This article was written by Adinah Brown from Leverate.
The recent spate of initial coin offerings (ICOs) has drawn the attention of the US financial industry’s regulatory body FINRA, warning about the potential risks to anyone that purchases the coins.
Register now to the London Summit 2017, Europe’s largest gathering of top-tier retail brokers and institutional FX investors
A bulletin from the Securities and Exchange Commission (SEC) highlighted the issue in the following terms. “Investing in an ICO may seem like an exciting way to be a part of the virtual currency and Blockchain
Blockchain
Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned.) In this sense, blockchain is immune to the manipulation of data making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tamper with. The Evolution of BlockchainBlockchain was originally invented by an individual or group of people under the name of Satoshi Nakamoto in 2008. The purpose of blockchain was originally to serve as the public transaction ledger of Bitcoin, the world’s first cryptocurrency.In particular, bundles of transaction data, called “blocks”, are added to the ledger in a chronological fashion, forming a “chain.” These blocks include things like date, time, dollar amount, and (in some cases) the public addresses of the sender and the receiver.The computers responsible for upholding a blockchain network are called “nodes.” These nodes carry out the duties necessary to confirm the transactions and add them to the ledger. In exchange for their work, the nodes receive rewards in the form of crypto tokens.By storing data via a peer-to-peer network (P2P), blockchain controls for a wide range of risks that are traditionally inherent with data being held centrally.Of note, P2P blockchain networks lack centralized points of vulnerability. Consequently, hackers cannot exploit these networks via normalized means nor does the network possess a central failure point.In order to hack or alter a blockchain’s ledger, more than half of the nodes must be compromised. Looking ahead, blockchain technology is an area of extensive research across multiple industries, including financial services and payments, among others.
Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned.) In this sense, blockchain is immune to the manipulation of data making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tamper with. The Evolution of BlockchainBlockchain was originally invented by an individual or group of people under the name of Satoshi Nakamoto in 2008. The purpose of blockchain was originally to serve as the public transaction ledger of Bitcoin, the world’s first cryptocurrency.In particular, bundles of transaction data, called “blocks”, are added to the ledger in a chronological fashion, forming a “chain.” These blocks include things like date, time, dollar amount, and (in some cases) the public addresses of the sender and the receiver.The computers responsible for upholding a blockchain network are called “nodes.” These nodes carry out the duties necessary to confirm the transactions and add them to the ledger. In exchange for their work, the nodes receive rewards in the form of crypto tokens.By storing data via a peer-to-peer network (P2P), blockchain controls for a wide range of risks that are traditionally inherent with data being held centrally.Of note, P2P blockchain networks lack centralized points of vulnerability. Consequently, hackers cannot exploit these networks via normalized means nor does the network possess a central failure point.In order to hack or alter a blockchain’s ledger, more than half of the nodes must be compromised. Looking ahead, blockchain technology is an area of extensive research across multiple industries, including financial services and payments, among others.
Read this Term startup markets, but buyers should use caution when considering these complex investments,” said Gerri Walsh, FINRA’s Senior Vice President for Investor Education.
“ICOs involve new technologies and products that are highly technical and can be used by con-artists as an opportunity to dupe investors”. At the core of the issues is the structural issues associated with ICOs. Whilst an IPO is registered by the SEC, an ICO provides no such protection.
Investor protection, or lack thereof
A second critical issue is that it can be unclear what the ownership of the coin purchased confers. For an IPO, the person who makes the purchase is taking ownership of a share of the company. This provides a tangible and more importantly, quantifiable stake. The ownership is backed by a physical share certificate that is registered in a share registry.
A purchase of a coin via an ICO does not necessarily give the holder of the coin ownership rights, although this can often be the nature of the purchase. However, it can often simply be seen as a method of funding, whereby the ownership of the coin itself is the value, similar to how money works.
However, with actual currency, there is a market where the money can be used to purchase goods. The amount of coins are controlled by a central bank which is tasked with maintaining inflation and the ongoing strength of the economy. With a crypto-coin, although usually considered de-centralized, the de-centralization of the coin is more in relation to the users of the coin, rather than the issuing entity.
Generally the coin is monitored by a single entity, usually whichever entity that established the ICO (albeit, its creators, or miners are internationally dispersed). Unlike a central bank whose purpose is to maintain a steady control over inflation, the purpose of ICOs is to raise funds. Therefore, as long as the sale of coins have a market, the issuers will have an interest in selling them, potentially diluting the value.
