Cryptocurrency and blockchain are revolutionary technologies, but being so far ahead of the curve comes with consequences. With few precedents to learn from and regulatory frameworks still in their infancy, the crypto space has attracted its share of shrewd opportunists whose scams — such as the infamous pump-and-dump schemes — have grabbed international headlines.

Tech giants like Facebook and Google recently placed a ban on crypto ads to combat the spread of shady coin offerings, and U.S. regulators like the Commodity Futures Trading Commission and the Securities and Exchange Commission are investigating cryptocurrencies for price manipulation and other forms of fraud.

Pump-and-dump schemes aren’t new — nor are they limited to the cryptocurrency space (just ask Jordan Belfort). That said, the growing popularity of blockchain technology, combined with a lack of general public understanding, make the space a breeding ground for these types of ploys. Meanwhile, social media channels like Twitter, Telegram, and Reddit add a new level of speed and scale to the process.

So how do they work? Those who are in on the pump-and-dump scheme form groups, often with thousands of others, and overhype the trading volume of a coin. Then, once people are willing to buy in at grossly inflated prices, the perpetrators dump their holdings for a massive profit.

It’s becoming so commonplace that the SEC created the aptly-named HoweyCoins website to help investors spot signs of a crypto scheme. Not long ago, we also saw the crypto community take a hard line against Bancor’s Twitter giveaway, accusing it of normalizing the language and promotional techniques commonly abused by scammers.

The pressure is on for cryptocurrencies to prove their legitimacy, and I don’t blame people for being wary of them. But I also know that for every scam, there are countless examples of cryptocurrency and blockchain technology being used responsibly to create opportunities, grow economies, and do good in the world. We need to remember that cryptocurrency fraud is the exception, not the rule.

Several Kinds of Crypto Scams

For better or worse, cryptocurrency has become known as a get-rich-quick industry — one where people enter the market without much awareness of the technology or its unique implications.

We saw the price of Bitcoin skyrocket to unprecedented levels in late 2017 — which new research asserts was driven by furtive actions of a few big players, rather than real investor demand. Regardless, the spike resulted in a rush of new currencies, wallets, and exchanges, many of which were poorly planned at best and outright fraudulent at worst.

And of course, legitimate services attract fake copycats. For instance, an app posing as MyEtherWallet, one of the most popular services for storing Ethereum and other coins, rose to the top of Apple’s App Store charts in December 2017 before it was revealed to be a scam. Although these sorts of scams have nothing to do specifically with cryptocurrency or blockchain and are basically akin to phishing, they still create a widespread negative perception of cryptocurrency as a whole.

But just because scams may have dominated the news cycle for a while doesn’t mean investing in cryptocurrency is a fool’s errand. The same principles of sound investing — tracking trends, diversifying, and weathering volatility — apply to crypto. And there’s no replacement for due diligence before putting your money into a project, regardless of whether it’s on the blockchain.

That said, with so many investors losing money to market manipulation fraud, it was only a matter of time before regulators stepped in.

Cracking Down

Although government policy has struggled to keep pace with cryptocurrency, we’ve gotten to a point where regulators are stepping in and taking highly punitive action against pump-and-dump schemes in cryptocurrency.

In the United States, most state and federal regulators deal with crypto projects on a case-by-case basis. Take the CFTC’s charges of fraud and misappropriation of funds against Patrick McDonnell. McDonnell allegedly promoted himself as an expert in cryptocurrency investment and promised clients returns of up to 300 percent; yet after receiving payment, he’d sever all communication without providing anything in return. The McDonnell ruling treated cryptocurrency as a commodity, which allows the CFTC to assert jurisdiction over players engaged in related schemes.

Meanwhile, the case between Maksim Zaslavskiy and the SEC dealt with an alleged ICO scam. About 1,000 people invested in Zaslavskiy’s project, but it became apparent that neither a token nor a digital asset was issued to investors, and no real blockchain technology was playing a role in his ICO. The Zaslavskiy ruling treated cryptocurrency as a security, which could encourage regulators to focus on registration issues — a potential snare for players launching ICOs without abiding by the SEC’s registration requirements.

Cases like these show that regulators are testing several judicial theories and practices, and their rulings will set the precedent for future enforcement in an area where laws lag behind tech advancements.

The Path to Legitimacy

Because cryptocurrency spans across so many legislative districts, it’s hard to get everyone to agree on the same path going forward. That said, I’d like to try to provide a basic framework for what a legitimate blockchain project should look like.

The first thing any organization should do when considering an ICO launch is ensure it meets the SEC’s security offering requirements. It’s worth bearing in mind that the SEC has never approved any crypto-related assets for listing and trading, so be careful if you come across an ICO claiming to be SEC-approved. But we can begin building a better, more reliable investment framework by complying with regulations in advance. As we’ve seen, legislation and regulation tend to follow technological innovation — so innovators can save time and reduce friction by leading the way responsibly.

