A Firstline Securities Limited Blog by: Maxine King
“BITCOIN ACCEPTED HERE”. That was the sign on the front door of a popular sports bar in Port of Spain, which my friend and I visited for a Friday evening ‘lime’. I receded and re-read the sign and found it curious that no one paid it any attention; not even my friend who works in the financial sector. I enquired what the procedure was if I wanted to pay via Bitcoin and I was not surprised when the Attendant replied that I had to speak with the Supervisor. My friend said she thought it was some kind of a token for some game.
Well she was not totally wrong about a token, just misguided as to its use and how it is created. As we explore this topic we will see the relevance of tokens within the cryptocurrency space.
Apparently, many exciting, mind-boggling and questionable things are happening in the world of cryptography and crypto economics; whether it is Bitcoin, Ethereum, crypto investing via Initial Coin Offerings (ICOs), crypto labs, blockchain or the myriad of discussions, research and investigations being conducted by sovereigns, corporates and developers alike. These events are not however devoid of many, many fraudulent activities, exposing investors to the risk of loss and global economies to systemic risk. Without caution and controls crypto currencies may assume the alternate image of kleptocurrencies.
REGULATORY RESPONSE TO CRYPTO CURRENCY ACTIVITIES
On Monday September 4th the Chinese government declared Initial Coin Offerings (ICOs) as unapproved illegal, public financing and outlawed these activities, insisting that investors be refunded and threatening penalties for previous and new infractions.
South Korea also announced that it would increase penalties and punishment for offenders caught raising funds via ICOs and its Digital Currency Task force has agreed that regulation on digital currency should be monitored and tightened.
On September 5th Hong Kong’s chief securities regulator sounded a warning on ICOs, remarking that some tokens may constitute securities, in like manner as statements issued by public officials in Canada, Singapore and even the USA.
In late July 2017, the US SEC issued its first warning to all those entrepreneurs who had been publicly raising funds for projects, via cryptocurrency. It published its opinion on the recent ICOs (Initial Coin Offerings), including the DAO Ethereum project, deeming token sales, sale of digital assets and coin offerings to be securities and subject to US law.
In a show of flexing its strong arm, the US authorities also brought down the Russian Exchange BTC, accusing it of money laundering US$4 billion worth of BTC since 2011, along with receiving funds from the dark web and from ransomware.
Although the Bank of Russia does not serve as a financial regulator in Russia, it also published a notice on September 4th, advising that, given its high risks, it was premature to admit cryptocurrencies and other financial instruments associated with cryptocurrencies, into circulation, for organized trade, clearing and settlements infrastructure.
In a recent report from the blockchain tracking company, Chainanalysis, the company estimates that some 10% of funds marked for ICOs are stolen by cyber criminals. They also stated that Ethereum-based cyber crimes have netted these criminals an estimated US$225M. It appears that phishing was the main approach and not high profile hacks.
According to the company, the hackers created websites or social media accounts which mirrored a real ICO project and then solicited prospective investors to send money to their address using these fake accounts. They also used Twitter posts, Slack messages, and targeted email campaigns.
Chainanalysis also advised that cyber criminals were also able to steal money by tapping into project loopholes such as that of the Decentralized Autonomous Organization (DAO) project, which was referred to earlier. Apparently these scam artists were able to exploit a bug in the system that led to the theft of US$55M worth of Ethereum at that time.
At a very recent panel discussion about cyber crime, the US SEC Co- Director, Steven Peikin, also publicly excoriated these ICO scamsters.
A report in the ‘Cryptocoin News’ (CCN), in April of 2017, also refers to an allegation by a South Korean cybersecurity firm that hackers from North Korea were stealing US$90k worth of Bitcoin monthly, during the period 2013 to 2015, as a means of evading sanctions and building their reserves of hard currency. They too used phishing as the hacking tool, targeting several South Korean cryptocurrency exchanges.
These warnings have however not curtailed the trading of Bitcoin on various platforms, including Chinese platforms after reports in the WSJ and Caixin that the People’s Bank of China may ban Chinese cryptocurrency exchanges
In similar fashion as main stream investments, investors in crypto currency continue to employ idiosyncratic investment decisions, some of which are guided by knee jerk reactions to news, predictions and the notions of gains and value creation based on some of the new projects offered.
In excess of US$2bln has already been raised via Initial Coin Offerings, for varying projects. Oblivious to the SEC, no less than 46 such offerings are in funding phase and many more have been announced, even in the face of investigations by the SEC.
Daily Bitcoin and other crypto currency activities continue apace. Whilst the major digital currencies have been posting sharp price volatilities, as can be seen from the Chart above, Bitcoin’s price reflects an uphill climb. Ethereum is still more than 2,000 percent higher than its price in 2016. This is because the Ethereum cryptocurrency experienced a phenomenal price increase in early 2017 due in part from the boom in ICOs.
Statistics provided by Coinmarketcap.com’s website indicates that Bitcoin alone has a market cap of US$71.5Bln, with 16.6M Bitcoins in circulation. This is followed by Ethereum with a market cap of US$28.9bln and a circulating supply of 94.6M. Total Market cap for 1,108 virtual currencies listed was US$151,269,643,116, down by more than US$30bln after hitting a peak of US$179.5bln on Sept 2nd, 2017.
According to this same website, monthly (30 day) volumes of Bitcoin, Ethereum, Bitcoin Cash and Litecoin were recorded at US$66bln, US$29bln, US$20bln and US$14bln respectively, with all but three of the 1,108 virtual currencies listed, recording monthly activity.
These statistics prompt the question about source of funds, and whether the crypto economy is as disruptive as its activities imply.
It is felt that the stock market has seen the largest withdrawal rate since 2004, with shifts away from precious metals holdings in portfolios, as well as private client allocations. Cryptocurrency and cryptography has neither been daunted by the regulatory pronouncements of various countries, nor the reports of fraud and cybercrimes. Blockchain developers continue to focus on improvements in the technology so as to evolve the virtual currency eco-system into activities to facilitate the “internet of value”.
A lot has been introduced by way of information with respect to crypto economics. In the second part of this Blog, we will explore some of the commonly used terms and their meanings.