'Smart' contracts
That is not necessarily the case with all Cryptocurrencies
Cryptocurrencies
By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the networks which are used to authenticate blockchain technology. Cryptocurrencies can be thought of as systems that accept online payments which are denoted as “tokens.” Tokens are represented as internal ledger entries in blockchain technology while the term crypto is used to depict cryptographic methods and encryption algorithms such as public-private key pairs, various hashing functions, and an elliptical curve. Every cryptocurrency transaction that occurs is logged in a web-based ledger with blockchain technology.These then must be approved by a disparate network of individual nodes (computers that maintain a copy of the ledger). For every new block generated, the block must first be authenticated and confirmed ‘approved’ by each node, which makes forging the transactional history of cryptocurrencies nearly impossible. The World’s First CryptoBitcoin became the first blockchain-based cryptocurrency and to this day is still the most demanded cryptocurrency and the most valued. Bitcoin still contributes the majority of the overall cryptocurrency market volume, though several other cryptos have grown in popularity in recent years.Indeed, out of the wake of Bitcoin, iterations of Bitcoin became prevalent which resulted in a multitude of newly created or cloned cryptocurrencies. Contending cryptocurrencies that emerged after Bitcoin’s success is referred to as ‘altcoins’ and they refer to cryptocurrencies such as Bitcoin, Peercoin, Namecoin, Ethereum, Ripple, Stellar, and Dash. Cryptocurrencies promise a wide range of technological innovations that have yet to be structured into being. Simplified payments between two parties without the need for a middle man is one aspect while leveraging blockchain technology to minimize transaction and processing fees for banks is another. Of course, cryptocurrencies have their disadvantages too. This includes issues of tax evasion, money laundering, and other illicit online activities where anonymity is a dire ingredient in solicitous and fraudulent activities.
By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the networks which are used to authenticate blockchain technology. Cryptocurrencies can be thought of as systems that accept online payments which are denoted as “tokens.” Tokens are represented as internal ledger entries in blockchain technology while the term crypto is used to depict cryptographic methods and encryption algorithms such as public-private key pairs, various hashing functions, and an elliptical curve. Every cryptocurrency transaction that occurs is logged in a web-based ledger with blockchain technology.These then must be approved by a disparate network of individual nodes (computers that maintain a copy of the ledger). For every new block generated, the block must first be authenticated and confirmed ‘approved’ by each node, which makes forging the transactional history of cryptocurrencies nearly impossible. The World’s First CryptoBitcoin became the first blockchain-based cryptocurrency and to this day is still the most demanded cryptocurrency and the most valued. Bitcoin still contributes the majority of the overall cryptocurrency market volume, though several other cryptos have grown in popularity in recent years.Indeed, out of the wake of Bitcoin, iterations of Bitcoin became prevalent which resulted in a multitude of newly created or cloned cryptocurrencies. Contending cryptocurrencies that emerged after Bitcoin’s success is referred to as ‘altcoins’ and they refer to cryptocurrencies such as Bitcoin, Peercoin, Namecoin, Ethereum, Ripple, Stellar, and Dash. Cryptocurrencies promise a wide range of technological innovations that have yet to be structured into being. Simplified payments between two parties without the need for a middle man is one aspect while leveraging blockchain technology to minimize transaction and processing fees for banks is another. Of course, cryptocurrencies have their disadvantages too. This includes issues of tax evasion, money laundering, and other illicit online activities where anonymity is a dire ingredient in solicitous and fraudulent activities.
Read this Term, as many have an inbuilt maximum designed to give the coins a continued value, with Bitcoin a prime example. However, the more recent issues of cryptocurrencies are not necessarily designed to mimic a financial system like Bitcoin.
Ethereum for example, has been created to allow 'smart contracts', effectively to create an efficient system of ownership transfer. Whilst maintaining the value of Ethereum coins is important, it is not essential.
There are a few other aspects that add risk to the purchase of coins from an ICO. Many of the ICOs are tokens issued by startup companies to help fund their own cryptocurrency software. since ICOs are related to a product and a company, a deep understanding of the company would help the purchaser know the long term prospects of the company and software.
Since these companies are generally not listed as a public company, they are not subject to public disclosure requirements, making the research process challenging. Since the ICOs do not confer ownership this is less of a concern, but should a company not develop the software, the tokens will be useless.
Issues of cybersecurity should also be at the forefront of the minds of those purchasing coins. It is possible that the company has poor cybersecurity, meaning that the coins are easy to steal, or worse, allow attacks on your personal information.
Issues surrounding how to get your money back, what rights are conferred with the coins and how the coin issuance is structured are key elements that also need to be investigated. In most cases there is no requirement for an ICO to address any of these issues, since there is no process for financial regulation.
