Monday, 7 October 2019
On Monday 30th September 2019 Zimbabweans woke up to the news that the popular mobile money service Ecocash had effectively been shut down. This followed a hastily crafted statutory instrument which gave effect to a directive by the central bank to stop cash deposits or withdrawals from mobile wallets.
Mobile money users could now neither cash in nor cash out while the thousands of independent Ecocash agents were effectively put out of business at the stroke of pen.
It took just two days for the country’s central bank, the Reserve Bank of Zimbabwe to perform an about turn. Normal Ecocash services were restored, albeit with more restrictions than before.
It turns out that the seemingly clueless central bank top hierarchy is unable to provide a lasting solution to the long running cash shortages. Instead, the central bank is now focusing on blaming imaginary enemies for every problem that besets the country’s financial system while ignoring its own misdeeds.
Rogue Ecocash agents?
In the Ecocash case, the RBZ management believes money launderers and those engaged in the illegal foreign exchange trading are using this mobile money platform to facilitate their operations. RBZ also believes these bad actors to be behind the spectacular collapse of the local currency in the month of September.
Consequently, the central bank thought by shutting down 50 000 Ecocash agents it would take the fight to illegal currency traders. Taking such a bold move would help financial authorities to rein in on runaway inflation as well as to stabilize the local currency while suffocating informal currency markets.
However, a court challenge to the directive as well as the disruption to business activity caused by the order exposed the central bank. Matters were not helped by rumour suggesting that Econet Wireless is contemplating shutting down the service completely as retaliation. Perhaps this might be what forced the central bank to rescind its decision.
To give perspective, in Zimbabwe, mobile money is primarily used for micro payments and Ecocash—a division of the country’s largest MNO Econet Wireless –enjoys a near total control of this niche market. A total shutdown of this service will result in chaos in currency markets and the greater economy.
Central point of failure
Currency traders—which government is blaming for sabotaging the currency—primarily use the Ecocash platform as well as conventional banking platforms to facilitate currency exchanges. From the central bank’s perspective, attacking this one central point— the Ecocash platform—would garner the best result in this fight against currency traders. However, the one sided central bank decision ignores the concerns or potential effects on other stakeholders.
Since launch in 2011, the Ecocash service has been hailed locally and abroad for being an ingenious solution to the country’s long running cash shortages. In fact, Ecocash has been particularly effective in availing financial services to the unbanked and the under banked than regular financial institutions.
Yet somehow the storyline changed a few months ago as the biting cash shortages led to some Ecocash agents allegedly demanding premiums as high as 60% for clients that wished to cash out or withdraw money. According to the RBZ, the withdrawn cash is then used to buy foreign currency on the parallel market.
The high premium charged by Ecocash agents meant clients looking for cash had to be prepared to part with nearly half of their funds as the transaction fee! For example, a client that wants to withdraw ZWL $1000 from their mobile wallet has to cash out/withdraw ZWL $1500. The difference between the actual amount being sought (ZWL $1000) and the amount deducted (ZWL $1500) is the premium charged by the agent.
The extortionate premiums charged —which are also a reflection of the worsening cash shortages—naturally led to an outcry as users felt robbed of their hard earned money. Somehow it is this platform (Ecocash) which has become villain and authorities who too eager to ingratiate themselves with the public, seized on this misdirected public anger by censoring Ecocash. But how did this situation get out of hand and who really must take the fall?
To illustrate, we briefly explain the southern African country’s unique currency problems and how these have contributed to the crisis that now subsists.
Since late 2016, Zimbabweans have become accustomed to three kinds of money, the US dollar, electronic money which encompasses mobile money and bond notes. The latter two are the local currency.
Central bank versus markets
For a long time the central bank stubbornly insisted that all these forms of money were equal. This policy only changed in February 2019, when the ZWL currency was allowed to depreciate against major global currencies. Since then the currency has been tumbling and at the time of writing the ZWL trades at about 15 to one US dollar on the official interbank market although the rate is weaker on the so-called black market.
The interbank rate only reflects trades that occur under the watchful one of the RBZ. Trades on the black market on the other hand are largely conducted via the Ecocash or banking platforms where the RBZ has limited influence.
