'Investors need protection from cryptocurrency scams'
The growing threat of scams amid a rise in cryptocurrencies and Initial Coin Offerings means authorities must act to protect investors with new regulation.
That is the view of Giovanni Lesna, chief commercial officer of crypto exchange Blocktrade.com, which is looking to bridge the gap between the crypto and traditional financial worlds.
Lesna welcomed the UK government's announcement of an inquiry into cryptocurrencies and blockchain technology and said there is now an appetite around the world for regulation amid a huge surge in Initial Coin Offerings.
However he said authorities "must truly understand crypto before regulating as being too hard on it could stifle creativity".
ICOs are an innovative method of raising capital which operates in a similar way to an Initial Public Offering. But rather than issuing equity, the company issues tokens, which represent access to a future service rather than an economic windfall.
The relative lack of registration paperwork and fact that investors do not control any part of the new company is a concern for regulators who saw more than $2 billion of capital raised by blockchain companies in ICOs in 2017. More than 250 ICOs have taken place since 2016.
“ICOs have eliminated the middle man - a stock exchange - and cut them out of the picture,” Lesna told BusinessCloud.
“The costs are very low, the regulation is very low, so the barriers to entry at the moment are also very low. That is why there has been a huge surge in ICOs.
“From January to June last year all ICOs hit their targets and were sold out. But now the number has increased dramatically and many of them are not hitting their targets.
“I think 2018 is the year of regulation. The United States sees blockchain technology as something akin to the internet in 1994 and don’t want to come down with a heavy hand and stifle innovation, but they now recognise the need to have a framework in place to protect investors.
“What makes it scary is the volatility, but also the intangibility of it all – the lack of regulation. I wouldn't invest half of what some crazy Americans have been doing on cryptocurrency with credit cards.
“The number of scams out there means they must find a way of discerning whether ICOs have some substance or are just a vehicle for fraudsters.”
The enormous rise in value of virtual coins like Bitcoin has caused many people, both in finance and the general public, to jump on the ‘Bitcoin bandwagon’ as they fear missing out on substantial returns.
However the market is extremely volatile, with currencies correcting in value by margins in the thousands of pounds every day. And with so many cryptocurrencies to choose from, it can require research of almost PhD proportions to find your way in the increasingly crowded crypto investment marketplace.
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Liechtenstein-based Blocktrade.com is working with Buchman Indices to develop an index of the top and safest cryptocurrencies, a ‘basket’ which people can invest into with one click. It is due to launch in the second quarter of this year.
“The crypto financial instruments we are developing will bring crypto trading into the mainstream,” Lesna explained.
“You will initially be able to invest Ethereum and Bitcoin into the basket of the top 30 cryptocurrencies. Our research showed us that 90 per cent of the whole value of the crypto market – $450bn – is coming from these currencies.
“When you invest in our crypto basket, you are in essence buying the whole crypto market rather than picking a winner. It only takes one or two winners in that basket to generation quite attractive returns which you can’t even compare to your normal asset classes such as equities or commodities.”
Blocktrade.com has a detailed rule book which determines which cryptocurrencies to invest in passively. One rule, for example, is concerned with currency manipulation and would therefore block investment into a cryptocurrency with potential for fraudulent activity.
Lesna, who is based in Johannesburg, South Africa, is a big believer in the power of blockchain to change the world – and not just because of its potential for greater transparency.
“It is far cheaper and quicker to transfer money via the blockchain than via traditional means,” he said.
“Look at Africa, where I am right now: many poor people send money back home to different countries in Africa and if they're earning $100 and it's costing them $10 to send that money back home, they're living on $1 a day.
“This technology will have a huge impact on those people's lives if it can be incorporated into everyday use.”