In Networks We Trust? The True Value of Cryptocurrencies in the Age of Regulation

Guest post by Michael Ou, CoolBitX

Why is a dollar valuable? Why do we clutch our wallets tightly and treasure the little slips of paper they hold? In short, because of faith and tradition. Once, it’s true, currencies were backed by gold supplies, but gold is valuable because, centuries ago, we deemed its beauty made it precious. What makes a bitcoin or a unit of ethereum valuable? Skeptics will remark cryptocurrency is that a given coin or token or project’s worth seems to be arbitrary, that all its value derives from the processing power in a given network, but no one has yet devised a currency entirely free from arbitrariness. Bitcoin and Ethereum function because millions of people believe in them and have linked machines to the blockchain, just as the dollar, the euro, the yen, and the yuan all function because their issuers are known to be stable and trustworthy. When a country’s residents and the international community don’t believe an issuer warrants trust, the result is often hyperinflation and economic collapse. The same rules apply to digital assets, with one significant difference: it’s possible to manufacture support for a cryptocurrency in a way that’s no longer (largely) possible for national currencies. Why is this? And what might be done? Today, investors, whether individual or institutional, must be familiar with the dangers of market manipulation. Two cryptocurrency bills, H.R. 922 and H.R. 923, were introduced to Congress at the end of January, but the government should not bear the full weight of responsibility. The community — and I include individual and institutional investors, development teams, and even Congressional and securities regulators in the community — must ensure that exploits and manipulation become impossible.

CoinMarketCap, perhaps the most popular source for digital currency market capitalization, and similar crypto tickers are essential tools for anyone in the cryptocurrency world; they provide information on the market capitalization, price, volume, circulating supply, and market history of more than 2,000 coins and tokens, from market leaders like bitcoin and ethereum to also-rans and outed scams. A ticker is at least a daily visit for anyone interested in cryptocurrency; most traders will have one bookmarked, and some may even set it as their browser’s homepage. Tickers are wonderful resources, but they’re not auditors or watchdogs: it reports the numbers and leaves analysis to the users. When an apparent fortuitous spike or cataclysmic drop in a currency’s value registers, some traders will fail to realize there’s market manipulation afoot. Concerns about abuse aren’t hypothetical: Large crypto exchanges like Huobi and CoinBene have periodically fielded accusations of running pump and dump operations to artificially increase the price of assets; at least one small exchange has proudly admitted to manipulation of obscure coins. The Blockchain Transparency Institute concurred with the negative assessment: Up to 80% of the Top 25 BTC pairs on CoinMarketCap may be wash-traded. Neither confirmed nor rumored manipulation inspires any great confidence in the crypto market, and such stories only serve to delay cryptocurrency’s mainstream adoption. Though duped investors are the obvious victims of market manipulation, such misbehavior penalizes the entire cryptocurrency sector.

There are many kinds of scams, most of which resemble former blights on traditional markets. Scams operate by faking changes in the sentiments that drive markets: Painting the tape and wash trading artificially elevate the sale volume of a coin by buying, selling, and rebuying coins or, in crypto, potentially just moving coins between different wallets controlled by the same users. Artificial sell walls are a problem in cryptocurrency in part because cryptocurrency has so many “whales” with vast holdings: They possess enough of their favored coins that they can temporarily drive down prices in a way that might be impossible in a more mature environment. Given this reality, it’s no surprise that Anti-Money-Laundering and Know-Your-Customer (KYC-AML) rules, once anathema to investors who hoped for wholly decentralized markets, gain more support among the crypto faithful every year. At present, exchanges can claim plausible deniability of suspect transactions; with KYC-AML, better market surveillance, and more data scientists at work in the field, bad behavior will look much less appealing.

We ought to remember that these problems, though endemic to digital assets, are not unique to them. As historians can attest, market fraud is hardly new: stocks have been subject to fraud for over 300 years. Pump and dump schemes now deposit their perpetrators in jail cells, but the cryptocurrency market has, for now at least, fewer strict rules. A more heartening consideration: Cryptocurrency is maturing far faster than stock trading did. Rules that it took centuries to establish for traditional markets have been confirmed in months or years by crypto’s innovators. That said, we should not expect lightning fixes to today’s problems. The deployment of Nasdaq SMARTS Market Surveillance systems to some crypto markets is a positive development, one that regulators like the SEC and CFTC will welcome and that individual investors should applaud, but we must strive to develop the norms and rules that make infringement relatively uncommon in long-established institutions. The SMART headlines are nice to see, but ultimately it’s the integration that matters. Some exchanges may not survive scrutiny; we will be better off without them.

Although cryptocurrency remains an exciting field, it’s no longer the monetary “Wild West” we once believed it to be. Many exchanges and projects are now filing for money transmitter licenses; others are making their adherence to regulations and their allegiance to the Securities and Exchange Commission (SEC) into selling points. As regulations proliferate and norms cohere, these sorts of safeguards and precautions will be expected, not exceptional. Investors lose money on stocks every day, but accept these risks because they understand that the market, if not always fair, is at least always honest. The cryptocurrency industry should aspire to that level of trust. There’s still work to be done, but this bright future is within reach. Tomorrow, digital wallets may be standard accessories like billfolds and pocketbooks today, and we may trust cryptocurrencies at least as much as we trust paper money.

Michael Ou is Founder and CEO of CoolBitX. He is a FinTech entrepreneur who is extremely passionate about blockchain security. Michael owns a 17-year old banking security solution company, which was originally founded by his father, that helps 50+ banks in 30+ countries protect their users’ assets.

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