Digital currencies aren’t worth your money

Initial coin offerings have become the most common way to finance cryptocurrency ventures, of which there are now nearly 1,600 and rising. In exchange for your dollars, pounds, euros, or other currency, an ICO issues digital “tokens,” or “coins,” that may or may not be used to purchase some specified good or service in the future.

Thus it is little wonder that, according to the ICO advisory firm Satis Group, 81 per cent of ICOs are scams created by con artists, charlatans, and swindlers looking to take your money and run. It is also little wonder that only 8 per cent of cryptocurrencies end up being traded on an exchange, meaning that 92 per cent of them fail. It would appear that ICOs serve little purpose other than to skirt securities laws that exist to protect investors from being cheated.

If you invest in a conventional (noncrypto) business, you are afforded a variety of legal rights — to dividends if you are a shareholder, to interest if you are a lender, and to a share of the enterprise’s assets should it default or become insolvent. Such rights are enforceable because securities and their issuers must be registered with the state.

Moreover, in legitimate investment transactions, issuers are required to disclose financial information, business plans, and potential risks. There are restrictions limiting the sale of certain kinds of highrisk securities to qualified investors only. And there are anti-money-laundering and know-your-customer regulations to prevent tax evasion, concealment of ill-gotten gains, and other criminal activities such as the financing of terrorism.

In the Wild West of ICOs, most cryptocurrencies are issued in breach of these laws and regulations, under the pretense that they are not securities at all. Hence, most ICOs deny investors any legal rights whatsoever. They are generally accompanied by vaporous “white papers” instead of concrete business plans. Their issuers are often anonymous and untraceable. And they skirt all AML and KYC regulations, leaving the door open to any criminal investor.

Jay Clayton, the chairman of US Securities and Exchange Commission, recently made it clear that he regards all cryptocurrencies as securities, with the exception of the first mover, Bitcoin, which he considers a commodity. The implication is that even Ethereum and Ripple — the second- and third-largest cryptoassets — are currently operating as unregistered securities.

So, hundreds of ICOs that have raised billions of dollars in recent years have been technically illegal. Even worse, the business model behind most of them is simply to fleece customers.

In normal business transactions, customers can buy goods and service with conventional currencies. But in an ICO, customers must convert that currency by buying into a limited pool of tokens in order to make a purchase. No legitimate business that is trying to maximise profits would require its customers to jump through such hoops.

In fact, the only reason to restrict a purchase to token-holders is to create an illegal cartel of service providers who are safe from price competition and in a position to gouge their customers. Consider Dentacoin, a ridiculous cryptocurrency that can be spent only on dental services (which almost no dentist actually accepts). It would be hard to come up with a better illustration of why business cartels are illegal in all civilised countries.

The fact that everyone within a given country uses the same currency is precisely what gives money its value. Money is a public good that allows individuals to enter into free exchange without having to resort to the kind of imprecise, inefficient bartering on which traditional societies depended.

That is precisely where the ICO charlatans would effectively take us — not to the futuristic world of The Jetsons, but to the modern Stone Age world of The Flintstones where all transactions occur through the barter of different tokens or goods. It is time to recognise their utopian rhetoric for what it is: self-serving nonsense meant to separate credulous investors from their hard-earned savings. —Project Syndicate Nouriel Roubini is a professor at

NYU’s Stern School of Business and CEO of Roubini Macro Associates.

The fact that everyone within a given country or jurisdiction uses the same currency is precisely what gives money its value