Spotting a Scamcoin: HoweyCoins
Usually we like to dedicate this series of articles to uncovering cryptocurrency scams, or studying scams previously uncovered, in an attempt to not only entertain but educate our readers about the pitfalls of investing in crypto. We take a break from that approach in this article to tell you all about a recent ICO that actually had the nerve to admit it was a scam from the get-go. It’s not just any kind of scam, though – it’s a scam endorsed by the U.S. government – which thankfully has thus far failed to rake in any profit whatsoever. We present to you the unique story of HoweyCoins.
In this special edition of Spotting a Scamcoin we bring to you an interesting tale about the world’s first government-endorsed “non-ICO,” called HoweyCoins. The first thing you need to know about HoweyCoins is that they’re not real. In a rare display of humor, the U.S. Securities and Exchange Commission (SEC, the ones who are also responsible for repeatedly denying approval of a Bitcoin ETF) decided to pitch the idea of a fake ICO advertisement to educate naïve investors about how to avoid falling prey to a fraudulent ICO. The fake ICO page displays all the characteristics of your every-day “too good to be true” ICO, complete with bonus ending countdown timer (which resets to “14 hours 22 days 26 minutes” remaining every time the page is loaded), a whitepaper, an “investment ladder” structure (similar to many Ponzi and Pyramid scheme-type ICOs), a Team Members section and endorsements (from fictional celebrities).
The premise of HoweyCoins (again, not a real coin, if you’ve forgotten already) is that they are bringing cryptocurrency to the entire travel industry – a pretty hot selling point by ICO standards. Without ever going into too much detail in one particular area about how they plan to accomplish their goals (specifics about what type of blockchain technology they plan on using, how they plan to rope in participating partners, where the raised funds are going), they make a brilliant case for why people should purchase their coin. On the “ICO” homepage, they offer the following sales pitch:
“HoweyCoins platform stands as one of the largest cryptocurrency platforms ever built. Recent market surveys expect the luxury travel industry to set a world-record high of over $1.5 trillion this year. The vast majority of these business and vacation transactions require processing, centralized currency and, most importantly, nickel and dime fees that add up to literally billions. HoweyCoins utilize the latest crypto-technology to allow travelers to purchase all segments without these limitations, allowing HoweyCoin users to buy, sell, and trade in a frictionless environment – where they use HoweyCoins to purchase travel OR as a government-backed, freely tradable investment – or both!”
Among some of the (fictional) benefits listed of HoweyCoins are:
they are officially registered with the U.S. government;
they will trade on an SEC-compliant exchange where they can be bought and sold;
they can be used with existing points programs;
they can be exchanged for cryptocurrencies and cash;
they can be spent at any participating airline or hotel;
they can also be redeemed for merchandise.
Sounds pretty great, right? There’s only one problem: you can’t actually purchase HoweyCoins. It’s just not possible. Every time a link is clicked on a button that says “Buy Coins Now!”, the “investor” is taken to a landing page run by the SEC, which explains to those fooled by the fake ICO how they could have potentially just fallen victim to an ICO scam.
So why would the SEC, one of the most serious government institutions in the entire world, pull such a weird prank on unsuspecting website visitors? Their main goal is to help educate naïve investors about how to identify the warning signs of an investment scam, with their main point being how cryptocurrency has actually made this possibility a much more feasible one. If a potential investor does indeed click one of the many “Buy Coins Now!” buttons dispersed across the ICO page, the SEC’s warning page not only tells them that HoweyCoins are fake and that they could have been scammed, but also lays out the “red flags” of a fraudulent investment as presented in their ICO offer, hopefully providing some valuable education to its visitors. The red flags of an ICO scam as defined by the SEC are as follows:
- Claims of high, guaranteed returns. This is pretty much the #1 tactic used by scammers worldwide to lure people into their investment schemes and goes all the way back to Charles Ponzi in the early 1900s. What’s an abnormally high, guaranteed return? As far as traditional money markets are concerned, its good to keep in mind that the most generous of banks pay out 1-3% interest per year on savings accounts, and that the entire stock market averages about a 10% return on investment (ROI) per year. To further put things in perspective, famous con artist Bernie Madoff made his clients only 12% per year — pretty tame compared to HoweyCoin’s advertised 1% daily returns (the equivalent of 3,396% profit per year). While its true that crypto markets are much more lucrative than traditional markets, there’s no such thing as a “guaranteed” profit when it comes to investing in anything.
- Celebrity endorsements. Aside from the fact that the celebrities endorsing HoweyCoin aren’t real people, the SEC reminds would-be investors that “it is never a good idea to make an investment decision just because someone famous says a product or service is a good investment.” Case in point, the founders of an ICO which used Floyd Mayweather and DJ Khaled as celebrity endorsers were indicted on charges of fraud earlier this year, forcing their forfeiture of $90 million in Ethereum raised during the ICO process. The misadventures of Mayweather and Khaled just go to show that even if the celebrities are real, it doesn’t mean that the ICO is, and even if the ICO is real, it doesn’t on any level mean it will be successful just because of a celebrity endorsement.
