Cryptocurrencies and what history can teach us — is anything really new?

There are many articles in the press asking — are Cryptocurrencies a bubble market waiting to burst? I am afraid that we will not know until “pop”! However, it is interesting to look at how history seems to repeat itself.

One of the largest bubbles ever in the UK was the South Sea China Bubble in 1720 when the price of the South Sea Company went from £128 a share in the January of that year, to over £1,000 in the summer, to less £175 in September. This makes the rise of Bitcoin from $770 this time last year to over $17,327 today (the first day that one could trade Bitcoin on the futures market look rather tame.)

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Source Coinmarket cap

However, following this bubble popping the only way to set up a company was by Royal Charter, in an attempt to stop profiteering and speculation. It has been argued that such draconian action, which lasted until after the end of the Napoleonic wars, was one of the factors that had led Britain being almost bankrupt in 1815. So, an unintended consequence to “protect UK investors” by making it difficult to establish a company, led to almost 100 years of restricted economic activity.

It is interesting, and hopefully not prophetic, to be reminded of what Andrew Haldane (who was an Executive Director of Financial Stability at the Bank of England) said in 2009 when he compared the events in 2008 and the problems in modern markets, with the South Sea Bubble. The Guardian newspaper quoted him as saying about the South Sea stock:

‘a company for carrying out an undertaking of great advantage, but nobody to know what it is. Banking became the 21st-century equivalent.’

Is it potentially for this reason that the FCA in the UK have been reluctant to ban Initial Coin Offerings (ICOs), or is it more to do with the fact that ICO and the digital assets that they create is akin to grabbing a hand of sand? Before you know, the grains have seeped between your fingers.

Will we see Bitcoin follow similar trials and tribulations? It reminds me of “The Emperor has no clothes”!

ICOs and the tokens that they generate, being digital, can be created and launched from anywhere in the world. So surely it is better that you try and work with them, as opposed to banning them in a “nanny state” manner. After all, ICOs in 2017 have raised over $3.8 Billion, and on the back of this are raising tax receipts and creating jobs. Some of the ICOs are developing new technologies which holds the promise to help make our lives more efficient, transparent and cost effective.

However, regulators are beginning to turn their attention on ICOs with an announcement on 11 December 2017 that

“Securities and Exchange Commission aims to police a recent deluge of so-called ICOs of bitcoin-like cryptocurrencies, the SEC stopped a Yelp-like app called Munchee Inc. from offering its own digital tokens, forcing it to return the cash it had raised to investors”.

Meanwhile, it is interesting to see Microsoft in Abu Dhabi trying to attract tech companies by establishing a tech-start friendly environment, with potentially capital available to run business on a Microsoft-powered Blockchain. Most governments around the world are looking for new engines of growth and, let’s be honest, it is highly likely that out of over 1,200 plus ICOs that have been launched to date, a handful will emerge as tomorrows Amazon, Google, Facebook or Apple. So, creating lots of jobs and lots of tax revenues!

But enough about Cryptocurrencies that offer the promise to raise millions for the next new whizzy idea. Even though the market has risen in value from approximately $12 Billion a year ago to over $350 Billion today, with some tokens rising in price by over 3,000% e.g Ripple, as opposed to a lowly 2,000% from Bitcoin. So it is easy to see how Coinbase recently signed up 100,000 in 24 hrs and that they have more accounts than Charles Schwab Inc, and have announced recently they are increasing the number of staff 16-fold.

What other lessons does history offer? Well some of you will remember “Green shield stamps” — you collected them when you bought your groceries or topped your car up with “5 Star petrol”. In the 1970’s it was mainly commercial vehicles that used diesel, most private cars used petrol. It looks like petrol is having a come-back as governments around the world encourage people to use cleaner fuels. Yet another lesson from history, as diesel was seen as a dirty fuel in the past.