In contrast to the RBZ position, markets had long understood that there was no parity between the different forms of money and this had been reflected in the multi-tier pricing system that remains in place to this day. A single product can have three or four prices depending on the form of money used to pay.
The USD is perceived to be the strongest and holders of this currency pay the lowest prices. Additionally many businesses index their products to this currency.
Regulations that outlawed multi-tier pricing and USD indexing have since been promulgated but this has not helped, businesses continue to make reference to the USD when setting prices.
Electronic ZWL dollar inferior to physical ZWL dollar
Next to be perceived as a strong form of money is the so called bond note or the ZWL cash. It should interest the reader to know that even prior to the belated no parity admission by the central bank back in February, prices quoted in ZWL were higher than those quoted in USD. For nearly four years, ordinary Zimbabweans understood this and went along with this set up. The RBZ admission was academic, it did not change anything.
Ecocash and RTGS balances are at the tail of this spectrum, they are perceived to be weakest forms money/currency in Zimbabwe. Consequently prices that are quoted for items sold via Ecocash or bank transfer are much higher than when they are paid for in ZWL cash.
This probably happens because just like the USD, the ZWL cash is generally in short supply when compared with electronic balances held at banks and Ecocash. As official accounts show, the electronic balances seem to be growing all the time.
Sadly the law of supply and demand will still apply regardless of central bank threats or sanctions. When there is too much money chasing a few goods prices will rise and a currency will lose value. Therefore as RTGS balances grow their value in real terms goes down.
In the case of USD and ZWL, the central bank eventually relented and now it agrees that the latter is inferior. Yet somehow the central bank still refuses to accept the fact that electronic ZWL balances are inferior to ZWL hard cash, which is in short supply. This reality has subsisted for more than four years and this state of affairs also helps to explain why Zimbabwe has multiple exchange rates. But what prompted a return of this economic malaise last seen in 2008?
Well, it seems things started going south once the local currency was brought back into circulation after an eight hiatus.
Premature return of Zimdollar
While the ongoing blame game has reached fever pitch, it is the RBZ that should take the fall for the currency mess because by prematurely bringing back the local currency, it created a favorable environment for the money launderers and speculators that now it blames for manipulating currency markets.
Zimbabwe dollarized in 2009 because its local currency had become worthless and confidence in the central bank had disappeared among many reasons.
However, it should be noted that dollarization came at a great cost, it curtailed the central bank’s ability to influence economic activity. Indeed between 2009 and 2013, the RBZ was a mere spectator in the economy while corrupt politicians could not use it as a vehicle to enrich themselves.
Everything seemed to flourish until when the local currency was brought back into the equation.
Now as the local currency looks destined for another collapse it is imperative for Zimbabweans to understand that there is a need to explore a different currency solution.
The crypto alternative
Cryptocurrency appears to be the answer, whether it is a central bank digital currency (CBDC) or a privately issued currency, the country has to move away from a flawed system that only serves the interests of the few.
If Zimbabweans were to adopt a cryptocurrency that is underpinned by the blockchain, it will not be possible for any central authority to manipulate such a currency. The blockchain technology is designed to pre-empt the RBZ from curtailing or shutting down part of the financial system as it has done with Ecocash.
A cryptocurrency is immutable meaning it will not be possible for any one authority to replicate notes a practice that was uncovered a few months ago. Apparently there are several 5 dollar notes bearing the same serial number that are in circulation and this is something that shatters confidence in a currency.
With a cryptocurrency everyone including governments will be forced to live within their means as it should be. Zimbabweans need to take just charge of their future by asking government to abandon the flawed fiat money in favour of cryptocurrency.
Confidence in the central bank alone is no longer enough to support a currency.
Sunday, 15 September 2019
● Multi-asset blockchain enables exchange of crypto assets across separate blockchains without intermediaries
Kuva, a crypto start up inspired by monetary history in Africa recently released a technical whitepaper for its blockchain kNET. The whitepaper release marks the beginning of an economic and monetary operating system, driven by users’ satisfaction. It is also the culmination of a two year effort by the Kuva team to create a scalable crypto-currency for Africa and indeed the world.
