In my letter ‘Virtual currencies and vigilance’ (January 2, 2018) I had concluded: “My view is a definite no to cryptocurrencies but by all means let us explore the potential introduction of blockchain technology with adequate safeguards.”
The more I read on both subjects makes me even more convinced of the above-mentioned assessment. This newspaper reported (January 1) that, according to research by Ernst & Young, more than 10 per cent of funds raised through ‘initial coin offerings’ (ICOs) are lost or stolen in hacker attacks.
This research showed that in ICOs companies raise money to build new technology platforms or to fund businesses that use cryptocurrencies (also called tokens) and blockchain, the software that underpins them.
This is the distinct difference that needs to be made between blockchain and cryptocurrencies. While the former is a useful software tool that can be used to support not only financial products but a host of other purposes (e.g. retaining medical or other records), the latter are fraught with risks and have been referred to by one of the world’s most successful fund investment managers as a “lottery ticket”.
Among the first virtual currencies to appear on the scene early in 2014 was the Bitcoin. Its price rose to the $1,000 range by mid-2017 when a lot of hype led many to believe that this was a way of making easy money and jumped on the bandwagon.
This led to Bitcoins reaching astronomical heights ($17,500) about this time last year. Even at $15,000 gamblers were still piling in until the price crashed to the current level of around $3,500. Thus, the gamble paid off for those who bought in 2014 and still held on even until now but just think of those who bought at $15,000 – or even higher – and are now showing a loss equivalent to some four times of the current value of Bitcoins.
Virtual currency peaked more than a year ago; there are still people trying to build businesses on it
The risks attached to virtual currencies have been highlighted by various financial analysts in leading newspapers and financial journals published in London and New York. I quote some comments which I have gleaned over the past couple of years.
US authorities said that one- third of the world’s Bitcoin exchanges were hacked between 2009 and 2015. A Briton was accused of a $30 million crypto fraud. The 30-year-old founder of Canada’s largest cryptocurrency exchange died suddenly last December and took with him the password which allegedly was known to him only and no other.
Thus the owners of some $200 million in their ‘virtual wallets’ have no means of withdrawing their money.
It was reported that the combined market value of the world’s 1,500 plus cryptocurrencies plunged from $830 billion to $424 billion in January 2018 - $400 billion (48 per cent) in virtual wealth swept away in just one month.
A Visa executive made one of the most outspoken attacks from the financial establishment on the Bitcoin craze saying that cryptocurrency was used by “every crook and politician” and by “speculators who had no clue”.
In June 2018 Japan’s financial regulator cracked down on cryptocurrency exchanges after a $530 million theft of digital money from Coincheck, one of Japan’s biggest exchanges. The regulator also ordered all exchanges to make improvements to lax measures on money laundering.
Although the virtual currency phenomenon peaked more than a year ago, there are still people trying to build businesses on it and punters prepared to help them.
The UK’s Financial Conduct Authority stated recently that investors in cryptocurrencies such as Bitcoin and Ether (another popular exchange) tend to have a ‘get rich quick’ attitude and invest only because they fear they will miss out on the next big thing.
A survey revealed that 45 per cent had first heard of the investments through online or traditional news outlets while 36 per cent had been encouraged by friends, social media connections or work colleagues.
Here in Malta we pride ourselves with having a robust legislative framework regulating virtual currencies and ICOs. However strong and comprehensive such framework may be, experience elsewhere has shown that anybody with criminal intentions can find a way of acting fraudulently. Time will tell.
What is essential, to my mind, is for the MFSA and the Central Bank of Malta to keep hammering on the risks attached to virtual currencies. The MFSA had issued a stark warning way back in the last quarter of 2017 but nothing else since then.
One cannot deny that some Maltese thrive on their gambling instinct and can easily be misled into thinking that making money on virtual currencies is even more likely to be fruitful than e-gaming or trying their luck at one of the local casinos.
Last July a leading licensed local investment services company launched what was claimed to be the first cryptocurrency trading platform. The local print media has been replete with articles, which subtly promoted virtual currencies.
Now even members of a popular social club in Sliema have been invited to attend a seminar entitled ‘The power of owning cryptocurrency and Bitcoin’.
The foreign promoters were said to be from three separate international companies with no offices in Malta. One is prompted to ask if these virtual currency promoters are properly licensed in terms of law.
Anthony Curmi is a former bank executive.
This is a Times of Malta print opinion piece