Market Watch: A Look Into The Credence Of Cryptocurrency
Cryptocurrencies have changed the way people interact with the capital market, garnering attention from companies and governments alike. This fast-moving market has sparked mainstream interest in crypto-asset operations such as blockchain security, cryptocurrency mining and cryptocurrency trades and investments.
However, there are those who hold reservations on how these digital currencies oppose the institutional methods of finance. We looked into what cryptocurrencies can offer and any caveats you should be aware of.
For those unfamiliar with cryptocurrencies, it all began in 2009 with the creation of bitcoin. A person or a group under the alias Satoshi Nakamoto, the identity of which has never been solved, created bitcoin as a digital form of currency to be exchanged directly between people without the use of banks, brokers, dealers or traders. It’s a decentralized system without any ties to banks or countries and, for a time, was left completely unregulated.
The name “cryptocurrencies” comes from the cryptographic techniques the software uses to prevent fraud. The software runs on an interlinked network of computers that record the transactions in real-time on distributed ledger technology, or blockchains. These blockchains are managed by the network of computers which is viewable to the public, meaning no singular entity controls the technology – a feature many users find more efficient than what traditional financial institutions do. The transactions are also made anonymously since user information is kept private.
People can buy and sell bitcoins by getting a digital wallet, or an online account, from companies that exchange bitcoins and other cryptocurrencies. A popular exchange company is Coinbase, which oversees the account on your behalf. Other ways to get bitcoins are by trading with other people through apps or by making your own bitcoins through “mining,” which is a process that involves solving sets of computer codes with the bitcoin software. Because of the openness of the software, its able to be copied and changed by other parties interested in creating their own digital currency.
As mentioned before, blockchain technology is a favored feature of cryptocurrencies as it relies on complex coding. The blockchain manages countless transactions, piling them into a database that cannot be altered once recorded. This single public ledger substantiates competition with stock exchanges, clearing houses and large trading houses as it doesn’t charge users any fee for its performance. Blockchains allow users to make exchanges with strangers by trusting in the efficiency of the technology and its verification by fellow users who can view the information openly. However, this trust is still susceptible to exploitation especially when it comes to purchases of initial coin offerings or ICOs for blockchain-based companies.
To summarize, an ICO is a form of company fundraising that uses cryptocurrencies rather than traditional capital markets. These companies are typically in the tech industry or are startups in the cryptocurrency market. They use cryptocurrency software to create their own respective currency or tokens that can be used specifically with their services. In some cases, these companies sell their tokens like IPO securities, allowing people to invest by purchasing shares in the company.
According to a WSJ report, the amount of money companies raised from ICOs passed $4 billion by the end of last year. Although anti-money-laundering laws still apply to companies, the U.S. Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, has established expansive regulations for digital currencies applicable to certain activities of token-issuing companies. Despite this, Dan Wager, LexisNexis Risk Solutions’ vice president of financial crime compliance, has noted that there is still non-transparency with ICOs on the manipulation and transaction tracking of their tokens which has the potential to abuse purchasers’ trust.
Just last month, the U.S. Commodity Futures Trading Commission filed lawsuits against Patrick K. McDonnell of CabbageTech and Coin Drop Markets, and Dillon M. Dean of the Entrepreneurs Headquarters Limited for deceiving customers over how their purchases were to be used. McDonnell’s companies promised to trade and give advice on bitcoin, but it was an alleged front for McDonnell to abscond with the funds he garnered from the ICOs.
In Dean’s case, his company was alleged to be running a “Ponzi scheme” in which he misappropriated funds from customer to customer to make it seem as if they were receiving positive returns on their ICO investments. However, these are just the latest of discovered scams in ICO cryptocurrency purchases. Late last year, the startup Confido also absconded with funds from their customers ICO purchases valued at $375,000 – then disappeared thereafter.
It’s because of scams that abuse customers trust that many banks and governments are quite reserved when it comes to cryptocurrencies, if they don’t flat out refuse to interact with it. Earlier this month, Citigroup, JPMorgan Chase and Bank of America announced that they will apply a global restriction on their credit card holders from purchasing cryptocurrencies. Their concerns lie with the losses their customers may suffer from their investments with poor-performing cryptocurrencies.
They’re also concerned with losses from fraudulent purchases, which are contested by customers against the vendor behind the transaction, but because of blockchains, there is no way for them to find and hold those vendors accountable. In either case of loss, each bank’s respective capital will undergo heavy losses due to the anonymity behind the cryptocurrency market.
These banks are not alone in their wariness of cryptocurrency market activity. Facebook announced back in January that they were banning ads associated with cryptocurrencies, including ICOs, to protect users from potential scams that seek to deceive them of their money. Rob Leathern, Facebook product management director, reported to WSJ that their interest lies with genuine companies who their users can trust, but conceded that they would revisit the ban in the future once they review the cryptocurrency industry.
Nevertheless, cryptocurrencies have found approval with companies that go well with the digital currencies market. Robinhood, an investment app, announced at the end of last month they would support stocks in cryptocurrencies. The app has marketed itself to millennials as a non-traditional means of investment, and adequately finds that its mission falls in line with the appeal for digital currencies. Co-founder and CEO of Robinhood Baiju Bhatt stated cryptocurrencies are “a shift from institutions back to the people.” Starting with Bitcoin and Ethereum in a few states until eventually more cryptocurrencies will be added and users nationwide will be able to trade.
Other companies have created niche services that allow them to also enter the crypto-asset market. Line, a popular messaging app based in Japan, announced in January that it would add cryptocurrencies exchange to their platform. This feature will be in addition to their already established Line Pay wallet service. The company stated it has applied for a license with Japan's financial regulator, which recognizes the value of cryptocurrencies.
With the number of cryptocurrencies alternative to bitcoin growing, more attention will be placed on how to interact with this kind of capital market. The crypto-asset market will be revered by some, disparaged by others and seen as formidable by most. For someone just becoming interested in the potential of this kind of exchange, its advised that you remain openminded while proceeding with caution.