Functionally, Kuva’s native blockchain, kNET allows crypto-currency users to switch between different currencies, both digital and fiat without intermediaries as well as enabling users to pay for various services.
At a protocol level, the kNET Blockchain attempts to incorporate end user satisfaction into its governance protocols. In a statement, Kuva outlined what it terms a third generation Blockchain technology, with world first utility, scalability and user governance.
Kuva Director of Strategy, Andreiko Kerdemelidis said:
“The Kuva team has worked hard to address challenges seen in the first generation Blockchain, the Bitcoin Blockchain. Bitcoin has shown its resilience and utility as a store value over the past 10 years but its noble consensus protocol has made it difficult to implement enhancements that can help drive user adoption. Bitcoin consensus protocol has in effect become its Achilles heel.”
According to the Kuva whitepaper, statically decentralized, consensus-driven, trustless networks like that of Bitcoin, are a Gordian knot; the same security that enforces their protocol and keeps users safe is also their weakness. These protocols can only change with the majority agreement of those who provide the resources to sustain the network, with the unintended effect that these protocols rapidly harden and become unchangeable to the detriment of end users.
For instance, it has not been possible to get miners’ consensus on controversial issues like increasing the block size. Increasing the block size (a part of the protocol where transactions are processed and stored) enhances the scalability of Bitcoin. However, for miners, a smaller block size means limited space or a scarce resource which can be exploited to extract a premium on the fees paid by those who want quick confirmation of their transactions.
The result is that Bitcoin which was launched with a vision as a universal “peer-to-peer electronic cash system”, has now settled permanently to be a form of ‘digital gold’ rather than ‘digital cash.’ Bitcoin is effectively unusable for making day-to-day small-value purchases due to the cost of transacting which grows every time the cryptos’ value increases.
Some Bitcoin supporters believe addressing this scaling challenge will be vital in facilitating the next wave of its adoption. As it stands now, Bitcoin remains stuck at a block size of just 1MB, smaller than a typical photograph taken on a modern smartphone and this happens despite Bitcoin’s specialised computing power which exceeds capability of every single supercomputer on Earth put together!
User ratings in governance
Bitcoin proponents and opponents alike do acknowledge the effect of this challenge (block size) in slowing the biggest cryptocurrency from achieving its goal of creating a true alternative to fiat money as well as advancing the financial inclusion cause.
So in order to avoid falling into the same trap, Kuva has conceived that by involving end users—the true economic majority—in the governance process, the chances of a Blockchain’s ability to scale and get adoption are greatly enhanced.
Kuva believes it will achieve this by incorporating governance protocols that are intended to progress the network toward a ‘dynamically decentralized’ system with a representative strategic governance that balances the incentives for service providers and infrastructure providers, based on the satisfaction of end users. This point is appreciated when one observes the progression (or lack thereof) as well as the trends observed in pioneering Blockchains. A pertinent example is crypto mining.
A few years ago, some mining pools in Bitcoin gained over 40% of the hashing power in the network, a phenomenon that raised concerns with stakeholders. These major pool oligarchies are reported to have backed off from the 50% mark ‘voluntarily’ in order to preserve confidence in the system.
To pre-empt something similar to this from happening, the kNET whitepaper is proposing what it terms a strategy and governance for the network to be shared between collateralized Licensed Service Providers (LSP) and network infrastructure operators; the Masternodes and Masterminers.
Importantly, this complex protocol allows the public or a third-party organization to submit ‘Strategic Governance Proposals’ for voting. Collateralized stakeholders will post a vote on a submitted proposal. In other words, Kuva users will be able to influence changes or the direction of further development of the network and protocol.
Solving the exchange dilemma
Meanwhile, the whitepaper touches on what it terms Chainbond Protected Swaps (CPS) or simply put, a two party exchange between crypto-currency assets across separate crypto networks. This allows the seamless exchange between crypto-currencies like Bitcoin and Ethereum without the involvement of an exchange as is currently the convention.
This is a potential game changer as users will not have to briefly relinquish control of their private keys each time they want to swap assets. Even better, they will not have to store funds with exchanges which historically, have been vulnerable to hacking.
