Niall Ferguson, who wrote a seminal book on the history of money, has been getting a bunch of pitches for dodgy crypto schemes lately. At a recent seminar hosted by the Bank of England, Ferguson affirmed that he’s open to the concept of bitcoin, but initial coin offerings (ICOs)—a kind of unregulated crowdfunding laced with crypto speculation—are a step too far.
“I wish I had a bitcoin for every phony white paper I’ve been shown the last six months, by people trying to raise money before the SEC clamps down,” said Ferguson, a senior fellow of the Hoover Institution at Stanford University, and author of The Ascent of Money: A Financial History of the World. “When there’s no regulation, then the rogues are very quickly on the scene.”
As he sees it, this is what happens when you allow unregulated fundraising. And like others, Ferguson thinks the Wall Street Journal’s recent analysis (paywall) of ICOs probably understates the extent of fraud. The newspaper said it went through the documents (typically called “white papers”) behind 1,450 ICOs and found 271 with red flags, such as fake executive teams, plagiarized documents, or promises of guaranteed returns. Bloomberg’s Matt Levine said he would have guessed the percentage of ICO fraud was “somewhere north of 50?”
Other reports signal deeper problems in these markets. Half of the $300 million raised by ICOs in Russia in 2017 went into pyramid schemes, according to newspaper Izvestia, citing the Russian Association of Cryptocurrency and Blockchain.
The upshot isn’t just that scams are flourishing in some corners of the crypto world. The popularity of these schemes also suggests room for improvement in traditional financial markets. It implies that other investments for retail investors aren’t compelling.
For retail investors, ICOs may seem more fun than investing in, say, an initial public offering. (Ignore for now that “fun” isn’t a good way to go about making money on investments.) There’s a wall of intermediaries wedged between regular investors and the stock market, and a widespread belief that individuals are outgunned by professionals (which, of course, they are).
Investors need protections from scammers and access to comprehensive financial disclosures to make informed decisions. Over the decades, as rules and regulations have piled up, the big financial institutions have cemented their advantage over other players, and markets seem increasingly remote to regular people. The stock market is probably safer than it used to be, but it doesn’t seem like a place where small investors can thrive. The best bet is a boring exchange-traded fund that you’re supposed to buy and then forget about as it steadily, unspectacularly rises in value. (Hopefully.)
If regulators want retail investors to be less easily seduced by unregulated schemes, they have to demonstrate the value of oversight, promote fairness, and emphasize that if something seems too good to be true, then it probably is. Making sure that investing is easy to access and feels rewarding is important, too.
The future of finance on Quartz
Why are there so many Russians in crypto? Based on where the CEOs or founders of ICO-seeking projects are based, Moscow comes out on top. This is down to a combination of the country’s top-tier programmers, limited access to traditional sources of funds, and lack of job opportunities.
The 226-year-old New York Stock Exchange named its first female president. For context, Hester Serafini was already president of an important clearing division at NYSE owner Intercontinental Exchange—an appointment that wasn’t front page news. The media frenzy around Stacey Cunningham‘s promotion shows NYSE’s enduring brand power and will hopefully spur more appointments for women in the sector.
Fintech unicorn Revolut is betting that more crypto is better. It added XRP and bitcoin cash to its lineup this week. Will this entice new customers to use its other services?
Fewer US banks are too big to fail. In a new bill, only banks with $250 billion or more in assets would be deemed systemically important, up from a previous threshold of $50 billion. That means fewer than 10 banks would have the designation, subjecting them to stricter regulations than the rest.
Starbucks is beating Google and Apple in mobile payments. It underscores the lukewarm reception to Apple and Google Pay.
The future of finance elsewhere
The US Justice Department opened a probe into bitcoin manipulation. The criminal investigation is focused on the likes of spoofing, according to Bloomberg (paywall). An upside to more institutional trading in crypto markets is that, unlike some retail investors, they care a great deal about these shenanigans, which can fool their computers.
Speaking of machines… Jump, the high-frequency trading firm, has a team of 22 people working on crypto, according to Jim Greco, founder of the Direct Match trading platform. That’s more staff than the HFT has on any of its other teams.
Mergers could help UK banks compete with their US peers. A tie-up between Barclays and another lender like Standard Chartered, which the Financial Times (paywall) reports is being considered, could help address the size differential. A sticking point could be that both are already considered systemically important (pdf).
Small banks are helping propel financial startups. Silvergate Bank nearly doubled its assets by serving crypto-related companies (paywall) that big banks won’t touch. Other fintech firms also rely on smaller banks that quietly run in the background. If you believe banking should become a boring utility, this type of arrangement shows a way to get there.
Best of the rest. Kabbage plans to launch a payment processing service next year. PayPal admits that cash is stiff competition to electronic transactions. Cash is most certainly king in Southeast Asia. Square, meanwhile, launched a device in the UK for small- and medium-sized companies to accept cards. Dutch payment-processor Adyen is seeking an IPO in June. And the Federal Reserve (paywall) is keeping an eye on Amazon’s financial services ambitions.