The pendulum is swinging back against cryptocurrencies in a big way. Regulators across the world are getting mobilized.
While the technology behind cryptos—blockchain—will morph many times, regulators want to get a handle on cryptos. There may be fraud, market manipulation and money laundering involved. It's a legitimate concern.
The most recent reason to be worried is that a crypto-token called Tether may be propping up Bitcoin prices. Tether is a virtual currency said to be backed up by a reserve account linked to the value of real dollars. Like most cryptocurrencies, Bitcoin is only backed by what people think it's worth.
"Some people think bitcoin’s spectacular price rise last year was manipulated by a cryptotoken called Tether that’s supposed to be pegged to the US dollar," reports Quartz.com.
"Now, an anonymous report answers the question: What would bitcoin be worth without Tether? The answer: around $4,500, based on the current bitcoin price of about $7,600."
Why should you get bothered about an anonymous report? For one thing, regulators have subpoened records relating to Tether, Bloomberg reported.
If the currency isn't really linked to actual dollars—and it was propping up Bitcoin prices—then that would signal that Bitcoin and other currencies aren't worth what speculators and investors think they are. Using an analogy, it's the equivalent of a company lying about its orders or accounts receivable. That would lower its net earnings—and would clobber its stock price once investors found out.
So regulators are most focused on a lack of transparency in who's buying cryptocurrencies and their related "coins," which have become a big business.
More than $1 billion has been raised in initial coin offerings in this January alone, compared to only $2 million raised in the same month a year ago, according to Token Economy.
Not surprisingly, regulators from the Bank of Japan to securities regulators like the SEC have issued targeted warnings on ICOs and direct cryptocurrency ownership.
Even though they occupy space on your computer's hard drive, they can be hacked and stolen.
You could also get swindled by something selling cryptos. They are not gold and certainly not bonds.
Then there's the volatility. Bitcoin has lost half of its value this year. Now, even state agencies are trying to warn investors.
The Idaho Department of Finance, for example, issued this warning:
“Investors should go beyond the headlines and hype to understand the risks associated with investments in cryptocurrencies, as well as cryptocurrency futures contracts and other financial products where these virtual currencies are linked in some way to the underlying investment,” said Gavin Gee, director of the Department of Finance.
“The recent wild price fluctuations and speculation in cryptocurrencyrelated investments can easily tempt unsuspecting investors to rush into an investment they may not fully understand,” Gee said.
“Cryptocurrencies and investments tied to them are high-risk products with an unproven track record and high price volatility. Combined with a high risk of fraud, investing in cryptocurrencies is not for the faint of heart.”