Sometimes a person in African who wants to buy digital currency often has to spend time looking for a seller because there are no formal and locally domiciled exchanges operating. This is ironic, as the strongest use cases for alternatives to government issued money are in developing countries. Chainbond Protected Swaps address an area that is presently hindering many potential users from adopting crypto-currencies.
James Saruchera, Chief Executive of Kuva said, “CPS will enable direct, trustless exchange between ordinary people where crypto is needed the most.”
kNet’s ability to allow trustless exchange across blockchains and user centricity, are attributes that may position it as the final missing piece in the crypto puzzle.
Saturday, 7 September 2019
The 2019 Bitcoin price surge has reportedly seen some institutional investors joining the craze by adding this fintech to their investment portfolios. As per custom when there are concerns of a possible global recession, investors will seek cover in unconventional assets which can preserve value, things like old paintings, antiques, precious metals and now Bitcoin.
The last Bitcoin bull market resulted in a huge price surge with the crypto almost crossing the $20 000 in 2017 mark before retreating to just under $4 000 by the end of 2018, a less than proportionate drop. Those who were invested significantly in this asset class reaped huge rewards while those who stayed on the fence took note.
Some are now predicting that Bitcoin will end 2019 much higher than $20 000 and that when the bears market takes over, possibly after the next halving in 2020, a new lower value will be established and it will be higher than $4000!
The expected Bitcoin upward price movement reinforces a realization that the token is increasingly considered a new asset class whose returns surpass even that of bluechip stocks.
When Bitcoin launched in 2009, it had a value of around $0.03 and it would only reach parity with the USD in 2011. It will be in early January of 2017 when Bitcoin managed to break past the $1000 mark and it has not gone below that mark since. `
In fact, available data shows that Bitcoin has—during its presently short lifespan—even outperformed gold, the only asset to have consistently topped the US dollar in real terms over the past fifty years.
The US dollar has lost approximately 97% of its purchasing power in relation to gold in the nearly 50 years since the United States went off the gold standard. Similarly, the euro has lost over 75% of its value on a gold basis since the currency debuted in 1999.
Gold is traditionally seen as hedge during periods of uncertainty, in times of sustained debasement of national fiat currencies and the subsequent inflation. No fiat currency has maintained its value against gold in the long-run unless of course it is backed by gold.
Even with a limited history and track record, this digital asset has nonetheless shown that it can weather economic storms and fittingly, some now consider it the digital equivalent of gold.
Jerome Powell, the US Federal Reserve chairman is the latest high profile figure to have recently come to the that conclusion. Appearing before the US Congress, Powell refused to assign the currency status to Bitcoin but he seemed happy to validate the contention that it is a store of value akin to gold.
Powell declared: ‘Almost no one uses Bitcoin for payment, they use it more as an alternative to gold really. It’s a store of value; it’s a speculative store of value like gold.’ Perhaps it was disingenuous for Powell claim that almost no one uses Bitcoin for payments but nevertheless, it is his admission of the latter use case that is seen as a huge endorsement for the crypto. That Bitcoin has no intrinsic value like gold does not matter as long as the confidence in the Blockchain technology that underpin it remains.
Of course, Powell’s boss President Trump had less flattering words for Bitcoin, and his comments fits well with those long opposed to Bitcoin.
But just how does it fare when compared with gold?
Regardless of statements made by politicians, Bitcoin looks set to maintain its new found status as digital gold. This apparent but inadvertent status is in stark contrast with the initial vision for Bitcoin. The crypto was supposed to be the peer to peer electronic cash, the internet of money. Yet for all intends and purposes, it has morphed into digital gold, which is unsuitable for day to day small value purchases. It only makes sense using it for high value transactions.
Gold might not be fungible but it is a good store of value nonetheless and the same goes for Bitcoin. This point is supported by reports that some central banks around the world are holding Bitcoin and other crypto-currencies as reserves to back their respective currencies. When crypto-currencies grow in value and this has the effect of boosting or stabilizing exchange rates of fiat currencies that are backed by such digital currencies.
