A recent Reuters special report on an imperiled cryptocurrency venture shines a harsh light on some of the many risks and the paucity of regulatory oversight in cryptocurrencies and Initial Coin Offerings (ICOs) (http://dtn.fm/Jvc7A). Cryptocurrencies are digital mediums of exchange that function through extremely complex code systems called blockchain technology that encrypt sensitive data transfers, essentially creating a public ledger maintained by a network of computers. Blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block contains a link to a previous block, plus a timestamp and transaction data. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks. The decentralized digital ledger records transactions across an entire network of computers, so transaction records can’t be altered without the verification of the entire network.
Blockchain technology applications are being tested by retailers, food suppliers and other businesses as a way to make record-keeping simpler and cheaper. Over the last year, blockchain start-ups have been raising cash by creating and selling their own currencies or tokens in unregulated offerings that bypass banks and venture capital firms. In the first nine months of 2017, over $2.2 billion was raised in ICOs.
The first and most recognized cryptocurrency, bitcoin, has given rise to the rash of ICOs. Bitcoin’s meteoric roller coaster rise from $0.08 in 2010 to over $5,900.00 recently has helped fuel the rush to evermore ICOs. Other cryptocurrencies began to emerge within a year of bitcoin’s birth.
Nearly half of respondents to a recent CNBC survey said the price of bitcoin could be heading to over $10,000, despite trading at an all-time high and having no government backing or underlying assets. JPMorgan CEO Jamie Dimon has called bitcoin a ‘fraud’ that will eventually blow up and likened bitcoin mania as reminiscent of the tulip bulb craze in the 17th century. “It’s worse than tulip bulbs. It’s just not a real thing, eventually it will be closed,” Dimon was quoted as saying at the Delivering Alpha conference. While Dimon was saying that, JPMorgan, among other financial institutions, was actively looking into and testing blockchain technology for its potential to help cut the costs of cumbersome back-office processes, such as the clearing and settlement of securities trades.
Virtually unregulated, cryptocurrency exchanges have become magnets for fraud and deception. More than 980,000 bitcoin, worth over $5 billion today, have been stolen since 2011. Blockchain start-ups have been raising cash by creating and selling their own currencies or tokens in unregulated offerings that bypass banks or regulatory review. In the U.S., investments in assets such as company shares and other securities are regulated by the Securities and Exchange Commission. The SEC has been studying ICOs and, in July, issued an investor bulletin that warned: “Depending on the facts and circumstances of each individual ICO, the virtual coins or tokens that are offered or sold may be securities.”
Tezos, the troubled cryptocurrency in the Reuters article, is similar to bitcoin and other blockchain platforms. Most software platforms provide for automated updates, but blockchains remain notable exceptions because update procedures are typically centralized. Tezos touts itself as the first blockchain platform to allow for decentralized and automated upgrades, making it more secure.
However, all parties involved in the Tezos ICO are in the midst of an international acrimonious dispute, and the $230 million coin offering is in limbo. Investors in Tezos have no recourse and can only hope the dispute is amicably resolved and the “Tezzies” start trading. Buyer beware…
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