Looking into the Crystal Ball
Following the FTX scandal will Cryptocurrencies be subject to more rules and regulations?
If Cryptocurrencies are subject to more rules and regulations, will they have a future?
Will the original dream or idea still be around?
What could be the role of a Cryptocurrency such as Bitcoin?
If you are reading this Blog, then it is safe to say you are interested in Cryptocurrencies. Think back to 2009, when the first Cryptocurrency in the form of Bitcoin came into being. Since 2009, there has been an incredible rise in the interest in Cryptocurrency Markets, the volume traded and, in some cases, but not all, the value of the individual coins.
While it is difficult to pin point a singular specific reason, the most common quoted is a lack of trust in a governments’ traditional role as an issuer of “fiat money.” As we all know the Cryptocurrency World was stunned, rocked, shaken by the FTX scandal or presumed, accused fraud in November 2023.
In the aftermath of the FTX scandal, the Cryptocurrency Industry and its investors are quickly learning about another important role a Federal Government, which is regulating financial markets and securities trading.
What is a Cryptocurrency?
More importantly what is the role, mandate, or purpose of a Cryptocurrency?
Typically, a Cryptocurrency is described as having three possible roles.
- A Currency
- A Store Of Value
- A Security
Cryptocurrency as a Currency
A Cryptocurrency such as BITCOIN can be a way to trade, negotiate, exchange, or barter. The name makes it sound like a money, but it is not Money, the terms used such as Crypto Wallet as possibility intended to make it sound like Fiat Money, a medium of exchange.
Then again if two people agree, anything can be used as an exchange or “money”. If the two parties agree that bananas or pineapples can exchange in barter, so be it.
Yes, Cryptocurrencies are a form of money, used in exchanged again if the two parties agree the exchange price can be in Bitcoin. This is the fundamental role of the USD.
Then again is the US Federal Government about let another currency compete with the USD by being regulated in the US. I for one cannot imagine the conversation, and I cannot see that the proposal based on the perceived dislike of the USD because of all the controls and regulations.
So, in the future the question is will a Cryptocurrency act to buy and sell things? The answer is probably yes, but there will be more scrutiny.
A Store Of Value
Gold has a unique position as an asset, the world’s major Central Banks will hold gold as a reserve asset to establish the value or reliability of the Fiat Currency under their mandate. The Federal Reserve and the USD for example. The Currency being backed by Gold reserves, provide a buffer against economic and financial instability.
Of course, this reinforces the perception of gold as a safe and reliable store of value in times of price instability being either inflation or deflation. Periods of price instability undermine the value of fiat currencies. Gold is often considered a hedge against inflation because it has historically retained its value over time.
Gold is a physical asset, more importantly the value of a Gold Bar, a Good London Delivery (GLD) gold bar is established, to meet the required specifications set by the London Bullion Market Association (LBMA). The GLD bars weigh 12.5 kilograms and are assayed to be 99.5% pure Gold. The GLD Bars are produced by a number of qualified LBMA Gold refineries, they are registered and stamped.
Therefore, GLD bars are traded on the London Bullion Market in international trade and investment and they are recognized as being of an established quality and purity.
Any other Gold Bar must be assayed.
Therefore, the question is, can a Cryptocurrency establish the same authority to Gold?
It is true that a Cryptocurrency such as Bitcoin has similar characteristics to Gold. Cryptocurrencies are not tied to any currency or government.
Can the value of a Cryptocurrency be established?
Are the value of Cryptocurrencies subject to the same inflationary pressures as fiat currencies?
Investors view gold as a safe haven asset that can protect their wealth during times of price instability, can a coin such as Bitcoin be viewed this way?
Over the past two years, there has been two very distinct periods of inflation, in 2021 a period of Low Inflation and 2022 a period of High Inflation. Let’s look at a quick regression between the Price of an Exchange Traded Fund (ETF) and the Price of Gold analysis using Data from Barchart. A regression analysis of the daily closing prices of Bitcoin and the SPDR Gold ETF for the past two years gave an R-Squared value of 0.3, the correlation is very low.
