Alternative title: who will be the Harry Markopolos of cryptocurrencies? If you don’t know who Harry Markopolos is, quickly google his name and come back to this article. If you do, and you aren’t completely familiar with the relevance he has to btcc pool mining bitcoin cryptocurrency world, let’s start with a little history. Why hasn’t the “community” done “X”?
Simultaneously, despite the hundreds of millions of dollars raised by VCs and over a couple billion dollars raised through ICOs in the past year or so, not one entity has been created by the community with the power or moral authority to rid the space of bad apples and criminals. Where is the regulatory equivalent of FINRA for cryptocurrencies? Part of this is because some elements in the community tacitly enable bad actors. Bitcoin infrastructure was set-up and co-opted by Bitcoiners themselves, some of whom were bad actors from day one. There are many examples, including The DAO. 4 But the SEC already did a good dressing down of The DAO, so let’s look at BTC-e.
BTC-e is a major Europe-based exchange that has allegedly laundered billions of USD over the span of the past 6 years. In other cases, some entrepreneurs and investors in this space make extraordinary claims without providing extraordinary evidence. Such as, using cryptocurrency networks are cheaper to send money overseas than Western Union. But those who make these unfounded, feel-good claims are not held accountable or fact-checked by the market because many market participants are solely interested in the value of coins appreciating. Anything is fair game so as long as prices go up-and-to-the-right, even if it means hiring a troll army or two to influence market sentiment.
Any working groups advising the government on policy are certainly worthy of investigation. Bitfinex eventually painted over these large losses by stealing from its own users, by socializing the deficits that took place in some accounts across nearly all user accounts. Another user claims to have retained a lawyer and he did not have any haircut. Bitcoin industry has to avail themselves of.
Yet there is little action by the cryptocurrency community to seek answers to the open questions surrounding Bitfinex. I wrote a detailed post several months ago on it and the only reporters who contacted me for follow-ups were from mainstream press. The latest series of drama began earlier this spring: Bitfinex sued Wells Fargo who had been providing correspondent banking access to Bitfinex’s Taiwanese banking partners. Wells Fargo ended this relationship which consequently tied up tens of millions of USD that was being wired internationally on behalf of Bitfinex’s users. This also impacted the price of Tether. ERC20 token on top of Ethereum. ERC20 tokens are arguably not the same thing as a cryptocurrency, they are more like colored coins.
As a corporate entity, Tether’s governance, management, and business are fairly opaque. No faces or names of employees or personnel can be found on its site. 16 Bitfinex was not only one of its first partners but is also a shareholder. Tether as an organization creates coins. USDT each of which, as is claimed on their webpage, is directly linked, 1-for-1, with USD and yen equivalents deposited in commercial banks.
Which leads to the question: are the seven banks listed by the recent CPA disclosure aware of what Tether publicly advertises its USDT product as? Who is responsible for issuance, and how if at all can they be redeemed? Are they truly backed 1:1 or is there some accounting sleight-of-hand taking place behind the scenes? Theoretically they could maintain a fractional reserve to service redemptions although this isn’t a problem per se, provided that it is disclosed. Despite myself and others having urged coin media to do so, to my knowledge there have been no serious investigations or transparency as to who owns or runs this organization. Tether offers users a way to move USD from one country to another, much like Western Union.
In other words, the reason these exchanges were able to operate and survive while charging zero-fees is partially offset by these exchanges using customer deposits to invest in other financial products, without disclosing this to customers. Note: they did have withdrawal fees which likely generated revenue from arbitrageurs. Many exchanges, especially those in developing countries lacking KYC and AML processes, directly benefited from thefts and scams. Yet we’ve seen very little condemnation from the main cheerleaders in the community. For example, two years ago in South Africa, MMM’s local chapter routed around the regulated exchange, patronizing a new exchange that wouldn’t block their transactions. 26 MMM is a Ponzi scheme that has operated off-and-on for more than twenty years in dozens of countries.
It was a lack of this market surveillance and customer protections and outright fraud that eventually led to many of the Chinese exchanges being investigated and others raided by local and national regulators in a coordinated effort during early January and February 2017. In addition to lying about being investigated, they were lying about the true volume on their exchanges. They combed through the accounting books, bank accounts, and trading databases, logging the areas of non-compliance and fraud. China involved in fiat-to-cryptocurrency trades have announced they will close in the coming weeks, including Yunbi, an exchange that was popular with ICO issuers. The two other large exchanges, OKCoin and Huobi, both announced on September 15th that they will be winding down their domestic exchange by October 31st. These exchanges had multiple chances to clean up their act and even self-regulate but because of the competitive pressures in China towards zero-fees, no one wanted to be left behind.
As mentioned in an earlier post, cryptocurrencies are the preferred payment method for ransomware today because of their inherent characteristics and difficulty to reclaim or extract recourse. Through the use of data matching and analytics, there are potential solutions to these chain of custody problems outlined later in section 8. The opportunity costs foregone by the executive team that has to road show is often called a necessary evil. There has to be a more accessible way, right?
Often times, ICO organizers will have a private sale prior to the public ICO, this is called a pre-sale or pre-ICO sale. One reviewer mentioned: “Depending on the jurisdiction, these pre-arranged discounts might be deemed as structured products. Hence, ICOs are one of the major contributing factors as to why we have seen record high prices of many different cryptocurrencies that are used as gateway coins into ICOs themselves. 1 billion has been raised around the world for 140 different ICOs this year. I’ve encountered him on a number of occasions. ICO investors so they can push the price up on a thin order book by 10x, 20x, or 30x before distributing and pulling support.