Global Trustee and Fiduciary Services News and Views Issue 50

Global Trustee and Fiduciary Services News & Views | Issue 50 | 2018 69 All this volatility suggests cryptocurrencies can’t be relied on as a stable method of remuneration or trade. At this point in time, it may be prudent to think that they can only be considered as a speculative investment. The original aim of providing an alternative to central banks and government-backed fiat currencies is still some way off. Can you rely on the technology? Both Wei Dai and Satoshi Nakamoto’s proposals for decentralised currencies are based on the premise that you can’t trust anyone else. Therefore, by distributing the ledger to multiple nodes and using independent verification of transactions, double-spending and fraudulent transactions can’t happen. However, they do. Despite the safety net of decentralisation that cryptocurrencies promise, there is a flaw with the nexus between the virtual world and the real world. It’s here, in the digital “wallets” where individuals exchange fiat currencies for the cryptocurrency of their choice (or vice versa), that fraudulent attacks have taken place. Whereas Bitcoin’s type of distributed ledger, known as blockchain, can only be corrupted by a coordinated attack by the majority of users, some exchange and wallet providers have proved themselves to be incapable of protecting investors’ interests. 9 And with so many small cryptocurrencies in existence, the nightmare scenario of a 51% attack, where the fraudsters computing power outweighs that of other users, has become a reality with reports of blockchain-based cryptocurrencies experiencing attacks from coin miners controlling the majority of the processing power. In these cases, the attacking miners double-spend coins, transferring them to wallets and converting the value to other cryptocurrencies, never to be seen again. 10 There’s also the issue of scale. In its 2018 Annual Report, BIS estimates that if a cryptocurrency was to replace a fiat currency as an everyday means of payment, the size of the ledger would exceed the available storage capacity of servers in a matter of months. BIS also raises questions over the ability of current cryptocurrency algorithms to process the number of transactions required by a fiat currency, and quotes cryptocurrencies’ ability to process over three transactions per second. However, according to BIS, VISA currently processes over three and a half thousand transactions per second. Evolving technology will eventually bring transaction speeds up, but mass-market applications are still years away. Initial Coin Offerings: there’s one born every minute P. T. Barnum, purveyor of hokum and humbug, may not have said “there’s a sucker born every minute”, but plenty of people have fallen prey to the ICO humbug. Barnum did say “ ‘humbug’ consists in putting on glittering appearances — outside show — novel expedients, by which to suddenly arrest public attention, and attract the public eye and ear.” 11 And there have been numerous examples of ICOs appearing, attracting investment with the glitz and glamour of untold returns, only to disappear overnight, the invested money gone, the organisers, so prominent and good-looking in the ICO’s promotional material, no more real than Barnum’s Feejee Mermaid. 12 So what’s an ICO? Broadly speaking, an ICO’s a fundraising event where the issuer offers coins/tokens in return for investment of existing coins such as Bitcoin or Ether as well as fiat currencies. They’ve become a popular method of crowd funding, bypassing more established crowd-funding platforms and appealing to those who have already caught the cryptocurrency bug. However the cryptocurrency craze that has fuelled their volatility has attracted the unscrupulous, as well as those who honestly see ICOs as an efficient way to fund their businesses. Using the anonymity built in to cryptocurrencies, miscreants have created an industry where thinly veiled scams promising unlikely returns have taken in millions of US dollars only to be revealed as nothing more than smoke and mirrors and because investments are made using cryptocurrencies, it’s almost impossible to trace the fraudsters once they’re gone. 13