Fraud and regulation plague start of 2018

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Global cryptocurrencies dropped into the red amidst a string of negative news causing a steep loss of confidence for investors. These events were headlined by:

1. Korea government debates on banning or regulating bitcoin

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In early January 2018, Korea’s Finance Minister Kim Dong-yeon said in an interview that banning trading in digital currencies was ‘a live option’, and that ‘There are no disagreements over regulating speculation’. In addition, Korea’s Justice Minister Park Sang-Ki claimed his ministry ‘is basically preparing a bill to ban cryptocurrency trading through exchanges'. With Korea being the world’s largest bitcoin trader, this regulatory scare sent negative shockwaves in the crypto market.

However, any draft legislation would require parliamentary approval, meaning it could take months if not years to come into effect. Even then, given the hugely popular nature of cryptocurrencies and timing of local elections later this year, the Korean officials’ remarks seem more to clarify the government’s stance, with regulatory action being highly unlikely.

2. Chinese regulatory crackdown to stem capital outflows and harness corruption

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From outlawing ICOs last November, China ordered exchange bank accounts to be frozen, drove out miners, and are in the process of banning internet and mobile access to cryptocurrency exchanges and applications nationwide.

Given that in September 2017 two-thirds of bitcoins were mined in China, the vast majority of mining companies unable to relocate to places with cheap electricity may shut down due to dramatically reduced profit margins. Although this crackdown targets bitcoin, other altcoins have also been trending downwards given the government’s determination to ban cryptocurrency trading altogether.

However, amidst the uncertainty, it is worth noting that the People’s Bank of China is seeking to develop its own national digital currency, which could greatly alleviate fees for millions of Chinese lacking access to basic banking services. The future thus may lie in cryptocurrencies aiming to stay regulatory-compliant or co-operative such as NEO, nicknamed ‘China’s Ethereum’. It’s founder Da HongFei has already secured local government partnerships on identity-verification projects using OnChain, being endorsed by the Guiyang Government.

3. Fraud among bitcoin exchanges: Record heists and fears at CoinCheck and Bitgrail

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Hackers stole US$530 million from Tokyo-based cryptocurrency exchange Coincheck in January, exacerbating security concerns and prompting increased Japanese and Chinese regulatory probes into exchanges. Given that the vast majority of everyday investors trust their cryptocurrency holdings with exchanges as opposed to physical wallets, waves of sell-offs across prominent exchanges Bitfinex, Poloniex and Binance were witnessed as a result.

Confusion and scam fears on bitgrail amidst tougher KYC laws: the recent mandatory KYC (Know-Your-Customer) verification and disabling of withdrawals on Bitgrail by the owner further illustrates the paradoxical issue of investing in a future of decentralization whilst trusting your holdings with a poorly-managed, centralized authority. By forcing non-EU accounts to close and liquidating RaiBlocks (now Nano) into Bitcoin before withdrawals, a massive drop in XRB of over 50% and artificial BTC price increase was engineered on the exchange, resulting in a significant loss of investor confidence.

As a result of these recent events, almost $400b was seen wiped from the total market capitalization of cryptocurrencies, with community reactions mixed and investor appetite reduced.

Feb 1 2018: Cryptocurrency threats in India’s budget speech

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Yesterday, India’s finance minister Arun Jaitley noted in his budget speech that ‘cryptocurrency is not legal tender’ and promised a crackdown on ‘illegitimate activities’involving crypto sent the markets into overdrive . A flood of comments warned of an outright ban, appearing on mainstream press and popular bitcoin discussion forums Reddit and Bitcointalk.

However, India has been sporadic in its attempts to formalize cryptocurrency regulation in the past two years, with the Finance Minister’s full budget transcript revealing a neutral albeit cautious stance towards cryptocurrencies, with Jaitley stating ‘The Government will explore the use of blockchain technology proactively for ushering in digital economy’. Indeed, crypto exchange Unocoin concluded there is ‘no change’ in government stance, with the news simply being ‘business as usual’

Future outlook: Concern or opportunity?

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So what lies ahead for the crypto world in 2018? Are global cryptocurrencies currently underpriced amidst market overreactions, or does the fraud and regulatory hammer brought down in January forebode a total collapse in investor confidence?

Nobody knows! However, the Cryptovate team would like to part with some general wisdom that we hope will guide you well in your cryptocurrency ventures:

1. For the savvy investor: DO NOT entrust your cryptocurrency holdings with exchanges.

• ‘But Binance, Bitfinex or Poloniex will never scam me!’,you may remark.
  However, in the crypto world, any exchange is similarly vulnerable to hacks as evidenced by Coincheck, and investors should expect them as opposed to become complacent – these are no longer black swan events. If the genius of blockchain technology was to achieve decentralization, then entrusting your savings into a centralized exchange would be a paradoxically foolish and naïve decision.

Learn how to keep cryptocurrencies under your own control now by transferring to a wallet:

2. For the cautious investor: Discern fear and hype from fundamentals.

• The cryptocurrency playing field is rife with speculation and hysteria, with prices highly fragile given the lack of government validation or asset-backing they have in the real world. As such, markets tend to over-react and misinterpret negative news. With governments across the biggest crypto hotspots in China and Korea already having made their move, what further negative downsides remain to be seen?
• Although cryptocurrencies were never created to comply with regulation or appease the government, investors nonetheless duck for cover once the regulatory hammer comes down. However, the fundamentals of blockchain technology and the notion of decentralization are still being embraced by the government, evidenced through China’s experimentation with implementing their own digital currency.

At Cryptovate, we believe recent regulatory pressures are cautionary retaliations by global government authorities to ensure cryptocurrencies do not threaten fiat, and operate within the bounds of legality. It is merely a necessary step towards mutual co-operation to achieve a blockchain-enabled future, spearheaded by cryptocurrencies that aim to stay regulatory compliant.

All the best, from the Cryptovate team.

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Disclaimer: Research publications are furnished by independent authors on the Cryptovate team. You are not obtaining any advice from Cryptovate Investments. You should always consult with your advisers before making any investment decisions and should you have any questions as to the laws that govern our cryptocurrency research, you should consult with your legal or investment advisers.