It was said that CRYPTO would behave like GOLD, which is a store of value, during times of high inflation, when the first true test came, Bitcoin failed miserably.
A Security
So, how will Cryptocurrencies be regulated?
It will be regulated as a security because it clearly fits the Howey Case from 1946: Determining an Investment Contract: Invests Money, Common Enterprise, an Investor Expects Profit.
So Cryptocurrencies will be regulated as a security, but it is not a traditional security because it is not an equity or a bond, there are no assets except for Stablecoins. This gives an indication as to the future direction.
By the way, we should not comingle Cryptocurrencies with Blockchain Technology, they are not the same. Blockchain is a distributed ledger technology (DLT) made up of a growing list of blocks (records) that are securely linked together using cryptography and can work with or without a Cryptocurrency. Blockchain under various applications has a future.
Crypto Exchanges are not Exchanges
An Exchange in the U.S. is a regulated entity and they are regulated by the CFTC and the SEC. The issue with FTX was the language used by people who should know better, FTX was never an Exchange, not even a Broker Dealer, it was simply a web-based Platforms. FTX was not regulated exchanges like the NYSE or the CME in Chicago. But being called an Exchange gave the FTX platform a sense of respectability by making it look, or spoken of like they were a regulated exchange. In the FTX structure, they were nowhere near close to what could be remotely considered as a regulated Exchange. In fact, the roles of a normal regulated exchange were far too concentrated at FTX and not noticeable level of Risk Management.
Industry Participants, Venture Capital Groups
So how did some of the major venture capital groups include Sequoia, Tiger Global, Temasek, Lightspeed Venture Partners, and Third Point Ventures, just to name a few, get involved. Some, if not all, of these groups took part in the capital raising, the 2021 capital raising $1 billion. They made big investments, in some cases $200 million or more, but they only made up a small part of the Total Asset Under Management.
Some of the VC funds ARE focused on FinTech, which Crypto is a part of, probably invested around about 2.5% of the AuM of these FUNDS. The mandate of the Venture Capital groups is to get involved with new businesses, new technologies and the companies behind them. Venture Capital groups then often then bring order to what could be a chaotic situation.
The bottom line is to do your own Due Diligence, your Investment Mandate is likely to be very different to a Venture Capital group.
Regulation in the U.S
In the wake of FTX, people have been pointing the finger at the Regulators in the U.S, and this understandable. So, Let’s look at the most important regulatory bodies or agencies in the United States.
SEC
The US Securities and Exchange Commission, oversees and is responsible for most of the rules for public capital markets in the US.
CFTC
The Commodity Futures Trading Commission, is in charge of regulating the derivatives markets in the United States. This includes futures, swaps, and options.
FTC
The Federal Trade Commission, is to protect people from misleading or unfair business practices and unfair ways to compete.
OCC
The Office of the Comptroller of the Currency. The OCC Charter is to regulate all national banks, federal savings associations, and federal branches and agencies of foreign banks.
IRS
Internal Revenue Service. The role of the IRS’s is to help the vast majority of taxpayers who follow the law. While making sure that the few who don’t pay, do in fact pay their fair share.
FinCEN
The Financial Crimes Enforcement Network collects and analyses information about financial transactions in order to stop money laundering, financing of terrorism, and other financial crimes, both in the US and abroad.
Cryptocurrencies Are Securities
The SEC is going to be the lead regulator in charge of making sure that cryptocurrency markets follow all of the financial rules that the SEC is in charge of. Over 95% of all cryptocurrency trading happens on the top five platforms. They should have to register with the SEC, if not already done so. The SEC is in the process of employing more Officers and forming the Crypto Assets and Cyber Unit.
To be clear, the SEC is fine with crypto businesses that follow securities laws.
Crypto platforms have always been hard to understand, which has let their owners make money without being watched or held accountable by Governments. This is changing. People have accused many platforms of Money Laundering, front running, and freezing their customers’ balances. So not a good place to start. The SEC’s push for enforcement will have a big effect on how cryptocurrency markets work and because tokens are sold as investments, they are governed by securities laws. The SEC’s actions have been against Initial Coin Offerings or ICOs, and the new types of Blockchain tokens have appeared, such as decentralized finance (DeFi) and nonfungible tokens (NFTs). Many of the new projects, think to get around securities laws because the tokens represent collectibles like in-game items or digital artworks.