For instance, media reports a few weeks ago that Bulgaria’s Bitcoin holdings had surpassed that of gold point to the fact that the token may have reached that threshold. Of course, it is also possible that the recent increase in Bitcoin value—from around $3 800 in March in 2019 to the current price of around $10000—may have increased the value of such holdings without necessarily increasing the amount of coins held.
Bitcoin is seemingly better at quickly factoring in things like inflation, global political risks, or a recession than gold. Perhaps for one to understand this they may have to go through the LBMA Alchemist issue 94, which explains the general rationale for gold holding during a recession. The reports states:
On the one hand, investors are looking for safe havens in times of crisis, and gold is the classical safe-haven asset. On the other hand, many investors will anticipate monetary and fiscal stimuli, and buy gold for inflation protection.
As the global economy marches to towards another recession spawned by politics and a trade war between United States and China, we see that it is Bitcoin and not gold that has grown threefold. Gold does not respond as quickly as Bitcoin to events and certainly it does not grow as much. In fact, according to data by Incrementum AG, this classical safe haven asset has only managed to grow by an average of 20.8% during the past six global recessions spanning four decades. Given this background it is safe to assume that the coming recession cycle will be no different, gold will grow by about 20%.
Smart investors have long realized that holding Bitcoin actually protects an investment portfolio, not only from hyperinflation, but from government policies that attempt expropriate value. As long as the cryptography and mathematics behind Bitcoin remains uncompromised, this token will remain a superior hedge against inflation for the better part of the foreseeable future.
Indeed, others have argued that Bitcoin, which unlike gold, is a creation of man and thus it might be tempered with in a way that nullifies some of its key attributes. Such tempering or changes will undoubtedly affect how people perceive its value or its usefulness. For example, some users have confidence in Bitcoin because it has a fixed supply of coins that can ever be issued but that confidence will be shuttered if coins exceeding 21 million are created.
In theory this could be true, it might happen that coins which exceed the supply limit will be issued but in practice, this will be hard to achieve even for the creators of Bitcoin. In fact, the continuous flow of new tokens claiming to solve the Bitcoin ‘flaws’ is proof of this token’s immutability. Just like gold, Bitcoin cannot be replicated, it can only be mined and many in the crypto community acknowledge this.
Also a statically decentralized, consensus-driven and trustless network like that of Bitcoin is a Gordian knot according to those proposing alternatives to it. In simple terms, this means the same security that enforces its protocol and keeps users safe is also its weakness. Bitcoin protocol is designed to rapidly harden and become unchangeable such that any changes which might make the crypto-currency more useful to users become increasingly restricted by the network as user adoption increases.
For example it has not been possible to get Bitcoin miners’ consensus on controversial issues like increasing the block size, a change that might enable the network to process more transactions. While this side effect is not deliberate it does work to keep Bitcoin unblemished.
This unintended aspect of Bitcoin blunts the argument that the token is susceptible to manipulation by a bad actor. As long as it stays the same, the digital gold attributes will only get better.
Bitcoin not subject to control
Perhaps the one aspect where digital gold total trumps the physical gold is control. Gold is a heavily controlled commodity, in fact in some countries like Zimbabwe, its mere possession by ordinary citizens is forbidden. Those holdings or trading commodity without a state issued license risk jail time yet this commodity would seem the most logical asset to have in any portfolio given that country’s current hyperinflation environment.
Meanwhile, there are no such restrictions or controls when it comes to Bitcoin. Anyone can acquire Bitcoin to protect earnings or savings from crazy economic policies. In fact, there is no government that can enforce a ban on Bitcoin and that sometimes explains the hostility exhibited towards the fintech. Bitcoin dilutes control of the monetary space and few monetary authorities will countenance that.
In Zimbabwe, authorities have issued warnings about the possible risks associated with Bitcoin trading but ironically, they expect Zimbabweans to use the rapidly depreciating and very volatile Zimdollar fiat currency as a store of value. Since reintroduction in 2016, the Zimdollar has depreciated by about 900% and this trend looks set to continue as financial authorities impose more draconian financial controls.
Evidently, the Zimdollar is a much riskier than Bitcoin and a growing number of Zimbabweans are realizing this as the country’s economic decay worsens. Possession of this digital gold can potentially free Zimbabweans from the shackles of a failed fiat currency regime. Of course Zimbabweans and indeed all citizens of the word need to know this if they are going insulate themselves from bad policies.
