Is cryptocurrency market a ticking time-bomb?

Ethereum co-founder warns investors are fanning a blockchain assets bubble

NEW YORK: Investors pouring millions into startups with nothing more than a white paper and entrepreneurs issuing dispensable digital coins to cash in on the hype are fanning a blockchain assets bubble, according to one of the ethereum network’s co-founders.

Firms have raised US$1.3bil this year in digital coin sales, surpassing venture capital funding of blockchain companies and up more than six-fold from the total raised last year, according to Autonomous Research.

The so-called initial coin offerings helped ether, the digital currency linked to the ethereum blockchain, to surge from around US$8 at the start of the year to just under US$400 last month. It’s since dropped by about 50%.

“People say ICOs are great for ethereum because, look at the price, but it’s a ticking time-bomb,” Charles Hoskinson said in an interview. “There’s an over-tokenisation of things as companies are issuing tokens when the same tasks can be achieved with existing blockchains. People are blinded by fast and easy money.”

Hoskinson is part of a growing chorus of blockchain technology watchers voicing concern about the rapid surge in cryptocurrency prices and digital coin crowdsales that have collected millions of dollars in minutes.

Regulation is the biggest risk to the sector, as it’s likely that the US Securities and Exchange Commission, which has remained on the sidelines, will step in to say that digital coins are securities, he said.

Startups raising money through ICOs usually skip the safeguards required in traditional securities sales, like making sure they’re dealing with accredited investors and verifying the source of funds. That could lead to lawsuits in the future, as digital coin buyers can sue the issuer claiming they didn’t know the risks of buying those assets, Hoskinson said

Hoskinson joined the ethereum founding team in late 2013 and left in June 2014 as he advocated for a for-profit entity while others in the team led by Vialik Buterin wanted to keep it as not-for-profit.

Ripple chief executive officer Brad Garlinghouse had a similar view regarding regulatory risks.

Teams listing companies offshore and selling their coins to investors outside the US are naive to think there are no investor protection laws elsewhere, and also think the SEC will eventually say cryptocurrencies are securities, he said in an interview last week. — Bloomberg