- Claims of SEC compliance. It is very easy to claim that a cryptocurrency platform or exchange is “SEC compliant,” and almost as easy to verify said claims. The SEC has noted this as a selling point for fraudulent ICO products time and again, and reminds investors that short of the list of securities exchanges which have been registered and approved by the SEC for operation, they do not grade or review the standards of exchanges that specialize in the trading of digital assets. Therefore, there is no seal of approval which can be obtained from the SEC denoting a cryptocurrency or exchange to be “compliant” with its standards.
- Investing with a credit card. As any stock trader knowns, very seldom – if ever – are investments made using a credit card. While it might be possible to purchase bitcoin from a number of online services using one, the SEC states that “most licensed and registered investment firms do not allow their customers to use credit cards to buy investments or to fund an investment account.” Therefore, an ICO that offers the purchase of its products with a credit card is likely to be illegitimate, as the usage of bank funds (or at least a debit card) are almost always preferred (even in the case of legitimate cryptocurrency exchanges).
- Pump and dump scams. Though it should go without saying (yet frequently still needs to be said), ICOs which advertise the fact that they are running a “pump” should be completely avoided, as “pump and dump” scams are a form of securities fraud and entirely illegal. While the “pump” part may sound enticing to some get-rich-quick investor types, in which a company or group organizes an upward price manipulation (usually based on falsehoods), the process relies on there also being a “dump” component, in which coins or tokens are sold to later investors not in on the pump, who often incur an immediate and substantial loss. Basically, an ICO that offers this as part of their “plan” is telling the world 2 things about themselves: 1) they have low moral standards, and 2) they clearly do not mind breaking the law.
HoweyCoins gets its namesake from the Howey Test, developed by the SEC in the 1940s during a court case to decide whether or not an investment did indeed constitute the offering of a security. If it was selling a security, that would mean that the item being sold would have to be registered with the SEC as such, and the person(s) responsible for the sale registered as an exchange. The four criteria of the Howey Test are as follows:
– There is an investment of money;
– There is an expectation of profits;
– The investment of money is in a common enterprise;
– Any profit comes from the efforts of a promoter or third party.
Unfortunately for the Dao, one of the original Ethereum ICOs (and the biggest at its time) which was famously responsible for leading to the fork that brought about both variants of Ethereum (ETH and ETC), the SEC ruled it was a security, and even though it was developed and registered outside of the United States, it still had to comply with criteria put forth by the SEC in order for it to be legally sold within the country. Fortunately for most other cryptocurrencies (like BTC and ETH), the SEC has not ruled them as meeting the criteria, as there is no “expectation of profits” explicitly mentioned by BTC or ETH development teams.
Am I the only one who doesn't feel totally comfortable with a regulatory agency at the federal level deciding to be fun and/or wacky?
— Karate McAwesome (@KarateMc4w350m3) May 16, 2018
Since its launch in May 2018, the HoweyCoins website has received hundreds of thousands of visitors, an astounding number of which believe the ICO is the real deal. All one needs to do to confirm this is to visit the “official” HoweyCoins announcement thread on bitcointalk.org, which currently has over 17,000 views and 900 comments. Many of these comments are by users who are unironically or non-sarcastically offering their support and praises for HoweyCoins, even though the coin is not real and can’t be purchased! Here are a few such comments, which serve to demonstrate the remarkable level of naivete and unawareness exhibited by the average ICO investor:
“Form the name of the coin, I fell in love with the project already. I’m definitely putting my money where my mouth is. Just one question though, is there gonna be a bounty and airdrop campaign??”
“Since HoweyCoins was endorse by the most trusted person in bitcoin forum, I believe that this coin is very legit… and as I read the platform, It is very promising and it is usable to our society for now and nowadays, and I think it’s time dump my holding coins for this to invest.”
“The project HoweyCoins from the very beginning attracted my attention & the prospect of HoweyCoins development is worth looking forward to.”
“What is price now, can i still buy ?”
Clearly a proper understanding of the fundamentals of investing is missing in most of these commenters, who are likely of a young age and have little-to-no investing experience outside of ICOs. If the majority of them can’t even determine for themselves that the ICO is a joke and not real (despite several other commenters chiming in with clues like “THIS COIN IS NOT REAL!”), what is to stop them from being taken from another fake ICO that actually does want to separate them from their money? Unfortunately, there’s not much, and the federal government can only do so much to prevent the prevalence of crypto scams currently in the works. Instead of enacting draconian laws and harsh penalties which could have a side effect of banning cryptocurrency use altogether, the government will just have to let newbie investors overtaken by the glamor and glitz of crypto learn the hard way about how to avoid getting suckered into an ICO con job.