By Vanessa Rousso
Cryptocurrency—a concept that, despite its recent popularity, remains obscure and enigmatic to the vast majority—might as well have been called cryptic currency. Indeed, Investopedia defines cryptocurrency as, “a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.”
However, this definition glosses over one of the major risks inherent in a currency that—through immunity to government interference—is largely unregulated (and thus unable to protect consumers with quality-control standards, regulations to avoid pump-and-dump schemes, and measures to protect from outright fraud). Furthermore, while this definition also points out that this currency is difficult to counterfeit, it fails to highlight the countervailing factor that cryptocurrencies remain highly vulnerable to theft from hackers (most recently, one of Japan’s largest cryptocurrency exchanges has revealed that it’s lost nearly $400 million in a security breach).
Although, the “world of virtual currencies is getting very crowded with so-called altcoins,” the undisputed market leader is, by a wide margin, ‘Bitcoin’—which is the subject of another blog and can be read here: Investors Must Be Wary of Bitcoin Schemes. Ultimately, love them or hate them, cryptocurrencies are here to stay.
Those wanting to jump into the cryptocurrency game, found themselves in need of a way to raise funds for their ventures while remaining free from regulation—and so the Initial Coin Offering (“ICO”) was born. Investopedia explains, “An Initial Coin Offering (ICO) is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, but usually for Bitcoin.”
An ICO is more easily understood as a hybrid between IPOs and crowdfunding. Like IPOs, ICOs allow people to acquire instruments of value—coins or tokens are issued during an ICOs (versus stock in an IPO)—that are then traded, used, spent, or exchanged. What makes the ICO stand apart from the IPO is that, “literally anyone” can launch one—and that is where the crowdfunding element comes in.
With startups raising as much as “$200 million in one go,” ICOs are experiencing tremendous growth—among those looking to fundraise and those seeking to invest. However, the corresponding lack of regulation is alarming as ICOs are launched without “regulatory oversight, some without even a workable minimum viable product, without any financial statements or evidence that their company even exists.”
Ultimately, investors remain largely unprotected as they pour millions into ICOs and cryptocurrencies. With so much at stake, so little transparency, and such utter lack of regulation, the environment is ripe for fraud and criminal activity—and investors will be paying the price.