Although the cryptocurrency fever among student communities in Korea seems to be dying down, the attention of the world is still focused on cryptocurrencies. The cryptocurrency regulation was even dealt at the G20 Meeting of Finance Ministers and Central Bank Governors in March 2018, and even some countries are issuing their own cryptocurrency as legal tender. That is, cryptocurrencies may start to have a much bigger influence within society than first thought. Last month in the April issue, the Sungkyun Times (SKT) looked at the general concept of cryptocurrencies and their current position within Korea. This month in the second and last article on cryptocurrency, the SKT scrutinizes some controversies over cryptocurrencies and some of the measures that countries around the world are taking.
Into Cryptocurrency Affairs
Ticking Time Bomb: Cryptocurrency Pyramid Scheme
In Korea, people have recently been investing money into the “pyramid scheme” of cryptocurrencies. The crackdown by prosecutors and the police since July 2017 identified that the amount of losses caused by the pyramid scheme fraud of cryptocurrencies had already exceeded \500 billion in total. In the 2017 Mining Max incident, in particular, \270 billion was taken from 18,000 domestic and foreign IDs, which is known to be the biggest loss among cryptocurrency frauds. The victims were promised the trust management of Ethereum mining machines once they purchased them. The actual number of machines up and running, however, only accounted for 10% of the number of sales, while the amount of Ethereum being mined was shown to the victims as if there was no problem at all. The number of victims increased as people were encouraged to recruit new members through compensation, which is a typical characteristic of a pyramid scheme.
In February 2018, the Supreme Prosecutors’ Office announced its plan to hand-out heavy penalties to cryptocurrency pyramid scheme criminals. After the announcement, still, cryptocurrency seminars and presentations by pyramid scheme companies are being held almost every day all over the country.
|The main target of the fraud were those in their 40s and 50’s who are relativelyunfamiliar with the new technology/ news.joins.com|
Fake Security: Cryptocurrency Market Hacking
As cryptocurrencies became a new target for hackers due to their rising value, the amount of “coin” extortion increased more than 30 times over the past three years. Chainalysis, an American cyber security company, reported that the number of bitcoins extorted through hacking and fraud grew from about $3 million in 2013 to about $90 million in 2017.
Japan, where the biggest bitcoin markets exist and more than half of the global cryptocurrencies are transacted daily, was particularly affected by the cryptocurrency market hackings. In February 2014, Mt. Gox, the biggest cryptocurrency market in the world at the time, went bankrupt after bitcoins worth about $450 million were hacked and stolen. Four years later, in January 2018, a cryptocurrency NEM worth about $540 million was hacked again in Coincheck, the biggest cryptocurrency market in Japan. It was the largest hacking incident so far; the Wall Street Journal analyzed that it could have possibly put an end to the cryptocurrency fever. Eric Larchevêque, the CEO of cryptocurrency security company Ledger Wallet, said that hackers around the world are after cryptocurrency since it has instant monetary value unlike passwords of bank accounts.
|Timeline of Domestic and Internationl Cryptocurrency Market Hackings/ news.kmib.co.kr|
What are the Problems of Cryptocurrencies?
Futility of Ultra-Secure Blockchain
As introduced in the April issue, blockchain, the basis system for all cryptocurrencies, is characterized by its high security. Ironically, however, cryptocurrency hackings are occurring all around the world. This is mainly because blockchain technology is not being used during the process of transactions. Under the initially designed method, once every dealer creates a wallet, each wallet becomes one block and the management and transactions are made through the chain which links every block; this circulation is based on the blockchain principle. Most domestic and international cryptocurrency markets, however, are not applying this dispersal technology; rather, they are applying the centralized method just like the existing stock market.
Instead of using their own wallets, dealers create wallets in the market where they deposit money for later usage. Hackers, therefore, extort cryptocurrencies from the market mainly by using malware to check the market itself and find out where all the wallets and coins are being kept. Furthermore, there are two types of wallet used in the market, and they differ in security levels. A “cold wallet” is a hardware wallet similar to a USB; it is equipped with its own code and is relatively safe from hacking threats because it is physically separated from computers or smartphones. A “hot wallet”, on the other hand, is an online wallet for cryptocurrency transactions and its security level is lower than the cold wallet. The losses in the Mt. Gox and Coincheck incidents turned out to be considerable because all those coins were kept in hot wallets with low security levels. Weiss Rating, an American credit-rating agency, advised not to keep cryptocurrency in the market considering the dangers of being hacked. Experts also stressed that it was important to check whether the market is using cold wallets or not.
