Cryptocurrencies like giant pyramid scheme

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  • In the money: bitcoins sit among twisted copper wiring inside a communications room at an office in this arranged photograph in London in September (Photograph by Chris Ratcliffe/Bloomberg)

    In the money: bitcoins sit among twisted copper wiring inside a communications room at an office in this arranged photograph in London in September (Photograph by Chris Ratcliffe/Bloomberg)


Cryptocurrency. I touched on this one word last week in which I warned of snake oil salesmen. For me I cringe every time I hear the word uttered.

Why? Because once you get past the slick marketing campaigns, the media hype and self-styled investment gurus all telling you to invest now to get giant returns it all looks, sounds and smells like a giant pyramid scheme and is reminiscent of the great California gold rush.

Many commentators have likened it to the tulip bubble of the 1600s or better yet the South Sea Bubble of 1711.

If you have not heard of either then I urge you to look them up — but in short both were examples of speculative buying gone crazy which resulted in the “man on the street” losing his life savings.

Cryptocurrency is dangerous. Don’t take my word for it, rather spend just a few minutes examining the facts and figures and you will get the gist.

Just last week the BBC reported on a Boston College research paper entitled Digital Tulips which found that fewer than half of initial coin offering projects survived more than three months after the completion of their sales of tokens to the public.

Another study published in February 2018 by news.bitcoin.com reported that 46 per cent of ICOs failed in 2017 despite raising over $104 million.

And according to the head of Europol, as much as $5.5 billion is being laundered through cryptocurrencies annually.” (See Cointelegraph.com)

It is true that some people have made millions, but they are as elusive to find as the person who is at the top of a pyramid scheme or a leprechaun in Ireland.

In reality, ICOs are as put by one commentator “a way to raise funds by creating a new form of money from thin air” and when a country like Venezuela launches a cryptocurrency with each “coin” backed by a barrel of oil, it seems some have already scraped, well, the bottom of the barrel.

Meanwhile, despite the major issues with cryptocurrencies, Bermuda is steaming ahead with pronouncements that make it sound as if we will be a world leader in regulating cryptocurrencies.

Even a cursory glance online will demonstrate that 70 or so jurisdictions have already opined, legislated and embraced or banned the use of cryptocurrencies all together.

We certainly are not the first and we definitely won’t be the last in legislating cryptocurrencies.

In many instances governments have banned financial institutions like banks in dealing with cryptocurrencies but have at the same time allowed it to be traded like a commodity such as oil.

That is an “OK” middle ground, provided investors are aware of the huge risks associated with investing in cryptocurrencies.

Even bitcoin admits that in theory a cryptocurrency can become worthless if investor interest dropped off which could massively affect the world economy.

Other countries have not prevented the acceptance of payment in cryptocurrency for goods and services, but this has led to legitimate concerns of the use of cryptocurrency for nefarious purposes like tax evasion, fraud and other criminal activity.

In other words Bermuda is not at the forefront of cryptocurrency business — far from it.

And the danger is that as those who want to play in this sandbox try to play catch up, it is easy to be duped.

As a result of the failure of mainstream financial markets to embrace cryptocurrencies, Standard & Poor’s, a major global ratings agency said that it “doesn’t consider even the biggest cryptocurrencies … to be either a viable means of exchange or an asset class due to their extreme price volatility …”

S&P also labels cryptocurrencies as “speculative instruments which offer … significant risk of loss …” and that “a crypto [currency] downturn would result in major losses for retail investors”.

There is also a clear and present danger of fraud.

For some the anonymity of trading cryptocurrency is attractive, but it leaves the unwary open to massive fraud.

For example in late January 2018, Coincheck, a cryptocurrency exchange was hacked and the thieves took almost $500 million in virtual tokens (see the “The Worst Hack in Cryptocurrency History”).

Around the same time, Bitconnect, a cryptocurrency-lending scheme, shut down its operations and vanished into thin air, leading to a loss of around $250 million (see “Manila Bulletin”).

In February 2018, an Italian crypto exchange called BitGrail reported that it was hit with a hacking attempt that led to a loss of nearly $195 million worth of customers’ virtual tokens.” (see Investopedia).

All of these are huge red flags, red flags that the Bermuda public is not being told about in all the announcements, public meetings and glossy brochures.

Instead jobs are promised for Bermudians which seems to be the catch-all phrase used to stop anyone scratching the surface too much. What jobs will be available for Bermudians in the weird and wonderful world of cryptocurrencies?

According to the cofounder of bitsapphire.com the following: “Multisig and script developers; Microtransaction engineers; JavaScript crypto developers; UX/UI designers specialising in user-only security; crypto asset specific traders; cryptocurrency crowdfunding and consultants;

“Cryptocurrency gambling service operators; specific ASIC chip designers; mining pool operators; TOR market operators; crypto multisig escrow agents; crypto specialising lawyers; cryptocurrency exchange clerks; cryptocurrency ETF operators.

“Cryptocurrency ATM providers and identity verification personnel; cryptocurrency fraud detection experts; bitshares delegates; ripple and bitshares gateway professionals; ripple and bitshares market makers (liquidity providers); cryptocurrency exchange arbitrators.”

And guess what? I am sure that the Department of Workforce Development does not have lots of unemployed TOR market operators or crypto asset specific traders on their books. And I’m quite convinced that our graduating classes of 2018 were not full of aspiring crypto multisig escrow agents or UX/UI designers looking to specialise in user-only security.

As I’ve said before, until our education system is tailored to meet this challenge then the vast majority of required posts will be for non-Bermudians (in the legal sense) in any event. For some, this fact should be enough to make hell freeze over.

So, given the market volatility of cryptocurrency, the potential for theft and fraud, the fact that there is at least a 50 per cent failure rate of ICOs and there is a clear and present danger of cryptocurrencies being used for hiding ill-gotten gains from regulators, criminal investigators and tax authorities, is hitching a ride on the cryptocurrency bandwagon worth it?

I think not, especially if our pension funds find their way into such a speculative investment arena.

Michael Fahy is a former Minister of Home Affairs, Minister of Tourism, Transport and Municipalities, and Junior Minister of Finance under the One Bermuda Alliance government

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Published Jul 17, 2018 at 8:00 am (Updated Jul 20, 2018 at 2:41 pm)

Cryptocurrencies like giant pyramid scheme

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