Canadian Markets closed

'Wolf of Wall Street' warns raising money through ICOs is the 'biggest scam ever'

Sam Meredith
Jordan Belfort has urged investors to dismiss the current craze of Initial Coin Offerings (ICOs), calling them the "biggest scam ever."

Jordan Belfort, the infamous penny-stock broker formerly known as the "Wolf of Wall Street," has urged investors to dismiss the current craze of Initial Coin Offerings (ICOs), calling them the "biggest scam ever."

In an interview with The Financial Times published Sunday, Belfort warned promoters of ICOs were "perpetuating a massive scam of the highest order on everyone."

ICOs have become a primary means of fundraising for projects built on blockchain technology. Companies create and issue digital tokens that can be used to pay for goods and services on their platform or stashed away as an investment. But investors don't typically get equity stakes in a company like they do with an initial public offering (IPO). The projects or firms put out white papers describing the platform, software or product they're trying to build, and then people buy those tokens using widely-accepted cryptocurrencies (like bitcoin and ethereum) or fiat currencies like the U.S. dollar.

All of that is done without any regulatory oversight, and both regulators and members of the financial industry have expressed concern about the potential for money laundering and fraudulent activities.

In September, China's central bank banned ICO funding amid concerns that the exercise may involve financial scams while British regulators have said investors should be prepared for the value of their tokens to drop to zero.


'ICO funding far worse than anything I was ever doing'

Belfort, who spent 22 months in jail after pleading guilty to securities fraud and money laundering, said while most investors probably did not have bad intentions with ICOs, it would only take a small proportion of people trying to scam the others for it to become a "disaster".

"It is the biggest scam ever, such a huge gigantic scam that's going to blow up in so many people's faces. It's far worse than anything I was ever doing," Belfort told the Financial Times.

Digital currencies are pseudonymous, decentralized and encrypted, making it harder to track each of the transactions made, and the individuals behind them. Theoretically, anyone with an internet connection and a digital wallet can be part of a coin sale event. That, many worry, leaves plenty of room for people to launder money or engage in other fraudulent behaviors — especially in countries where corruption is rampant.

However, start-up companies argue ICO funding is a legitimate method of raising money and it is representative of a broad grassroots movement to unsettle big banks and venture funds. A frequent refrain from bitcoin enthusiasts and cryptocurrency stakeholders is that the blockchain system is actually problematic for would-be launderers.

That is, every transaction of a blockchain-based token is permanently recorded on a publicly view-able digital ledger. Although the parties associated with each exchange are hidden behind pseudonymous IDs, it is possible for investigators to track down who has done what if their activities go through a cooperating exchange.

So far this year, ICOs have raised more than $3 billion, according to Coinschedule.com.

Read the Financial Times full article here.

— CNBC's Saheli Roy Choudhury contributed to this report.