This article was written by Adinah Brown from Leverate.
The recent spate of initial coin offerings (ICOs) has drawn the attention of the US financial industry’s regulatory body FINRA, warning about the potential risks to anyone that purchases the coins.
Register now to the London Summit 2017, Europe’s largest gathering of top-tier retail brokers and institutional FX investors
A bulletin from the Securities and Exchange Commission (SEC) highlighted the issue in the following terms. “Investing in an ICO may seem like an exciting way to be a part of the virtual currency and Blockchain
Blockchain
Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned.) In this sense, blockchain is immune to the manipulation of data making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tamper with. The Evolution of BlockchainBlockchain was originally invented by an individual or group of people under the name of Satoshi Nakamoto in 2008. The purpose of blockchain was originally to serve as the public transaction ledger of Bitcoin, the world’s first cryptocurrency.In particular, bundles of transaction data, called “blocks”, are added to the ledger in a chronological fashion, forming a “chain.” These blocks include things like date, time, dollar amount, and (in some cases) the public addresses of the sender and the receiver.The computers responsible for upholding a blockchain network are called “nodes.” These nodes carry out the duties necessary to confirm the transactions and add them to the ledger. In exchange for their work, the nodes receive rewards in the form of crypto tokens.By storing data via a peer-to-peer network (P2P), blockchain controls for a wide range of risks that are traditionally inherent with data being held centrally.Of note, P2P blockchain networks lack centralized points of vulnerability. Consequently, hackers cannot exploit these networks via normalized means nor does the network possess a central failure point.In order to hack or alter a blockchain’s ledger, more than half of the nodes must be compromised. Looking ahead, blockchain technology is an area of extensive research across multiple industries, including financial services and payments, among others.
Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned.) In this sense, blockchain is immune to the manipulation of data making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tamper with. The Evolution of BlockchainBlockchain was originally invented by an individual or group of people under the name of Satoshi Nakamoto in 2008. The purpose of blockchain was originally to serve as the public transaction ledger of Bitcoin, the world’s first cryptocurrency.In particular, bundles of transaction data, called “blocks”, are added to the ledger in a chronological fashion, forming a “chain.” These blocks include things like date, time, dollar amount, and (in some cases) the public addresses of the sender and the receiver.The computers responsible for upholding a blockchain network are called “nodes.” These nodes carry out the duties necessary to confirm the transactions and add them to the ledger. In exchange for their work, the nodes receive rewards in the form of crypto tokens.By storing data via a peer-to-peer network (P2P), blockchain controls for a wide range of risks that are traditionally inherent with data being held centrally.Of note, P2P blockchain networks lack centralized points of vulnerability. Consequently, hackers cannot exploit these networks via normalized means nor does the network possess a central failure point.In order to hack or alter a blockchain’s ledger, more than half of the nodes must be compromised. Looking ahead, blockchain technology is an area of extensive research across multiple industries, including financial services and payments, among others.
Read this Term startup markets, but buyers should use caution when considering these complex investments,” said Gerri Walsh, FINRA’s Senior Vice President for Investor Education.
“ICOs involve new technologies and products that are highly technical and can be used by con-artists as an opportunity to dupe investors”. At the core of the issues is the structural issues associated with ICOs. Whilst an IPO is registered by the SEC, an ICO provides no such protection.
Investor protection, or lack thereof
A second critical issue is that it can be unclear what the ownership of the coin purchased confers. For an IPO, the person who makes the purchase is taking ownership of a share of the company. This provides a tangible and more importantly, quantifiable stake. The ownership is backed by a physical share certificate that is registered in a share registry.
A purchase of a coin via an ICO does not necessarily give the holder of the coin ownership rights, although this can often be the nature of the purchase. However, it can often simply be seen as a method of funding, whereby the ownership of the coin itself is the value, similar to how money works.
However, with actual currency, there is a market where the money can be used to purchase goods. The amount of coins are controlled by a central bank which is tasked with maintaining inflation and the ongoing strength of the economy. With a crypto-coin, although usually considered de-centralized, the de-centralization of the coin is more in relation to the users of the coin, rather than the issuing entity.
Generally the coin is monitored by a single entity, usually whichever entity that established the ICO (albeit, its creators, or miners are internationally dispersed). Unlike a central bank whose purpose is to maintain a steady control over inflation, the purpose of ICOs is to raise funds. Therefore, as long as the sale of coins have a market, the issuers will have an interest in selling them, potentially diluting the value.
