Profile of a fraud accuser
It was a roller coaster time for crypto currencies especially bitcoins – the most famous among the cryptos – in September through the middle of October. It all began on Sept 4 when China banned the Initial Coin Offering (ICO) platform used by startups to raise funds from the public for their innovative projects via issuing digital tokens.
Prior to this, in August analysts had already anticipated the move against ICO by China. Hence, the market had already factored in the ICO ban, and the fluctuations in prices and market capitalization of the crypto market thereafter were within a reasonably modest range for the next several sessions after the ban.
Until one loudmouth idiot started to label bitcoin as a fraud, then the crypto market soon went into a 40% dive. But even this did not constitute the end of the world for the cryptos as a fall of this magnitude is a recurrent pattern since late last year.
In mid July, for instance, it was far worse as the market had declined precipitously by nearly 50% from a peak in mid June, when it set an all-time high of a total market cap of US$115bil, according to data from Coinmarketcap. In just over 30 days, the market has fallen 50% to a low of US$61bil.
So the fall in prices and market cap due to China’s crackdown on ICOs was no big deal. Apparently, after the 50% fall in July, the market soon reached its previous all-time high set in June mentioned above and by August had already reached another record breaking all-time high of US$179.8 bil, which was on the eve of China’s crackdown on ICOs.
The immediate effect of the China’s ban was the erosion of market cap to below US$135 bil on Sep 5 (a day after the ban) before recovering to more than US$165 bil and dropping again to US$146 bil on Sep 8. After this, the market cap continued to fluctuate within a reasonably modest range for the next several sessions.
But all it took for the market cap of these coins to roll downhill was the declaration “bitcoin is a fraud” on Sep 13 by the loudmouth and rather inconsistent to the point of being schizophrenic CEO of JPMorgan, Jamie Dimon. By the next day, the market cap was reeling under this unfair characterization of Dimon to fall to US$112 bil – a 37.7% drop from its all time high in August.
Back in April 2015, Dimon, known to be famously dismissive of bitcoins had seemed repentant when he said his bank could learn from disruptive payment systems like bitcoin. He made the comments in his annual letter to JP Morgan shareholders, noting:
“You all have read about bitcoin, merchants building their own networks, PayPal and PayPal look-alikes. Payments are a critical business for us – and we are quite good at it. But there is much for us to learn in terms of real-time systems, better encryption techniques and a reduction of costs and ‘pain points’ for customers.”
The letter, which flagged the bank’s recent “record results” and incoming competition in the payments space, suggested JP Morgan would seek to monitor these competitors – and outpace them.
“We need to acknowledge our own flaws … Rest assured, we analyse all of our competitors in excruciating detail – so we can learn what they are doing and develop our own strategies accordingly.”
And by the first half of this year, JP Morgan was reported to have invested as much as US$9 bil in cryptocurrency technologies like the blockchain distributed ledger and public key cryptography, following the footsteps of other banks like Barclays, Citigroup and Goldman Sachs.
Interestingly, JPMorgan is a founding member of the Enterprise Ethereum Alliance, launched in February, which hopes to create an open-source blockchain standard around the technology for the business world.
It has gained more than 200 members in less than a year – including a number of Fortune 500 companies, with household names like BP, MasterCard, Intel, and Microsoft sitting side by side with cryptocurrency-focused organisations like talkcrypto.org, CoinFund, and iExec, along with a handful of banks and educational entities.
Thus, it is incredulous and mind boggling for Dimon to say that bitcoin is a fraud but at the same time sees potential in blockchain, the technology behind “fraud” bitcoin.
On Oct 13, JPMorgan launched a blockchain-based system with two other banks to reduce global payment transaction speeds “from weeks to hours”. Blockchain creates a quick, permanent and transparent record of transactions, eliminating the need for third party verification.
When the pseudonymous Satoshi Nakamoto conceptualised the first distributed blockchain in 2008, and later implemented it in 2009 as a core component of the digital currency bitcoin, where it serves as the public ledger for all transactions, trust in the ability of governments and banks to manage the economy and the money supply was at its lowest. This is in the aftermath of the sub-prime mortgage crisis also known as the Great Recession of 2008.
In this regard, Dimon does not stand on a moral high ground to declare bitcoin is a fraud when he himself has presided over the largest sanctions ever levied against JPMorgan – somewhere between US$2.6 bil it agreed to pay in 2014 for allegedly failing to stop Bernard Madoff’s Ponzi scheme, and a US$13 bil settlement it reached with government authorities in 2013 for its handling of mortgage bonds that fueled the financial crisis, as reported by Bloomberg.
Perhaps his schizophrenic statement on bitcoin and blockchain technology is a sign that he could already see the future in which banks like his do not stand a chance to be in its current, entrenched position and maybe eclipsed by fintech companies which are now startups and may play a dominant role in the banking and finance sector of the future with their disruptive technologies.
Whatever his motivation in declaring bitcoin as a fraud, he will make an interesting subject of study by the financial psychologists.
Now back to the China’s ban on ICO. The article below will highlight what’s behind the ban and the lessons from Singapore whose reaction to ICO can only be described as cool, collected and sensible.
It does not dramatise the rapid rise in the price of bitcoin as worse than tulip bulbs simply because it must have realised that 99.9% of the world population are still ignorant of the existence of crypto currencies. So how can the 0.1% cause a financial contagion with the volatility in price? Read on …
Mixed blessings of ICOs
By Jamari Mohtar
Across the Straits
Focus Malaysia | Oct 21, 2017
When China finally made the anticipated move against Initial Coin Offerings (ICOs) in September, followed by some other countries, the doomsayers were up on their feet, predicting gleefully on an impending epic crash of crypto currencies especially bitcoins.