No matter what the Token stands for, securities laws will apply to these Tokens, if Tokens are bought as an investment, which they are. Even though some NFTs are sold as collectibles, regulators will still treat them as securities.
Crypto platforms work the same way that regulated platforms have always worked. So, investors should feel the same level of security.
If a cryptocurrency exchange signed up with the SEC, it will have to use technology to make sure that its order books could be checked and for the market not to be manipulated, following strict rules about how orders are filled.
Then there are Stablecoins, which are Tokens whose value is tied to the dollar or another fiat currency. Stablecoin keep a lot of cash, treasuries, or other low-risk assets on hand, to back up their peg.
What will happen to the original Cryptocurrency dream?
More importantly, will this be the end of Cryptocurrency Scams?
Let’s take a look There are many Scams involving investments in cryptocurrencies and different ways to steal cryptocurrency.
Here are NINE of the most common.
Fake Websites
Scammers sometimes make fake platforms for trading cryptocurrency or fake versions of official cryptocurrency wallets to trick people who don’t know what’s going on. Usually, they do this by using a slightly different domain name than the official site.
Most fake sites for cryptocurrency work in one of two ways:
Phishing sites: The objective of the Scammers is to end up with your information, including your crypto wallet’s password and recovery phrase and other financial information.
Or theft: At first, the site might let you take out a small amount of money. If it looks like your investments are going well, you might decide to put more money into the site. But when you try to get your money back, the site blocks access.
Email Scams
Online wallet information is often the target of phishing scams that use crypto. Scammers go after the private keys that are needed to access the Tokens in a crypto wallet. Once the hackers have this information, they steal the cryptocurrency that is in those wallets.
Pump-and-Dump Schemes
Fraudsters do this by getting people excited about a certain coin or token through an email blast or social media sites like Twitter, Facebook, or Instagram. Investors buy the coins so they don’t miss out, driving up the price. After successfully driving up the price, the scammers sell their assets, which causes a crash as the value of the Coin to drop like a stone.
False Apps
Scammers also often use fake apps that can be downloaded from Google Play and the Apple App Store to trick people who want to invest in cryptocurrencies. Both Google and Apple move fast to get rid of them.
Fraudulent Celebrity Endorsements
Scammers who try to steal cryptocurrency may pretend to be celebrities, businesspeople, or influential people or say that they have their support. Sometimes, this means selling fake Cryptocurrencies to investors.
Freebies
Scammers promise to match or multiply the cryptocurrency sent to them in what is called a “giveaway scam.” Clever messages from what looks like a real social media account can make people feel like they can trust and act quickly.
Blackmail And Extortion
Scammers also use blackmail as a method. They send emails claiming to have a record of a potential embarrassing activity of the user and threatening to reveal this information unless the user shares private keys or sends Cryptocurrency to the scammer.
Cloud Mining
Cloud mining is the practice of renting mining hardware from a company in exchange for a fixed fee and or a share of the money you supposedly will make. In theory, this lets people mine from far away without having to buy expensive mining gear. On the other hand, many cloud mining companies are scams or you make much less than was expected.
Initial Coin Offerings (ICOS)
Customers are usually promised a discount on the new Cryptocurrency if they send active cryptocurrencies like bitcoin or another popular cryptocurrency. Several ICOs have turned out to be scams, with criminals going to great lengths to trick investors.
The Future
New regulation let’s see.
Most commentators believe that FTX could have been avoided.
Clearly under increased scrutiny and governance, the original crypto dream will likely be vastly different.
The SEC made it clear that it is willing to work with people in the industry who are willing to work with the SEC. The goal is to give crypto investors the same protections that have helped make the US Securities Markets, the Equity Markets and Fixed Income markets so successful.
The message is starting to get through, as more Cryptocurrency companies are cooperating with the regulators. The various Tokens, Cryptocurrencies’ and Blockchain must carve out their value added. If they do, they will have a future.
