ASIC recently announced that it has shut down several Initial Coin Offerings (ICOs) for misleading or deceptive statements in their marketing and operation of unlicensed managed investment schemes. This once again casts the spotlight on the unregulated nature of the Cryptocurrency industry and the need for investor protection.
Cryptocurrencies and, by association with the larger category of digital assets that they enable and are often confused with, continue to be viewed with suspicion by much of the mainstream public. This is despite, or in some cases as a result of, their explosion into the public consciousness in the last year. The reasons for this are varied.
The early association with nefarious activity has probably cast the darkest and most dogged shadow, one which continues to plague its legacy despite that being increasingly a historical issue. A 2018 Bloomberg report states that criminal activity accounts for only 10% of Bitcoin transactions. In contrast, a study by The United Nations Office on Drugs and Crime (UNODC in 2009 estimated that criminal activity amounted to 3.6% of Global GDP with 1.6 Trillion USD of that being laundered. It is worth noting that the entire market capital of all Cryptocurrencies currently is only about $200 Billion USD.
The very rapid rise in Cryptocurrency prices at the end of 2017 and then a very dramatic slump which has persisted across 2018 raised new concerns. That 75% drop in the total market capital compared to its peak at the start of the year, catalysed by speculative investors panic selling or exiting the market after making quick gains, had significant ramifications for confidence in the industry. Investors who got in at the crest of the wave made huge losses, the dramatic dip intensified talk of the industry being a “bubble” and the financial services industry saw further reason to shy away. Those in the industry though, will point to the fact that it was speculative investment and not the underlying technology that should be held culpable and the small market capitalisation which makes it so vulnerable to volatility. In addition, this industry remains very much in its infancy and as such lacking the solid foundations which would allow for a quick bounce back. For context, on the 26th of July this year, Facebook lost $119 Billion USD in a single day without similar rhetoric following it.
And then there have been scams capitalising on the anonymity the industry offers, hacks preying on the infancy of the infrastructure built around the technology, and the murmurings of market manipulation. All issues of concern but again not deficits of the technology itself but of the ecosystem building itself around it.
However, a more pertinent and relevant reason for oversight of this space has been the rampant and long unregulated rise of the ICO phenomenon. Initial Coin Offerings, the Cryptocurrency equivalent of Initial Public Offerings, grew in prominence in 2017 as projects raised huge sums of money based in some cases on little more than a whitepaper and an idea. The unregulated nature of this market reduced the impedance to capital rising by allowing crowd sourcing of capital as well as allowing it to ride on the coat-tails of a technology that showed the promise to revolutionise the way industries and business would operate.
Much of that promise remains valid. The technology underpinning many of these ICO projects, as well as the innovations they bring to the fore, are likely to continue to develop and cement their place in the future. The capital raise model pioneered by ICOs, based on decentralisation and the efficiency of smart contracts will likely evolve into a model that the future of business will be built on.
However, the potential of these technologies and innovations are likely to be curtailed by rogue projects without appropriate investor protections and/or individuals seeking to capitalise on the promise of the industry to raise capital for unvalidated ventures. This would be damaging to market sentiment to an extent that it would hamper the growth of the industry.
The industry then, rather than view the greater scrutiny by ASIC with pessimism, should instead welcome the move as a means of separating the wheat from the chaff, with a long term view towards increased legitimacy within a young, growing movement. These are but the early steps on the long road towards assimilation with, and adoption by, the greater financial services industry.
Dr Prash P is the CEO of Caleb & Brown, a Cryptocurrency Brokerage who serve to bridge the gap between Cryptocurrencies and the financial services industry. They were awarded Fintech Startup of the Year 2018 by the Stockbroker and Financial Advisor’s Association.