Monday, 12 August 2019
The African continent has made great strides in embracing the ideals of democracy and freedom but problems persist when it comes to managing electoral processes. Allegations of rigging and fraud are a common place on the continent where incumbents are known to abuse their position for the furtherance of their personal objectives.
Kenya, Nigeria, Malawi, Democratic Republic of Congo and Zimbabwe are part of an endless list of countries with disputed elections results and until now there has been no real solution to pre-empt this. Blockchain which hitherto, has been largely associated with crypto-currencies like Bitcoin, could potentially come to the aid of democracy on the continent and elsewhere.
Blockchain technology has many uses besides supporting digital currencies, it can be used in the insurance industry to enforce contracts, in the music industry to reward artists, for real estate management, solar energy management, maintaining academic certificates etc. There are ongoing projects exploring this and preliminary results appear to show immense benefits.
Now some crypto entrepreneurs are now suggesting the use of this technology in resolving electoral disputes and other controversial undertakings like the amendment of constitutions to suit interests a small minority.
For instance, some Blockchain specialists have suggested putting a country’s constitution on the Blockchain as one way of pre-empting the common abuses and the subsequent problems. When this important document is on a public ledger, which comes with the usual immutability and is decentralized, it means few individuals in a government cannot force amendments to the constitution without the knowledge or approval by the greater public.
To illustrate this point we look at Uganda. A few years ago, that country was plunged into chaos when long time ruler, Yoweri Museveni, sought to amend the constitution in order allow himself to run for office again by scrapping the age limit. The Ugandan leader had already served the maximum years allowed by the law but that was changed too in 2005 by using a parliamentary super majority. In Africa a dominant political party can change the rules even if that process is unpopular with the voters.
Had the Ugandan constitution been on a Blockchain years prior, this topic would not have come up for discussion to begin with. The Ugandan leader prevailed just like many others before him elsewhere, apparently democracy can be manipulated to suit interests of the elites, the minority. In fact, this problem is seen even in countries outside Africa like Turkey, where longtime ruler Recep Tayyip Erdogan pushed through a referendum that made amendments to the constitution. The amendments increased the powers of the president while reducing the influence of prime minister and parliament.
Now when a country’s constitution is on the Blockchain, it ordinarily means no one party—no matter how popular—will be able to freely change rules. A candidate who has already served a two term limit will be precluded from having his name on the ballot paper because the smart contract built into the Blockchain will reject it. So instead of resorting to demonstrations and violence as way of registering disapproval, citizens should insist on the placement of such an important document on a public distributed ledger.
The same should go for a voters roll, a document containing names and details of voters. Control of such voter records is seen as key for political survival by some political actors on the African continent. For instance, in Zimbabwe, the voters’ roll is tightly controlled by the incumbent party while the opposition as well as pro-democracy forces virtually have no access to it. Access is only granted briefly during an election period and it is availed in the hardcopy format and as such, no independent observer has been able to verify or authenticate its contents in time to make a judgment before the election. It is on the basis that the country’s opposition has been alleging vote rigging for years, a process which it says is being aided by government’s control of the voters’ roll.
Therefore if such a voters’ roll becomes available on the Blockchain, it means individuals can check to see if their names are properly listed thus avoiding the common scenarios of voters being turned away on election day. When the number of registered voters for a particular county is known well before an election, possible rigging and ballot box stuffing is avoided because a Blockchain based voters’ roll will reject the extra ballots on election day!
So in a nutshell, Blockchain technology has the potential to enhance democracy on the continent and reverse the trend of resorting to armed struggles as a way of fighting dictatorship. Civil conflicts which are specifically rooted in disputed election results will be avoided. Blockchain technology is known to infuse confidence in a monetary system like that of Bitcoin and likewise it will instill confidence democracies thus help reduce conflicts.
Pro-democracy activists as well as the media have greater role to play in ensuring citizens become more knowledgeable about these possibilities. When enough people become aware a momentum will be created and governments will eventually be forced to consider Blockchain for the constitution and many other aspects of its mandate.