'Smart' contracts
That is not necessarily the case with all Cryptocurrencies
Cryptocurrencies
By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the networks which are used to authenticate blockchain technology. Cryptocurrencies can be thought of as systems that accept online payments which are denoted as “tokens.” Tokens are represented as internal ledger entries in blockchain technology while the term crypto is used to depict cryptographic methods and encryption algorithms such as public-private key pairs, various hashing functions, and an elliptical curve. Every cryptocurrency transaction that occurs is logged in a web-based ledger with blockchain technology.These then must be approved by a disparate network of individual nodes (computers that maintain a copy of the ledger). For every new block generated, the block must first be authenticated and confirmed ‘approved’ by each node, which makes forging the transactional history of cryptocurrencies nearly impossible. The World’s First CryptoBitcoin became the first blockchain-based cryptocurrency and to this day is still the most demanded cryptocurrency and the most valued. Bitcoin still contributes the majority of the overall cryptocurrency market volume, though several other cryptos have grown in popularity in recent years.Indeed, out of the wake of Bitcoin, iterations of Bitcoin became prevalent which resulted in a multitude of newly created or cloned cryptocurrencies. Contending cryptocurrencies that emerged after Bitcoin’s success is referred to as ‘altcoins’ and they refer to cryptocurrencies such as Bitcoin, Peercoin, Namecoin, Ethereum, Ripple, Stellar, and Dash. Cryptocurrencies promise a wide range of technological innovations that have yet to be structured into being. Simplified payments between two parties without the need for a middle man is one aspect while leveraging blockchain technology to minimize transaction and processing fees for banks is another. Of course, cryptocurrencies have their disadvantages too. This includes issues of tax evasion, money laundering, and other illicit online activities where anonymity is a dire ingredient in solicitous and fraudulent activities.
By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the networks which are used to authenticate blockchain technology. Cryptocurrencies can be thought of as systems that accept online payments which are denoted as “tokens.” Tokens are represented as internal ledger entries in blockchain technology while the term crypto is used to depict cryptographic methods and encryption algorithms such as public-private key pairs, various hashing functions, and an elliptical curve. Every cryptocurrency transaction that occurs is logged in a web-based ledger with blockchain technology.These then must be approved by a disparate network of individual nodes (computers that maintain a copy of the ledger). For every new block generated, the block must first be authenticated and confirmed ‘approved’ by each node, which makes forging the transactional history of cryptocurrencies nearly impossible. The World’s First CryptoBitcoin became the first blockchain-based cryptocurrency and to this day is still the most demanded cryptocurrency and the most valued. Bitcoin still contributes the majority of the overall cryptocurrency market volume, though several other cryptos have grown in popularity in recent years.Indeed, out of the wake of Bitcoin, iterations of Bitcoin became prevalent which resulted in a multitude of newly created or cloned cryptocurrencies. Contending cryptocurrencies that emerged after Bitcoin’s success is referred to as ‘altcoins’ and they refer to cryptocurrencies such as Bitcoin, Peercoin, Namecoin, Ethereum, Ripple, Stellar, and Dash. Cryptocurrencies promise a wide range of technological innovations that have yet to be structured into being. Simplified payments between two parties without the need for a middle man is one aspect while leveraging blockchain technology to minimize transaction and processing fees for banks is another. Of course, cryptocurrencies have their disadvantages too. This includes issues of tax evasion, money laundering, and other illicit online activities where anonymity is a dire ingredient in solicitous and fraudulent activities.
Read this Term, as many have an inbuilt maximum designed to give the coins a continued value, with Bitcoin a prime example. However, the more recent issues of cryptocurrencies are not necessarily designed to mimic a financial system like Bitcoin.
Ethereum for example, has been created to allow 'smart contracts', effectively to create an efficient system of ownership transfer. Whilst maintaining the value of Ethereum coins is important, it is not essential.
There are a few other aspects that add risk to the purchase of coins from an ICO. Many of the ICOs are tokens issued by startup companies to help fund their own cryptocurrency software. since ICOs are related to a product and a company, a deep understanding of the company would help the purchaser know the long term prospects of the company and software.
Since these companies are generally not listed as a public company, they are not subject to public disclosure requirements, making the research process challenging. Since the ICOs do not confer ownership this is less of a concern, but should a company not develop the software, the tokens will be useless.
Issues of cybersecurity should also be at the forefront of the minds of those purchasing coins. It is possible that the company has poor cybersecurity, meaning that the coins are easy to steal, or worse, allow attacks on your personal information.
Issues surrounding how to get your money back, what rights are conferred with the coins and how the coin issuance is structured are key elements that also need to be investigated. In most cases there is no requirement for an ICO to address any of these issues, since there is no process for financial regulation.