Dr Timothy King from Kent Business School outlines the ongoing issues with cryptocurrencies and why it may finally be time for regulators to step in.
‘Digital-wallets are designed to be a secure password protected place in which individuals can hold cryptocurrency tokens, and hence store value. Common advice dictates that individuals do not disclose these credentials. This is not surprising. However, forgetting access credentials almost certainty means loss of digital wallet contents. While undoubtedly such events are harmful to individuals, what about cases when one individual controls access to all digital cash or has effective control of a cryptoexchange? Is fraud a possibility, will they exercise due diligence, are there effective safeguards in place?
‘For the founder of OKCoin, Star Xu, temptation, in the absence of effective industry regulation, seemed to be the catalyst for fraudulent behaviour. Suspicions of fraud and of OKex being a scam, promoted law enforcement to act in September, 2011 and arrest him on multiple charges. Many investors are said to have been significantly impacted by the alleged fraud at OKCoin.
‘Fast forward to 2019 and again investors are facing huge losses from an exchange founded by a single founder. QuadrigaCX, the largest Canadian digital currency exchange, when its 30-year-old founder. Gerald Cotton, died on December 9, 2018 in a hospital in Jaipur, India. Mr Cotton controlled access to all the company’s business, apparently on one encrypted laptop. According to legal documents filed in late January 2019 with the Nova Scotia Supreme Court, not even his not even his widow had access. The lack of contingency plans is startling and raises probing questions about effective governance and regulation in the industry. Unfortunately, for investors, it is not even clear where all deposited funds are, let alone whether they can ever be recovered.
‘As it stands, the sudden death of the QuadrigaCX founder, which led to the failure of the exchange and thousands of angry out-of-pocket customers to the tune of over $190 million, is just the latest event is a series of many acts in the ongoing drama of cryptocurrency markets. Not fraud perhaps this time, but the results are the same. Policymakers – (G20 Finance Ministers and Central Bank Governors, 2018, Financial Stability Board, 2018) – have previously expressed concerns about the industry. Perhaps this is the final act before they finally step in.’
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