Saturday, 10 August 2019
The concept of an initial coin offering (ICO) is not entirely a new phenomenon; in fact it is a borrowed one. ICOs are any attempt to replicate an initial public offering (IPOs), a renowned capital raising practice which has been widely used by businesses and corporations for decades. As the name suggests, this process enables privately owned businesses to fund new developments as well as the expansion of their present operations with capital raised from the public.
In the case of IPOs however, a regulating entity— often a securities and exchange regulator—will issue guidelines on how this process is consummated. For instance, the company seeking capital would have to produce a document called a prospectus. It is that document which typically lays out the responsibilities and expectations of those participating in any such fundraising.
IPOs generally come with many such safeguards in case something goes wrong but the same cannot be said of how ICOs have been handled in the not so distant past. Apparently ICOs were so simple to set up, anyone with basic IT skills could figure out a way to create a token along with a website and whitepaper to support the coin offering. There were neither a regulator overseeing this nor were there any legal remedies available to participants in case something went wrong.
Jelle Rijnink, a fintech expert with Aurus, a crypto start-up explains that a whitepaper—apparently the equivalent of a prospectus— would nominally outline the project’s objectives and how these would be achieved. In reality however, this whitepaper would turn out to be nothing more but part of a well orchestrated scam. The lax ICO atmosphere at the time encouraged a lot of innovation which in turn induced countless yet very ambitious projects to go public.
Such ICOs went on to generate millions of dollars in funding for new projects with 2018 offerings alone raising approximately $20 billion. Indeed many great projects that are functional today were born from such ICOs but it is also safe to say that the majority have since failed.
It is such failings that have led to widespread negative media coverage and this subsequently invited increased scrutiny from regulatory and consumer protection bodies.
For instance, the Financial Conduct Authority (FCA) of the United Kingdom notes these problems in a consultation paper that was released earlier this year.
According to the consultation paper, “2018 saw a significant reduction in the amount of capital raised in ICOs compared to the 2017 amount. Global ICO funding was $65m in the month of November 2018, compared to over $823m in the month of November 2017.There are a number of reasons for this fall, with (some) commentators identifying investor caution as a response to the large amount of fraudulent ICOs as well as a high failure rate of new enterprises that use the ICO process. This can also lead to ICOs missing their target collections. The underlying volatility of cryptoassets used may also be an issue as they are used, in many cases, for payments in ICOs.”
In light of this, the FCA is now proposing regulations that would guide future ICOs and help curb fraudulent coin offerings at least in UK territories. There is no doubt other regulatory bodies and consumer rights watchdogs around the world will make similar undertakings.
But exactly what caused many bad actors use ICOs as a way to dupe unsuspecting investors? Well the fear of missing out (FOMO) plays a part but it could also be the way the process was carried out that invited criminal elements.
Meanwhile Rinjink attributed the high ICO failure or fraud rates to a combination of three main factors namely;
· The ease of starting the coin offering process
· Anonymity of the process
· Lack of regulatory oversight created an opportunity for scammers and money grabbing schemes to emerge.
Apparently it was just too easy not to fulfill the promised deliverables and walk away with the funds without being made liable. There is/was no deterrent! Indeed many masterminds of fraudulent ICO projects which came with flashy websites and well put together whitepapers, managed to raise millions of dollars and disappeared.
Meanwhile, the FCA also concurs with Rinjink’s earlier assertion concerning whitepapers. In its guidance, the FCA notes that the whitepaper, which typically accompany ICOs, is not standardized, and often feature exaggerated or misleading information.
Given this lack of clear information, it is logical to conclude that investors/consumers may not understand that many of these projects are high-risk and at an early stage. Put differently, it means the risk profile of most of the capital seeking projects may not suit the risk tolerance, financial sophistication or financial resources of the investors. FCA has since concluded that regulation of ICOs is an inevitable but necessary response to the problem.
It remains to be seen how such regulations will be enforced given the disparate and fragmented regulatory approach to the issue. Others have largely ignored the problem while others have been quick to respond. So it could well happen that a capital seeking crypto start- up, which may be domiciled in an unregulated environment, can actually invite investors including those from a regulated environment to participate in an ICO. This leaves the supposedly protected investors vulnerable to fraudsters and not to mention that they is no legal recourse or compensation in case such an ICO fails.