One professor of economics sent me a Bloomberg article on JPMorgan Chase’s CEO Jamie Dimon saying bitcoin “is a fraud”, while a friend who was a former professor of economics with characteristic nonchalance messaged me, saying bitcoin is worse than tulip bulbs.
Then came the news that Bank Negara Malaysia (BNM) is mulling whether to ban cryptos by year’s end, and all smart-alecs went on overdrive in raving and ranting in a holier-than-thou fashion of “I told you so”, until I have to point out the fact the decision will be made later shows cryptos are currently not banned in Malaysia.
These people were barking up the wrong tree. The culprit is ICO but bitcoin gets the blame when in actual fact the famous crypto was never created through an ICO. Instead of an epic fall, it only fell 46% to US$2,981, days after Dimon’s comments on Sep 13 – a pattern already repeated several times this year, some with a more than 50% fall. But it has since recovered to its previous high in early October – another repeated pattern – and is now trading at about US$5,674 as of Oct 16.
What’s behind the China ban?
What we’ve seen in China is the proliferation of start-up companies or projects issuing digital currency tokens that were supposedly backed by the prospect of future technological innovations, which turned out to be dubious innovations and basically cashing in on this ICO craze. These are nothing more than scams.
The worst part is when ICOs were used to raise funds by creating digital tokens that are strictly not cryptos because of the absence of block chain distributed ledger and public key cryptography in their creation. Here’s a simple rule: Cryptos are digital monies but not all digital monies are cryptos unless they are “embedded” with the block chain and public key cryptography.
Take the case of the US dollars. At last count, there’s more than US$13.5 tril in existence. But the US Federal Reserve says only US$1.5 tril exists as actual paper notes, which means nearly 90% of all US dollars in the world exist as “digits on a screen” – digital monies not of the crypto kind.
And the Fed creates most of it out of thin air, which they can’t do with cryptos. You may remember quantitative easing (QE) used by the Fed to jump-start the economy and stimulate it. Most people think of it as a massive money-printing operation, but the Fed actually didn’t print any money. It just added a few digits to its balance sheet.
The QEs had depressed interest rate to almost zero which caused a global debt-spending spree that in turn caused asset price bubble, thus postponing complete recovery till today.
This low interest rate regime prompted investors to seek a better rate of return and when they saw prices of cryptos went up by leaps and bounds, the crypto craze was born. That was last year.
Hence, when US$400 mil has been raised in China so far on the ICO platform, the People’s Bank of China came out and said, “Look, enough is enough. This is out of control. We’re putting a complete ban on ICOs.”
Lessons from Singapore
Singapore has the uncanny ability to “smell” emerging technologies that will become mainstream when these were still in their infancy and are not on the lips of other governments.
Since independence, the city-state has made the art of futurology a science. Also known as strategic foresight, futurology is the study of postulating possible, probable, preferable or alternative futures, and the worldviews and myths that underlie them.
Tools of strategic thinking like scenario planning and terrain mapping are often used in this field. Also employed is the methodology called emerging issues analysis which searches for the drivers of change, issues that are likely to move from unknown to the known, and from low to high impact.
This has resulted in the city-state having a competitive advantage of being, most often than not, a first mover in applying new technologies.
The country’s pro-business policy is well known but what is seldom known is its love for for start-up companies that have the potential to, metaphorically speaking, lay the golden eggs. Thus, they will be treated like a “pampered” child so as to help them focus their mind on their innovative spirit to discover technologies that will be beneficial to mankind.
I first discovered this when writing that Bitcoin “rolled” in Singapore in FocusM in 2014. The focus of the news then was on the island-state being the first country in Asia to roll out the Bitcoin ATM and its stance on bitcoin being not a legal tender in the country and will remain unregulated. What caught my attention then was that a local startup was the manufacturer of the Bitcoin ATM machine itself. It had created a mania when it first made an appearance in Europe and the US.
My article and a subsequent one showed Singapore had already become a hub for crypto currency technologies in 2014. This means it had already positioned itself as a hub way back before 2014 when words like blockchain or peer-to-peer network were seldom heard. This also means the process of applying futurology that led to this decision was even made much earlier, probably in 2010.
Cool and collected
This explains why its response towards the ICOs is cool, collected and sensible. It does not dramatise the rapid rise in the price of bitcoin as worse than tulip bulbs simply because it must have realised that 99.9% of the world population are still ignorant of the existence of crypto currencies. So how can the 0.1% cause a financial contagion with the price volatility?
As for ICO, start-ups need funding for their innovative projects because they do not have the track record to apply for funding under a highly regulated Initial Public Offering (IPO), and the sole avenue open for them in this regard is the costly venture capitalists’ funding.
Singapore appreciates the innovative spirit of ICO, which strictly speaking resembles crowd funding, and hence it adopts a targeted approach to improving ICO with existing, not new, legislation by making any tokens that have the characteristics of securities come under the Securities and Futures Act.
On the exponential rise in value of some cryptos, the republic’s Deputy Prime Minister, Tharman Shanmugaratnam, said “as a financial regulator, MAS’ focus is securitised interests in assets – such as shares in a company”. The Monetary Authority of Singapore (MAS) “does not and cannot regulate all products that people put their money in thinking that they will appreciate in value”.
“But recognising the risks of investing in virtual currencies are significant, MAS and the Commercial Affairs Department have published an advisory alerting consumers to these risks, and are working together to raise public awareness of potential scams,” added Tharman to queries on virtual currency in a parliamentary sitting on Oct 3, the day BNM announced it was considering banning cryptos.
Jamari Mohtar is a veteran journalist who used to live and work in Singapore. Comments: email@example.com