The cryptocurrency industry has a lot to learn
So far, 2018 has not been kind to cryptocurrencies – digital currencies which exist only in electronic form. Their prices have steadily declined from the 2017 year-end surge that sent them skyrocketing to near unimaginable values.
The industry’s key attribute - unregulated currencies, free from governmental and regulatory intrusion - has quickly turned to a crushing liability. Once-buoyant investors, all too eager to flood the cryptocurrency markets with cash, are quickly losing patience with the continuing fraud, theft and claims of malfeasance that plague the industry.
In previous articles, I’ve suggested that for the cryptocurrency industry to thrive, it must embrace, at a minimum, some element of self-imposed governance. Yes, industry purists will decry this as heresy. However, they must consider that regulation, even self-imposed, is a key attribute for the success of the existing marketplaces that dominate our financial landscape.
A Self-Regulatory Organization, or SRO, is a non-governmental entity that regulates itself. The New York Stock Exchange, the Chicago Board of Trade, the Chicago Board Options Exchange and The NASDAQ Stock Market, among others, all operate as SROs. They assume primary responsibility for establishing standards of business conduct and enforcing compliance of federal securities laws. They conduct examinations and discipline their members for violations of SRO or regulatory rules.
The Securities and Exchange Commission (SEC) still maintains a robust oversight and control over these SROs. It allows the SRO flexibility to establish rules and policies that best reflect the real-world conditions of the industry, while minimizing the often heavy-handed and cumbersome oversight of a government agency, such as the SEC. The end result is a coordinated effort between government and private industry to ensure standards, rules and conduct for a fair and orderly marketplace protect both SRO members and the general public
The key deliverable in this partnership is confidence. Confidence by investors, traders, private institutions and the general public to place trillions of dollars of their money at risk in the stock, bond, foreign exchange, commodity and derivative markets, among others. For example, the total dollar value of all outstanding shares of stock in the Russell 3000 – which contains roughly 98 percent of all U.S. stocks – is over $30 trillion.
At the heart of these capitalistic endeavors is a public confidence in a fair, equitable and orderly marketplace. Unfortunately, this can’t be said for the cryptocurrency industry. Their lack of governmental or regulatory controls, or even common industry standards, still underscore its Wild West comparison. There are no restrictions on who can create their own cryptocurrency or cryptocurrency exchange - which serve as a centralized platform for the buying and selling of digital currencies. The rules, structure, integrity and quality of cybersecurity for these currencies and exchanges are determined solely by their creators.
According to an analysis by the Wall Street Journal, since 2014, theft by computer hackers have cost cryptocurrency investors at least $1.4 billion. The latest theft was last week, when Coinrail, a small cryptocurrency exchange in South Korea, reported the theft of 30 percent of all client digital coin holdings worth roughly $40 million. Yet, this pales in comparison to the January 26 theft of Japan-based exchange Coincheck, where more than $530 million in digital currency was stolen, the largest hack ever in cryptocurrency history.
Within hours of the Coinrail hack, the price of Bitcoin – the most prominent and well known digital currency – fell more than 7 percent to $6,700. Bitcoin continues to decline, approaching the 2018 low of $6,000 set in February. In December, at the height of the cryptocurrency craze, the price of a single Bitcoin was nearly $20,000. Other popular cryptocurrencies, such as Etherium and Ripple, have suffered similar fates.
In both the U.S. and abroad, regulatory control over the industry has moved at a snail’s pace. In March, the SEC expanded its authority over the cryptocurrency industry under the expansive umbrella of federal securities laws. However, the majority of the roughly 1,600 different digital currencies and the 200-plus cryptocurrency exchanges are based overseas, outside the reach of the SEC.
For enthusiasts and promoters of the cryptocurrency industry, there is a valuable lesson to be learned from the broader capital markets industry. It’s not the short-term hype, but the confidence of investors to place their capital at risk, that leads to the long-term success and acceptance of a marketplace.
Mark M. Grywacheski, Investment Advisor
Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets, or developments mentioned.
Quad Cities Investment Group, LLC is a registered investment advisor with the U.S. Securities Exchange Commission.