Mr Musk and his electric cars want to persuade us to go electric. Even this is not new as the first car races in the world, held in France in 1894 from Paris to Rouen, was due to have a number of electric cars from France and Italy, and an electric car from England to enter the race.

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The dawn of digital loyalty Tokens

But I digress — loyalty schemes like Green shield stamps, or the modern version of buy 10 drinks in Starbucks and get the next one free, or if you fly with most airlines, you can collect loyalty points. We have already see brands like Burger King launch digital loyalty schemes enabling burger buyer to earn Whooper coins, which can be exchanged for burgers.

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In a global economy where there are companies vying for our attention so they can sell more goods and services, Tokens created by an ICO are seen as a way to deepen and strengthen the interaction with customers, staff and suppliers. If customers are able to earn Tokens based on the time they spend on a firm’s website or as a reward for making purchases, it encourages loyalty. There are websites devoted to how you get the best deals, depending on which airline you fly on, or which credit card you use so encouraging potential customers to seek out the most attractive loyalty options. While loyalty schemes have been used for many years and been proven to be a highly effective way to attract and retain clients, Cryptocurrencies that can potentially be traded 24/7, offering organisations and marketers a new range of possibilities.

Local authorities, such as the Hull coin, “is the world’s first Community Loyalty Point”. Earn HullCoin by getting involved in great things in your community — spend HullCoin by accessing discounts with local retailers. But then there is nothing new here either, as the Brixton coin has been around since 2009.

Even central banks are now looking at the Cryptocurrencies, and the technology that powers them, as a way to have greater control of their countries’ cash that is in circulation. The black economy is a significant problem in many jurisdictions globally — indeed on the UK is it said that the amount of money laundered by foreign criminals is estimated to be as high as £100 billion a year. Unlawful tax avoidance costs UK taxpayers as much as £2.7 billion in lost revenue, according to Transparency International. But these Cryptocurrencies will not be designed to be speculative, as this is the last thing that they want, and so in turn help to reduce the overall volatility in the Cryptocurrency market.

To close with a look at lessons from the past — historically we have seen many companies list their share on equity markets around the world by carrying out an Initial Public Offering (IPOs). These IPOs had been used to encourage private investors to buy shares in companies that governments wanted to privatise i.e. BT, British Gas, BP, British Airways etc. But then companies increasingly turned to global banks, who underwrote IPOs, which often meant smaller investors were unable to get access to top performing IPOs.

Many of the ICOs in 2017 were being funded by 000s of small participants who invested small sums of money. It seemed we were seeing a ‘democratization of capitalism’ ie an asset class that was available for the masses, not just the preserve of the HNW wealthy private banking elite. However, now many ICOs are realising that unless they are able to prove that they have complied with the regulations around Know Your Client and Anti Money Laundering, they struggle to open a bank account and increasingly be accepted on to exchanges.

It is partially for this reason why some ICOs are now trying to raise capital 100% from accredited/professional investors, as there is less potential liability for the founders/directors from regulators in the future. How different though is this from an IPO that is underwritten by a merchant bank?

So undoubtedly Crypto currencies have created a New Asset class that can help organisations to grow by raising capital, as they are non-dilutive for shareholders and do not increase the indebtedness for the company that issues them. We are even likely to see them being used as a way to reduce fraud and corruption in some countries, or as a Token Attention Coin to encourage repeat purchases and engagement i.e. digital loyalty schemes. While much of this is not new, given the increasing digital nature of the global economy, it is not hard to understand how and why this market has grown so massively. I suspect we will see a pullback in prices before Tokens become more widely accepted by institutions and major global brands, even governments, in the next few years.

I would like to leave you with this comment from Jay Clayton Chairman of the SEC:

The world’s social media platforms and financial markets are abuzz about cryptocurrencies and “initial coin offerings” (ICOs). There are tales of fortunes made and dreamed to be made. We are hearing the familiar refrain, this time is different”.

….. REALLY?

December 2017