If there has been one constant amidst the craziness of the cryptocurrency market over the past year or so, it’s that it’s been, well, crazy. One only has to look at the vast fluctuation of bitcoin’s value during that time to show how wildly the market has grown in its current state without proper regulation.
The cryptocurrency market now is the Wild Wild West, filled with cowboys chasing after the latest opportunities and looking to make it big in the great unknown. At the same time, in the last 6 months, cryptocurrencies have seen a surge of interest amongst traditional retail investors. Institutions like Goldman Sachs have begun to set up trading desks specifically for the express purpose of trading bitcoin futures, and once they can figure out how to trade bitcoin in a way that doesn’t leave them vulnerable to hackers, this trend will likely accelerate.
But this comes at a price: as cryptocurrencies relinquish their position on the fringes of the web and move closer to widespread adoption and acceptance, there will need to be increased accountability.
It’s often said that the reason cryptocurrencies are as popular as they are is that they offer a way for people to make money and trade assets that aren’t tied to governments or existing financial institutions; in other words, it’s a decentralized system. Decentralization has its benefits, but it also has its risks, namely a lack of security and insurance in the event of theft.
Nothing shows the risks and rewards of the decentralized model more than the ICO (initial coin offering), which gives companies the option to eschew IPOs and venture capital in favor of raising money from individual investors.
For startups, this means being able to retain control without having to give up shares to a big investment bank, but it also means not yet having to comply with the strict rules and regulations around filing for an IPO. You can see where the problem lies. As these companies have not had to submit themselves to a long and arduous auditing process, investors who put money into an ICO have to trust their own instincts, with little to go on beyond the white paper that the company itself puts out.
But what happens if the ICO isn’t legitimate? A study by Satis Group, an ICO advisory firm, identified 78 percent of the ICOs in 2017 as being scams – which, when you consider the fact that ICOs conducted in the first half of 2018 alone have raised $10.3 billion, is a staggeringly high percentage.
All this leads me to my main point, which is that, because ICOs are for the most part unregulated and decentralized, there’s an even greater need for independent groups who are willing to put in the legwork to discover the potential risks to consumers. There need to be independent institutions in place to ensure that investors aren’t just being scammed out of their money by bad actors, as this will lead to improvements for the cryptocurrency market as a whole. Security, on the whole, is also a serious concern: It’s been estimated that $1.1 billion of cryptocurrency has been stolen this year, and apparently with relatively little effort.
Similarly, following the increasingly widespread adoption of Ethereum-based smart contracts in ICOs, investors are starting to pay more and more attention to the security of contracts. Because they are blockchain based, smart contracts can’t be altered once they go online.
Therefore, if there is a security vulnerability within the contract, then the losses to users can be potentially catastrophic and unrecoverable. Ever since hackers exploited vulnerabilities in the Ethereum blockchain to steal tens of millions of dollars from users in June of 2016, we have seen a never-ending stream of news regarding users having their crypto-assets stolen as a result of risky smart contracts.
There are some tools already out there to help investors make informed decisions about the coins they invest in: RatingToken, for instance, is an independent platform developed by the Blockchain Wave Lab (backed by my employer, Cheetah Mobile) that evaluates ICOs based a variety of factors, including their whitepaper information, social buzz, technical strength, team members, investment mechanisms, smart contract security, etc. and assigns them a score based on those factors. RatingToken also provides a smart contract verification service that allows users and ICO providers to easily analyze the contracts of a particular token and evaluate its security risks.
This allows investors to better adjust their strategies while helping ICO providers improve the overall security of their contract code. Other third-party rating agencies, including ICORating, provide similar services – which shows how much of a demand there are for platforms that actually educate investors on what they’re investing in.
For those who are opposed to increased government oversight, these independent platforms offer a valuable service. Decentralization allows for the democratization of opportunity and access; currently, anyone can make the decision to invest in an ICO without having to call their broker. But at the same time, the ecosystem is incredibly fragile, and a large-scale scam or hack could be all it takes for investors to lose faith in the system. Having a third party independently vet ICOs, and offer determinations on whether they think it’s a legitimate enterprise or not, will greatly help ICOs gain mainstream acceptance.
Some might argue that inviting this type of oversight will create a sort of walled garden, where only certain ICOs will be represented as being safe to invest in. But the goal of these platforms is not to create a cryptocurrency version of the FDIC; rather, it’s to ensure that investors become educated about the risks they are entering into and less vulnerable to bad actors. Decentralization remains at the heart of cryptocurrency, but it’s time to make ICOs a safer space for all.