Investment or Donation: Double-Sidedness of ICO
Initial Public Offerings (IPOs) have been one of the traditional ways of raising funds for companies; as cryptocurrencies developed, Initial Coin Offerings (ICOs) settled as a new fund-raising method. The two methods are similar in that both of them are used by companies to raise funds from the public, but they have definite differences since the medium has changed.
Unlike stocks in IPOs, coins in ICOs do not provide investors with any voting rights or stakes; therefore, it is investing based merely on the belief in the project plan of a certain company. Since people make investments with pure trust in the plan, ICOs are often referred to as “donations” rather than “investments”. It is hard to evaluate the authenticity of the developers or the vision of projects that little-known companies present solely through their plans though. According to the multinational business magazine Fortune, among 902 projects that raised funds through ICOs in 2017, 418 projects failed after or even before the funds were raised, showing a 46% failure rate. Recently, fraudulent ICOs were caught, startling the market. Regulations of the financial authorities of each country or a guideline, at least, seem to be necessary against the “ultra-high-risk, ultra-high-profit” ICOs.
Various Approaches Towards
As numerous incidents related to cryptocurrencies are occurring around the world and controversies still exist, various governments are approaching cryptocurrencies in diverse ways.
The cryptocurrency regulations imposed by each country around the world has been multifarious thus far, as can be seen in the chart below.
Countries with “voluntary restraint” regard cryptocurrency transactions as legal and do not make any related rules. In the case of Switzerland, however, the financial authority published a series of guidelines explaining how the existing principles of its financial market will be applied to ICOs, in order to raise the transparency of transactions. Countries with “legislation” also regard cryptocurrency transactions as legal and implement legal regulations through permission or registration systems in the market. Countries with “restraint but without legislation” are in quite ambiguous situations since they do not have any bills to ban or regulate cryptocurrency transactions, but neither are they totally generous about it. In the case of South Korea, there is no legal regulation but a regulation through a system such as real-name cryptocurrency transaction system exists; movements for legislation, however, are likely to be seen domestically. China, which has held the highest number of bitcoins in the world, started to regulate cryptocurrencies as soon as capital outflow increased along with the speculation. It prohibited ICOs by defining them as illegal and closed the market in September 2017, and mining has been banned since January 2018 as well.
Currently, clarifying the regulations on cryptocurrencies is one of the tasks that each government is required to solve. In order to counteract the side effects of the multifarious regulations of each country, such as money laundering through international cooperation, governments of the major countries discussed the need for a global regulation on cryptocurrency at the G20 Meeting of Finance Ministers and Central Bank Governors on March 19th and 20th, 2018. Details on the collaborative regulations will be discussed further this upcoming July.
2018, the Year of National Cryptocurrency?
Some countries have been issuing their own national cryptocurrency. Countries that were using Unites States (US) dollars due to the absence of their own monetary system are especially aiming to become “dollar-independent” by introducing their own cryptocurrency. The Marshall Islands in the Pacific Ocean, for example, recently issued a national cryptocurrency called the Soveriegn.
The most notable country is Venezuela. Venezuela issued its national cryptocurrency the Petro in February 2018 in order to substitute its existing monetary system that lost its function as legal tender due to severe inflation. On security of oil reserves of Venezuela, which are the biggest in the world, one Petro is worth about $60. The Venezuelan government announced that it has sold about Petro worth of $5 billion through advanced and official sales. Though there were skeptical views regarding the Petro due to the low credibility of Venezuela in the monetary market, the Petro is gaining worldwide attention as it has become more popular.
Some anti-American countries that are suffering from economic sanctions by the US are focusing on the national cryptocurrency as well. They anticipate to circumvent financial sanctions of the US by issuing cryptocurrencies which are hard to track. Iran, for example, is planning on introducing a national cryptocurrency through the Post Bank of Iran, and Russia is also proceeding with issuing a national cryptocurrency, the Cryptoruble, under the directions of President Vladimir Putin. Crypto Insider, an American medium on cryptocurrency, said, “Regardless of their questionable function, it is clear 2018 is set to be the year of state crypto. How long they last is another question.”
<저작권자 © THE SUNGKYUN TIMES, 무단 전재 및 재배포 금지>