Risks

For organizations and investors

  1. The lack of a due diligence obligation to evaluate the organization's assets before investing.
  2. The smart contracts still have some vulnerabilities which can unleash unexpected asset transfers for example. Flaws in these smart contracts can cause unchecked withdrawals.
  3. There is still an uncertain basis for token's valuation. Because of that, buyers might value a token considering expected resale profits instead of its underlying economic utility. Moreover, the first investors can profit primarily with the capital inflow generated by new investors, which can be dangerously close to a pyramid scheme.
  4. Many investors interested in purchasing ICOs are not familiar with the blockchain technology and this can make them more vulnerable. Also, those buyers can easily lose their keys generated by the system to access their accounts, which are necessary to access the tokens, and when a private key is lost the user can't recover her tokens. Finally, users can be more vulnerable to phishing scams, where the scammer impersonates the organization. If the user is caught in the scam she can't reverse the payment that was already done.

For the market

  1. The cryptocurrency market can be manipulated in some ways. For example, the token holder can change its price by releasing mislead information, a practice known as pumping and dumping; another practice is called spoofing, where traders place illegitimate orders to induce other users to buy or sell tokens and then cancel the orders submitted before their execution; also, some networks give users the possibility to make their transactions faster than others by paying higher fees, practice known as front running.
  2. Because of the underlying market manipulation, there is a risk of token's high price volatility.
  3. When large ICO orders are placed in the network, the token's transfer can suffer delays.
  4. It can be a challenge for organizations that issue ICOs to accommodate all contributors and give them assurance about the percentage of tokens that will be received for a given contribution. The token distribution mechanisms can be ineffective sometimes.

Compliance and regulatory risks

  1. Some organizations allow users to be completely anonymous, such as Monero or ZCash. Requirements associated with Know your customer process adopted by regular companies, or with Anti Money Laundering and Anti-Terrorism Financing regulations are difficult to implement to the organizations that issue ICOs.
  2. Because there is a lack of formal regulation in many countries about ICO, token users might avoid paying taxes, and the financial authorities will have a harder time to prove the tax evasion without official record keepings.
  3. The uncertain regulatory schema can potentially enable criminal practices such as the aforementioned (money laundering, terrorism financing).