Cryptocurrencies: welcome to the investment market’s new ‘Wild West’ where anything goes
Tue 13 February 2018 - 12:59 pmExpert | Featured | Opinion
Cryptocurrencies, and specifically digital currency offerings, have literally become the modern, investment market equivalent of the Wild West.
Hundreds of prospectors have heard about the money on offer and are throwing caution to the wind, risking a lot (everything, in some cases) to make their fortune. It’s almost lawless territory and you need to keep your wits about you to survive.
This goes for both those offering currency and those investors buying it. As if to highlight the current high-risk high-stakes nature of the crypto world, almost US$660 million in digital coins were stolen during a recent hack of a Japanese crypto exchange. It’s the equivalent of an old-fashioned bank hold-up in the crypto world. Anything goes.
The frenzy around digital currency has a lot to do with a lack of regulation. Many coin issuers, and too many investors, are seeing it as an incentive to get in quickly. Many are now panicking that regulation will end the party – however, my view is that regulation should be embraced. It’ll create a more even playing field for all parties. And here’s why.
The number of global ICOs increased from 46 in 2016 to more than 200 in 2017, with over $US3 billion raised, demonstrating that the appetite is there. There is money to be made – but an age-old rule applies – short cuts are rarely a path to success.
There are two clear sides to the crypto argument – the optimists say ‘run in and take your chances as this is the future of investing’. Old school fund managers ‘say stay away’ with some likening investing in digital currency with a trip to a casino.
Currently, a lack of industry regulation in almost all jurisdictions makes compliance a tricky path to navigate. Couple that with a remarkably brazen, gung-ho attitude from a lot of traders and it’s only a matter of time before someone gets in big trouble. And no doubt the authorities won’t hesitate in making an example out of whomever that may be.
Both France, Germany and Spain recently pledged to (at least attempt) to regulate Bitcoin, and other digital currencies, while fund managers around the world are steering well clear. China recently banned local cryptocurrency exchanges but is also restricting access to foreign exchanges. However, one man’s restriction is another’s opportunity – bans by regulators are now helping the birth of crypto funds – that is diligently run investment funds whose primary investment asset is crypto.
This provides hope that a sense of discipline and structure will now emerge in the sector.
Like with gold rushes in the Wild West, it’s the human-driven emotion, the sheer excitement and adrenalin rush that is in part fuelling the interest and indeed the value of digital currencies. At least gold had a clear tangible value however. The same cannot be said for cryptocurrency.
Some issuers will apportion a value to their coins, which may not be monetary – it might be a voucher for a right to a good or a service that the issuer can offer. Issuers need to ensure they are making the right disclosure, and it goes without saying, seek the right legal advice.
For those creating and trading in digital currency, being aware of legal risks and the different rules that apply in different jurisdictions is critical.
For example, if you are trading digital currency in Australia, and you are selling coins to, say, American investors, which laws do you need to comply with? What if you are an Australian company undertaking an ICO in Singapore? What happens if you offer those tokens to investors in Europe? Which jurisdictions’ laws do you need to comply with? The answer – probably all of them.
The lack of regulation can breed arrogance from businesses issuing ICOs.
“I’m located in Australia and I don’t need to comply with US law!” is a worryingly common attitude.
But consider the cautionary tale of David Carruthers, the CEO of the UK based BetOnSports gaming site.
In the early 2000s the US banned online gaming services to US citizens. Many businesses started offering online gaming to US citizens from overseas servers, assuming that the US had no jurisdiction over their activities. Carruthers learnt the hard way when he was arrested during a stopover in Dallas. If it can happen in the gaming space 10 years ago, it will happen with crypto.
For investors, the risks are many. The mad rush to “get in” the crypto wave has become intoxicating for some but the that should never cloud judgement when it comes to understanding exactly what you are buying.
A mere few of the risks include a lack of legal protection and exposure, inability to participate in later capital raising rounds in the case of an ICO, coins that are worth nothing, a complete plummet in the value of the asset when the market has a panic attack, and of course the possibility that your crypto-exchange could be hacked. The very simple message is that a lack of regulation should be a warning, not an incentive.
And for the issuers – be compliant. Seek the right advice. Otherwise a knock at the door may not be too far away.
Then, once law comes to crypto-town, you may just have whole new asset class to play with, with a dramatically reduced level of risk, but still enjoy those highly intoxicating returns.
About the author
Darren Sommers is a Principal Solicitor at Melbourne’s KHQ Lawyers. He has more than 20 years’ experience providing general commercial legal advice and specialist technology law advice to clients in the IT industry and other technology industries.