As Bitcoin Bubble Loses Air, Frauds and Flaws Rise to Surface

As Bitcoin Bubble Loses Air, Frauds and Flaws Rise to Surface, by Nathaniel Popper (in the NYT, which is ideologically predisposed to government currencies and lots of government regulation).

Bitcoin is currently at US$7,000, having peaked at nearly US$20,000 in December. (Exactly when futures trading of Bitcoin started. Coincidence? Probably not.)

You did not have to be a technophobe to worry that the virtual-currency boom of the past year papered over plenty of problems. …

True believers say the design of virtual currencies — meant to cut out middlemen and government authorities — has made bad behavior more prevalent amid this particular bubble.

“Cryptocurrencies are almost a perfect vehicle for scams,” said Kevin Werbach, a professor at University of Pennsylvania’s Wharton School. “The combination of credulous buyers and low barriers for scammers were bound to lead to a high level of fraud, if and when the money involved got large. The fact that the money got huge almost overnight, before there were good regulatory or even self-regulatory models in place, made the problem acute.” …

Early last month, securities regulators in Texas and North Carolina issued cease-and-desist orders to BitConnect, an operation that had grown to be worth $3 billion. But those moves only came after BitConnect had operated openly for months, collecting hundreds of millions of dollars from people around the world despite being labeled a Ponzi scheme by many prominent people in the virtual currency industry. …

A new virtual currency, Proof of Weak Hands Coin, whose creators referred to it as a Ponzi scheme on Twitter and use a pyramid as a website logo, raised $800,000 before hackers got into its systems last week and drained its funds. Another pyramid scheme, MMM, which was shut down in an earlier incarnation by the Russian government, has been revived thanks to the popularity of Bitcoin and is operating openly, with particular success in Africa. …

One challenge facing regulators is that it is unclear how much of the deceptive activity they can legally control.

Some online groups openly try to manipulate the prices of digital tokens in what are known as pump-and-dump schemes. Similar schemes involving stocks are illegal, but people operating the groups recently told BuzzFeed that they did not think the same rules applied to virtual currencies. …

Facebook announced last week that it would no longer allow advertisements for virtual currency projects. On Friday, JPMorgan Chase and Bank of America said they would bar customers from using credit cards to purchase virtual currencies; Citigroup followed suit on Monday. …

Coincheck, which until last month was one of the largest exchanges in Japan, announced on Jan. 26 that it had lost nearly half a billion dollars of a virtual currency known as NEM, in what appeared to be the largest hack to hit the industry.

Traders have been particularly worried about the largest Bitcoin exchange in the world, Bitfinex, an unregulated operation that has provided few details about its operations, raising concerns about whether it is insolvent or involved in price manipulation. …

But the biggest number of incidents have cropped up around so-called initial coin offerings, in which entrepreneurs sell custom virtual currencies to investors to raise money for software they are building. About 890 projects raised over $6 billion last year.