In The World Of Cryptocurrencies, The 'Wolf Of Wall Street' Guy Is A Paragon Of Probity And Reason

You don’t have to be an admitted securities fraudster of international repute to see how the ICO space might be tempting to crooks.

When some disgraced huckster claws his way back into the headlines, it’s usually because they either got caught doing something more pathetic and odious than the previous offense, or they’re trying to sell a book. In the case of Jordan Belfort, the stock-promoter whose drug-fueled debauchery and boiler-room scammery inspired Martin Scorcese’s 2013 film The Wolf of Wall Street, these days it’s the latter. But there’s still good reason to take heed of Belfort’s recent comments to the Financial Times regarding what might be the hottest financial story of the year: initial coin offerings:

“Promoters [of ICOs] are perpetuating a massive scam of the highest order on everyone,” he said. “Probably 85 percent of people out there don’t have bad intentions, but the problem is, if five or 10 per cent are trying to scam you, it’s a fucking disaster.”

There’s no irony in convicted scammer warns of scam here; game recognizes game. A guy famous for conning mom-and-pop investors out of at least $200 million understands intuitively that the bitcoin world is awash in opportunities for snake-oil peddlers. In fact, he might even be a bit melancholy that he can’t participate:

“Everyone and their grandmother wants to jump in right now,” he said. “I’m not saying there’s something wrong with the idea of cryptocurrencies, or even tulip bulbs. It’s the people who will then get involved and bastardise the idea…It is the biggest scam ever, such a huge gigantic scam that’s going to blow up in so many people’s faces. It’s far worse than anything I was ever doing,” he said.

There’s no reason to assume that Belfort — whose former firm Stratton Oakmont specialized in pumping-and-dumping penny stocks that it foisted on the elderly and uninformed — has any idea what’s going on with bitcoin and initial coin offerings. But that’s generally the case with born salesmen: It’s less important to know how something works than how it can work for you.

Still, here’s a quick crypto guide for the perplexed. Cryptocurrencies like bitcoin and its smaller cousin ethereum occupy a gray area between unit of exchange and speculative investment, allowing anyone with a computer to transact digital coins using decentralized cryptographic networks beyond the banking system. A tiny number of actual businesses out there allow you to pay in bitcoin, but this is a niche use; for now, bitcoin is about speculation.

If, however, we treat cryptos as a parallel to dollars (itself a contentious assumption), initial coin offerings are analogous to initial public offerings of stock. In both cases, investors fork over cash to help a business grow and in exchange they get something. In the case of dollar-denominated IPOs, that something is partial ownership and maybe some dividends. In the case of crypto-denominated ICOs, investors get tokens that can later be used to buy whatever it is the business wants to develop, be it cloud storage or taxi rides or zirconium produced in the Ural Mountains. (Importantly, ICOs offer tokens and not ownership stakes or income streams, since the latter would constitute a securities offering, which ICOs want desperately not to be — for obvious reasons.)

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You don’t have to be an admitted securities fraudster of international repute to see how the ICO space might be tempting to crooks. For one thing, the cryptocurrencies used to buy the ICO tokens — typically either bitcoin or ethereum — are already thriving vectors of money laundering.

And since they don’t hold themselves out as traditional securities offerings, which require all sorts of controls and fiduciary commitments, ICOs make it easier for a two-bit charlatan to rake in a few million dollars on the promise of developing technology X, pocket the cash, and then sadly inform investors that despite their best efforts technology X failed. The investors are left holding useless tokens for a non-existent product while the would-be developers spend their ill-gotten ethereum on dark-web MDMA and airfare to Thailand. Caveat emptor.

Though this potential for abuse may be readily apparent to the Jordan Belforts of the world, investors are still thronging for a shot at ICO riches. For speculators, it doesn’t matter whether Dennis-Rodman-endorsed PotCoins or Floyd-Mayweather-approved Hubiits ever do become capable of being exchanged for cannabis or web content. (So far, it turns out, just one in ten ICOs have actually yielded a viable service.) What matters is that the token price appreciates. And lately, cryptos have been on a tear. That’s why hedge funds are stepping all over each other to get a taste of the action in a space that has raised more than $3 billion this year alone.

This isn’t to say that bitcoin and ethereum are pure frauds, or that there aren’t some honest ICOs, or that the blockchain technology underlying it all doesn’t have potential. It’s just that the space is young and hot, and like many things too-young and too-hot, might best be approached with an abundance of discretion.

Every generation has its own form of financial fraud, from penny stocks to subprime mortgages to crypto scams, but the players involved are usually drawn from the same cloth. The local Craigslist in San Francisco, for instance, currently advertises a job opening titled, literally, BITCOIN BOILER ROOM. And what image did the post’s author, apparently without irony, decide to chose? A still from Wolf of Wall Street. Jordan Belfort should be proud.

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