More than 10% of funds raised by initial coin offering, or almost US$400 million, is lost or stolen in hacker attacks, according to a report on risks in the ICO market by global advisory firm EY.
The report studied 372 ICOs around the world, finding that the offerings raised US$3.7 billion in total, equal to twice the amount of VC investment in blockchain projects. The U.S. is the biggest ICO origination country with over US$1 billion, followed by China and Russia, each with over US$300 million.
Hackers benefit from the "hype, irreversibility of blockchain-based transactions and basic coding errors," according to the report. Funds are misappropriated via substituting project wallet addresses (phishing, site hacking), accessing private keys and stealing funds from wallets, or hacking stock exchanges and wallets.
Regulation is another growing risk faced by investors. "Different countries have varying levels of regulatory strictness for ICOs, leaving vulnerabilities in the market," said the report. "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."
In China, ICOs have been banned by regulators since last September.
The report also found that ICO volumes have been declining since mid 2017. Only 25% of projects last November were able to reach fundraising goals, compared with 90% last June.
Above all, token valuations are driven by "Fear of Missing Out," without any connection to market fundamentals, EY warned. The report noted that ICOs are typically supported only by a white paper that describes the planned technology and a small piece of software that governs how to use, issue and manage the tokens.
“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," said Paul Brody, global innovation blockchain leader at EY. "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.”