One of the most important stipulations for publicly traded companies approved by the SEC is transparency — and transparency is one of the main reasons why blockchain-based transactions were invented in the first place. Along with being publicly visible and accountable, organizations should work with regulatory bodies in any jurisdiction they plan to operate in. Criminals tend to avoid the law, and if an ICO has nothing to hide, it should have no problem cooperating with regulators. This is fundamental to building trust among cryptocurrency investors, professionals, and the broader global community.

In the past, proponents of cryptocurrency have championed its potential for deregulation, decentralization, and anonymity — but we’ve seen firsthand that where controls are too sparse, fraud runs rampant. And while not everyone agrees on the extent to which the cryptocurrency space should be regulated, I think we can all agree that without trust — in each other, in the rules, and in regulators to enforce those rules effectively — we can’t have a functioning system of investment and exchange.

As cryptocurrency continues to evolve, it’s important to continue supporting groups working for the good of others while calling out those who are trying to game the system. If we, as a community, cooperate with regulators and invest in companies that are adding value to the world, we can change how the world sees cryptocurrency.

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Investors, pundits, and enthusiasts can’t stop speculating about cryptocurrency, and more often than not, their predictions center on price. But simply musing over the market performance of a specific coin ignores the larger potential of cryptocurrency. This space is about more than price fluctuations — it’s a digital financial revolution that’s poised to transform the world.

Cryptocurrency is arguably the single most significant invention of our lifetime. In the very near future, I believe we’ll see financial borders dissolve almost completely. This international currency will allow us to transact in seconds and remove current geographical limitations and restrictions. There will be no middlemen adding forex, conversion, or other fees to the equation of a transaction.

How do governments and banks feel about this potential disruption? The United States has realized that the issue of cryptocurrency needs to be addressed. The U.S. House Financial Services Subcommittee on Monetary Policy and Trade met in mid-July 2018 for a hearing it called “The Future of Money: Digital Currency.” The subcommittee discussed two pertinent issues.

The first was the importance of regulation. Many regulators fear that governments will lose the ability to control the flow of wealth, which is particularly concerning when it comes to the funding of illegal activities. While the argument was made that it would be a mistake to regulate something simply because it could be used by criminals, there were also voices calling for a strict clampdown on cryptocurrencies. Congressman Brad Sherman went so far as to say that he would prefer the outright banning of cryptocurrencies.

The second issue the subcommittee raised was that of government-created cryptocurrencies. Alex J. Pollock of the R Street Institute said that: “In short, to have a central bank digital currency is a terrible idea — one of the worst financial ideas of recent times.” Pollock argued that “[The Federal Reserve] would automatically become the overwhelming credit allocator of the financial system. Its credit allocation would unavoidably be highly politicized. It would become merely a government commercial bank, with the taxpayers on the hook for its credit losses. The world’s experience with such politicized lenders makes a sad history.”

Yet governments are showing increased interest in cryptocurrencies. Last summer, Blockchain CEO and founder Peter Smith projected that within 24 months, a major government will issue a sovereign digital currency.

Indeed, last year China announced it was testing the development of its own cryptocurrency, and support from the government is one reason it’s leading the blockchain revolution. Similarly, the Bank of Thailand and Ministry of Finance backed OmiseGo, a Thailand-based crypto. Japan, Sweden, the U.K., and other countries aren’t far behind, either. It will be interesting to see where the United States lands on this.

And what about banks? After all, they’re the middlemen cryptocurrencies could potentially cut out. While this isn’t going to happen overnight, banks will have to face the reality of cryptocurrencies in the coming decade. By 2028, I believe it will be normal to be paid in crypto (and not just if you work for a blockchain company).

But for cryptocurrency to truly be easier than cash, it needs to overcome the technical hurdle. Ownership and security of crypto assets can be confusing to the average user. Crypto wallets need to become even more secure and easy to use than digital wallets like Google Pay or Apple Pay, neither of which has gained mainstream adoption yet.

And let’s not forget about the unbanked. Two billion people around the world don’t have bank accounts and can’t rely on their own currency as a store of value. What they do have, however, is access to mobile devices and the internet. The ability to bank and transact value on these devices using a currency that’s immune to regional borders will be incredibly useful.

I believe the move to cryptocurrencies will coincide with the rise of mobile banking and mobile wallet use. The macro-scale outcome will be a massive move toward a globalization of economies and currencies. People are already betting on it. Chicago-based derivatives company CME Group reports bitcoin futures volume have increased every month since December 2017.

In 10 years, people across the globe will have a deeper understanding and acceptance of cryptocurrencies. It isn’t going to fulfill bitcoin’s initial goal of completely toppling the financial system, but it won’t ever disappear, either. A decade from now, both digital and traditional will coexist in harmony, and we’ll have forgotten how complex it once was to use cryptocurrencies.

