Last week, Arizona’s legislators took the strange step of preparing laws to accept Bitcoin and other cryptocurrencies as tax payments.
This is equivalent to Canada Revenue Agency announcing it will accept Canadian Tire or Monopoly money as payment.
It’s foolhardy and what is the state thinking?
Financial regulators in most countries now realize that the digital currency world is as dangerous as the Vancouver Stock Exchange or pink sheets used to be, a playground where fraudsters bilk unwitting investors.
Anyone can create a cryptocurrency out of thin air. Venezuela recently launched the Petro, while Iran is also eyeing the development of its own digital currency. Anyone can fix a price and issue an ICO, or initial coin offering, to launch a startup company. Hustlers are busy creating websites that vanish without a trace after collecting investor money. Some create fake cryptocurrency exchange sites where bogus trading figures and prices are posted to entice money from the gullible.
So much so that the police is now getting involved. In December, a Quebec man was jailed and fined after fleecing $15 million from Canadian and American investors with an ICO called PlexCoin. Its promised profits and expert team were both fiction.
A newly created cyber unit in the U.S. has started to take action on such “pump and dump” schemes — where fraudsters lure investors, take their money, and run. It’s the old Vancouver, pink sheets swindle.
Sometimes crimes are enormous and South Korea and Japan have launched probes into how hundreds of millions in Bitcoin were hacked or embezzled from insecure or bogus exchanges.
For investors, the biggest risk involves new cryptocurrencies, tokens, coins or ICOs (initial coin offerings). These are equity issues without rules and investors should avoid them like the plague… or Bre-X stock.
Cryptocurrencies are also hazardous. Take Bitcoin, which is at least self-regulated, the currency yo-yos in value without any underlying valuation or justification. There are no controls over how many Bitcoins are issued, and digital counterfeiting rings have been busy replicating the currency at “Bitcoin farms”, and a few have been apprehended.
Without control over supply and demand, currencies can flood a market that’s rising to take advantage of demand then disappear, leaving valuations in tatters. It’s easy.
The potential for damage has become so serious that this month, Facebook announced a ban on Bitcoin or cryptocurrency advertising to protect its hapless readership.
Disappointingly, ignorance is so pervasive that even when warned the public is duped. Some technologists have issued satirical digital currencies to make a point, but ended up making a profit. The “Jesus Coin” was issued in December with the warning that it had no value except to “provide miracles exclusively to Jesus Coin owners”.
People bought this stuff.
“There over 600 cryptocurrencies currently traded,” a Jesus Coin spokesman told the Daily Beast. “None of them have any intrinsic value. Our point is that if you’re going to trade something with no value whatsoever, at least let’s make it about Jesus.”
Another parody website launched the “Useless Ethereum Token”. It warned: “the UET (Useless Ethereum Token) ICO transparently offers investors no value, so there will be no expectation of gains. No gains mean few investors, few investors means few transactions.”
It added: “Seriously don’t buy these tokens.”
Within days, investors bought $$250,000 anyway.
Governments like Arizona and banks and investors have no business weighing into this morass until it is properly policed. Even Bitcoin is a big risk and cannot replace fiat currencies.
“It’s (Bitcoin) not a reliable currency for transactions because if you’re a merchant (or tax department) and you have a 10 per cent profit margin, and you accept Bitcoin, and the very next day bitcoin drops 15 per cent, you are now underwater on that transaction,” warned PayPal chief financial officer John Raine.
First pubilshed Finacial Post Feb. 27, 2018