New Reports Provide Sobering Perspectives on Cryptocurrencies, ICOs, and Blockchain

In 2018, the fervor in some quarters for cryptocurrencies, Initial Coin Offerings (ICOs), and blockchain technology has been surging, even in the face of reports of cryptocurrency exchange hacking, investor fraud, and a 44 percent survival rate for cryptocurrency startups after just 120 days.  From 2017 to 2018, according to CoinSchedule, companies’ fundraising via ICOs increased substantially, from $3.8 billion to $11.9 billion.

Since June, however, a series of reports indicate that while industry leaders like IBM and Microsoft are heavily engaged in blockchain spending, companies and individuals should maintain a high degree of skepticism about the near-term prospects for cryptocurrencies, ICOs, and blockchain:

  • On July 2, CNBC reported that more than 800 cryptocurrency projects that had materialized in the preceding 18 months “are now dead because they were scams, a joke or the product hasn’t materialized” and their coins “are worthless and trade at less than 1 cent.” The report also noted that the price of bitcoin had fallen approximately 70 percent since its record high near $20,000 in 2017.
  • On July 16, the Commodity Futures Trading Commission (CFTC) issued an advisory that warned customers to “exercise caution and conduct extensive research before purchasing digital coins or tokens.” The CFTC, which has issued three previous advisories about virtual currencies, warned that “[t]he market for digital coins and tokens is still very young, and there is no widely-accepted standard for placing a value on a particular digital coin or token.”
  • On July 31, Forrester Research issued a report that indicated approximately 90 percent of U.S. companies’ experimental blockchain projects are ultimately being ended before they reach the operational stage.
  • On August 5, the Wall Street Journal reported, according to CoinTelegraph, that it had found 175 organized groups, trading 121 different coins, that had been engaging in “pump and dump” schemes to inflate coin prices artificially and sell their coin holdings rapidly in high volumes. In just the first six months of 2018, according to the Journal, these trading groups generated revenues of $825 million.

While there are reasons to hope that blockchain technology can improve financial crimes risk management and other processes in the future, at present cryptocurrencies as a payment instrument are, as Forrester put it, “not for the faint-hearted” and require a risk management decision if an organization is considering whether to accept them as payment.

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