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Economic bubbles aren’t new. From the tulip bubble of the 1630s, to the dot-com boom of the late 1990s, to the big-tech mania we’re seeing today, overvaluations happen — but not all bubbles pose the same risks or offer the same rewards. Every few years, it seems we’re warned of another looming “bubble” about to burst. Most recently, pundits like Warren Buffett and George Soros have compared the rise of cryptocurrency to the dot-com bubble, wondering aloud if we’re on the precipice of a big bust.

The similarities are fairly obvious. Cryptocurrency startups, much like the dot-coms, are experiencing an influx of capital that’s boosting the valuations of solid, innovative companies along with their relatively worthless counterparts — Dogecoin comes to mind as a cautionary tale. But while the dot-com boom produced plenty of duds, let’s not forget that it also gave birth to Amazon, Google, and eBay. Similarly, there are resilient, well-managed cryptocurrency companies that will be able to withstand drastic market fluctuations.

Sure, the current state of cryptocurrency bears some resemblance to the ’90s tech boom, but there are important differences to consider. Understanding the following factors can help you to mitigate long-term damage as the market naturally begins to self-correct.

1. Say hello to regulation: Cryptocurrencies, unlike the early dot-coms, are shaking up the U.S. monetary system and offering an alternative to worldwide fiat currency. Early internet technology was groundbreaking, but decentralized currency is truly revolutionary. Most governments don’t quite understand what’s going on, much less how to deal with it.

Recent fluctuations in the price of bitcoin and other cryptocurrencies were the direct result of new regulations announced by the South Korean government, and other regulatory agencies across the world are guaranteed to make similar moves. They will eventually make examples of nefarious players, helping to weed out more “shadowy” companies from the industry.

Be ready to work with government agencies and adapt to new regulations when they inevitably arrive. Private companies that behave like public companies are more likely to come out on top. In that same vein, be sure you’re not taking a ton of money from unaccredited investors — or investing it in secretive ways. The industry may not yet be fully regulated, but you need to start running your company as if it were.

2. Just say no…to casual investing: Yes, some venture capitalists in the dot-com era would throw money at any startup that showed signs of life, but the risks seem greater for those entering the crypto space with insufficient knowledge. More than 1,000 cryptocurrencies are active right now, and quite a few are hoping to ride the wave without doing their homework first.

Perceived bubbles are funny: They can propel even the worst companies to the top of the stock charts. You need to understand how to capitalize on the bubble — raising as much capital as you can (without destroying the structure of your company) and then managing that cash (knowing it won’t always be there).

Be able to effectively communicate your long-term value to shareholders. The blockchain is a brilliant invention, with applications we’re just beginning to discover, ranging from the financial space to healthcare, cybersecurity, retail, and beyond. It will transform the world as we know it, making a handful of companies and their investors extremely wealthy in the process. To find investors who will stay with you for the long haul, showcase realistic, revenue-generating applications of this technology and prove it can outlive the hype.

3. Abandon geographical boundaries: While the dot-com bust had some ripple effects on the world economy, the rise and fall of Silicon Valley was far more localized. Cryptocurrency is traded across the world, and countries are taking vastly different approaches in their adoption and regulation of it. South Korea only recently started exploring regulation, for instance, while Sweden has been offering derivatives in Bitcoin since 2015.

The international scope of this marketplace presents both unique challenges and an array of opportunities. Vitalik Buterin, founder of Ethereum, argues that blockchain offers particular value in parts of the world where people can’t yet trust their institutions — places such as Africa, India, and Eastern Europe. Blockchain, he argues, resolves the issue of market manipulation from the top-down.

All that’s to say: You must invest in a capable management team that can see the big picture. Nobody will predict every little twist and turn in the market, but the better your understanding of how your company could succeed on an international scale, the higher your chances of success.

When looking for dynamic and adaptable management teams, focus on candidates with a track record of success — those who can navigate an ever-changing technology landscape while incorporating traditional financial market tactics. At Neptune Dash we did just that, incorporating a well-versed technology team with adept financial leaders with proven success on public markets.

Finding footing on shaky ground

The ’90s tech boom was followed by a solid bust. In November 2000, an index of 280 internet stocks was down by $1.7 trillion from its 52-week high. Contrast that with recent fluctuations in digital coins, and the difference is obvious. Its value may rise and fall, but anyone who bought Bitcoin a year ago has earned more than a sixfold return on investment, for example.

The highs may be higher and the lows may be lower than in other industries, but the underlying technology is here to stay. Despite the common misconception, not all bubbles are created equal. An overvalued startup that does nothing for the world is destined to crash, but just as the Googles of past eras have survived, so will the very best cryptocurrency companies.

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