 8:30:00 AM

The biggest cryptocurrency scandals of 2018 & what they mean for due diligenceUp until recently, cryptocurrencies have been the rebel-held badlands of the financial world, riddled with criminals, con men and computer hackers. Though regulators across the globe are finally starting to formulate meaningful plans to put an end to this ungovernable “wild west”, the troubles are far from over and as due diligence professionals, we have to be ready to guard against the risks they still pose.

The biggest cryptocurrency scandals of 2018

The biggest hack (so far): In 2017, crypto exchanges recorded approximately $266 million in losses from hacking. The first half of 2018 recorded triple this amount and the biggest of them all was the massive $530 million Coincheck hack which took place in Japan this January. The company attributed the theft to a lack of talented developers on its own staff.

The biggest ICO fraud (so far): March 2018 saw Vietnamese cryptocurrency company Modern Tech launch an ICO for Pincoin, raising $660 million. After this successful ICO launch, the company introduced a second token, Ifan, with which it paid the Pincoin investors. Then the 7 strong team disappeared, leaving an empty office and a website that contained no useful information whatsoever.

Guarding against hacking through due diligence

This is not rocket science stuff, it simply requires you to apply the same rigorous approach you have to cybersecurity on any other type of investment to this one. And then raise your game a little. Ok, well, a lot. The main challenge will be understanding the answers you receive to your questions as they are likely to be highly technical.

Managers specialized in investing in cryptocurrencies are still just managers at the end of the day, for all that the investment landscape they operate in is very new and entirely digital. In fact, it is this very characteristic that should allow you to hold them to even higher standards of preparedness when it comes to cybersecurity.

  • Dig through the documentation: Even the newest ICOs should have a business plan or white paper of some kind that offers enough detail for you to get an initial picture of how they’ll manage the security of their tokens. Your manager ought to have a robust process for vetting and assuring these.
  • Talk to the team: The people behind each new crypto asset are critical to its relative success or failure. Because investments in crypto assets is an entirely digital game, you must expect everyone involved in it, from the fledgling currency or exchange themselves to the managers whose portfolios they sit in, to be supremely clued up when it comes to protecting those assets from hackers.

Guarding against fraud through due diligence

As with hacking, you don’t really need a hugely different approach to guarding against fraud in cryptocurrencies. You just need to apply your existing working methods in a new context and treat all anomalies with suspicion, requiring diligent and comprehensive further investigation.

  • Background checks: The first thing you need to do is to check everyone involved is who they say they are, in the case of endorsers or advisors that they have actually committed to being associated with the project and that no one has any shady dealings in the past or is saying anything that would cause concern where they think they’re not being overheard, for example on social media.
  • Contract terms: Once you’ve established that everyone involved is essentially a legitimate, honest person, you still want to make sure that the legalese is in place to provide protection in the case of fraudulent action by an unconnected third party, for example where criminals take advantage of the anonymous nature of the crypto asset space.

As you see, due diligence for cryptocurrencies isn’t a million miles away from due diligence for anything else, it’s just a matter of digging deep enough and making sure that you really understand the technical side of what is involved well enough to understand the answers provided.

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Tags: Due Diligence, Cryptocurrency Scandals

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