Therefore this means even today investors still face the risk of being lured to scams and as such, it will be wise for potential participants in ICOs or anything similar to know the signs of a potential fraudulent coin offering.
So how do you determine that an ICO is potentially fraudulent?
There are a number of key signs to look out for and below we list and expand on some of the usual signs;
· Too good to be true—as the sayings goes, if something is too good to be true then it probably is. Any investment has a potential to earn healthy returns for investors and equally, any such investment has an element of risk, an investor can lose everything. So when an ICO promises big on returns but is completely silent on the downside, there is a potential problem and investors need to approach this kind of ICO with caution. Usually a higher return means a higher risk. If you are however less risk averse, then murky ICOs could be the thing for you. Always remember there is no free lunch anything that promises surreal returns could otherwise be a scam.
· Depth of the whitepaper—the whitepaper is the equivalent of a prospectus that crypto businesses seeking funding from the public usually issue out. The difference however is that with prospectus there are set standards, if such a document fails to meet expectations, it will not be sanctioned for distribution to the public by regulators. At the moment there seems to be no such standards when it comes to ICO whitepapers, all that is needed is a website to host the paper. In addition, the information contained in many whitepapers inconclusive, even Facebook’s Libra has been attacked for being scant when it comes to providing vital information. An informative whitepaper must have in-depth details of the ICO process, the objectives of the fund raising and the background of those behind but without exaggerations. A potential investor could well use the services of an experienced crypto advisor to give an opinion about an ICO based on the information from gleaned from a whitepaper. Nevertheless, a novice investor will still be able to unmask outright exaggerations on issues like the professional experience of the proposed project’s key drivers. Crypto-currencies have been around for about 10 years now, therefore it stands to reason that all professionals in this field cannot have years of experience that exceeds ten years. Therefore when a chief executive officer in his mid 20s tells potential investors that he has more than 10 years experience, that could be the clearest sign of a potentially fraudulent ICO!
· No cap on maximum funds to be raised—dubious ICOs will not state the exact amount that needs to be raised, it is an open ended exercise. A document that essentially invites members of the public to participate in any fund raising activity must clearly state how much needs to be raised, the period of the fundraising exercise and to finance what? Transparency or lack thereof on this aspect will be essential in determining if an ICO is genuine or not.
· Current project status—as explained earlier, an IPO has been used by businesses that are seeking to raise capital from the public for the first time. The funding is usually needed to augment capital of an existing business. So this means potential investors can seek clues and a better understanding of what they are getting into by examining the existing business. The prospectus usually contains historical information about the existing. It stands to reason that a similar principle need be to applied to ICOs. A whitepaper should have this kind of information available, there must be something happening already that investors can look at in order to get a feel of the business that they are about to invest in. Whitepaper that has in-depth details of the business’ history will undoubtedly enhance the credibility of the ICO exercise.
· Core team—these are the actual brains behind the project that needs the funding. An IPO prospectus usually is accompanied by names of the management team, the identity of directors and the shareholding structure. A prospectus will go as far as publishing pictures of the managerial personnel, the residential addresses of directors as well the capital seeking company’s physical and contact addresses. This enhances the credibility of the process, potential investors know who they are funding and where they can find them. Whitepapers are not standardized yet but any start-up that wants to endear itself with investors can borrow a leaf from IPOs. At the same time, a shrewd investor should avoid investing in a faceless organization that only lists mobile phones as contact information!
· Overhyped projects—it may be natural for a capital seeking business to project success but that should fall inside parameters of what may be deemed reasonable. Overhyping means the revenue or profit projections maybe unrealistic when contrasted the present usage of cryptos in general. An overhyped project could potentially be the signal that an ICO is really a Ponzi scheme or a scam. There is no denying that all crypto-currencies face challenges that make the achievement of core objectives impossible, at least in the short term. So it should concern investors when a start-up promises a quick turnaround in a market that everyone agrees is far from reaching its full potential.
There are many more sources of information and diligent investors must always do more to get enough before committing to invest.