Is self regulation the answer to growing problem crypto scams?

In a previous piece that focused on the high incidents of crypto related scams, we highlighted how some countries in the Europe and Asia have approached this as well as the question of ICO/IEO and whitepaper regulation. Crypto industry players are instrumental in crafting the relevant regulations while regulators take a back seat. 

The article underlined that in these countries— particularly Asia ones—the blockchain and crypto companies have progressed due to less stringent regulations.

Regulatory authorities in those countries appear to be more keen on seeing this fledgling industry grow while also striving to keep consumers of crypto products protected.

The risks of self regulation

Nevertheless, opponents of this approach often highlight the risks involved by pointing out the fact that most high profile cases of hacking have occurred in Asia. For instance, fraudsters, scammers and hackers have struck and made off with hundreds of millions of dollars in Japan yet that has not deterred or discouraged authorities there from allowing this industry to grow further.

This Asian approach is quite a contrast with governments and regulatory bodies in Africa, which appear to have taken a wait and see approach. As per their adopted custom, African leaders wait and hope that Western countries will make the first moves. They then simply follow or copy and paste without studying and fully understanding the dynamics of their own circumstances.

For example, when governments and regulators in Europe repeatedly refused to recognize Bitcoin as legal tender, the same stance was adopted by many governments on the continent. In fact, some even went to the extent of banning Bitcoin, a decentralized and censorship resistant digital currency!

However, now that the same European countries—with the encouragement of the likes of IMF—are now exploring the possibilities of issuing own cryptocurrencies (or digital currencies as they prefer to call them), African countries too are considering taking the same approach.

Indeed, cryptocurrencies or ICOs remain banned in many African countries where ironically the same central banks (that banned cryptos) have announced new plans to study or to pilot digital currencies. This incoherent approach has not helped the cause of the continent’s crypto industry where the technology’s potential is much bigger than in developed countries.

In this article, AfricaBlockchainMedia asks crypto enthusiasts and experts from three countries, namely Kenya, South Africa and Zimbabwe for their opinions on what they see as the most suitable regulatory approach.

In particular, we sought their views on whether self regulation or normal regulation is the answer in the face of incessant cases of scams and Ponzi schemes involving new cryptocurrency token offerings.

From the responses gathered, it is clear, self regulation is favoured ahead of external regulation for the same reasons as is the case in Asia and some European countries. Government bureaucrats cannot be trusted to effectively regulate or police a new technology, which in most cases they hardly understand. In any case, this industry is seemingly still at an early stage of development, point even acknowledged by one regulatory body, the Financial Conduct Authority (FCA) of the UK. Over regulation has the potential to kill the technology.

AfricaBlockchainMedia asked what ordinary investors or token buyers must look out for when assessing the genuineness of a token offering? We also asked if external regulation was the answer.

Experts speak

As already explained in the last article, an IPO prospectus document is regulated while a whitepaper—an equivalent to the IPO in the crypto world— and a token offering process are not currently regulated.

This lack of regulation naturally creates opportunities for bad actors to defraud large groups of people and that is something that invites unwanted regulatory scrutiny.

One of the first to give their view is Roseylene Wanjiru, chief marketing officer at Kesholabs Development Studio, a Kenyan entity that advises on the blockchain and cryptocurrencies. In her responses, Wanjiru zeroed in on the first part of the inquiry by posing a series of important questions that a token buyer must ask before plunging in. She asks:

“How are similar businesses by age (of existence), staff size, market share &share price performing? How long do they take to break even?  How do they make revenue? /what’s their business model?”

Wanjiru adds that when one treats a token value just like they would treat a share price, then basic business metrics must make sense. She argues that if the numbers are exaggerated then it’s a red flag. She also suggests using IPO guidelines where applicable.

Next, Wanjiru suggests examining the reputation behind the founders of a particular project. Again she asks:

“Are they associated with questionable activities/investigations and are they publicly identifiable across either company portfolios, industry based interviews, features, awards and social/various media? If they’re relatively young in the industry, do they have any work that could speak for them?

A potential token buyer must ask and get satisfactory answers to these questions before making a decision. In this age of social media, it is rather uncommon for corporations and businessman not  to have a regular presence on popular networks like Twitter or LinkedIn. A crypto start-up with a team that hardly utilizes social media tools could be a sign of potential trouble ahead.

Lastly, Wanjiru focuses on the whitepaper itself by again posing more questions, which anyone looking to invest in cryptos must consider.

“What language is being used to describe the project? Is it hopeful, presumptuous, can you pick out FOMO/hype?  Is it professional or does it have logical, historical & grammatical errors? Would you feel safe or confident to work for such an entity?

Wanjiru emphasized that the issue is hardly about a perfect document but a realistic business proposition.

In the meantime, AfricaBlockchainMedia also received comments on the same inquiry from Justin McCarthy, a Co-Founder and CEO at UBU Core, a South African based tech firm that focuses on crypto and blockchain. McCarthy, a crypto enthusiast and just like Wanjiru, notes the same key things to look out for when buying tokens.

However, McCarthy goes further by asking an important question, one that potentially exposes questionable projects before they scam unsuspecting people. He asks:

“Are they building or have (they) built own blockchain? If so, why? If not, what blockchain are they using and why”

There are already 2000 plus tokens and blockchain networks and potential token buyers need to pay special attention to any whitepaper or project that proposes something completely new. A project that promises radical upgrades and changes to the technology or one that promises to re-invent the wheel is a potential red flag.

Next, McCarthy asks about the exchange listings a token or project has or has at least lined up. The team behind such an offering must be able to produce some evidence of any such listing.

Again failing to do provide this could be a sign that something is amiss.

Capping the list of our respondents that favour self regulation is Jonathan Fennell, Founder of Genesis Block Africa (GBA). Fennell focuses on more subtle aspects of token offerings that a serious token buyer must also consider.

For instance, he draws our attention to the depth and quality of information contained in ICO whitepapers. With respect to IPOs, it is a routine for a company that is seeking funds from the public to furnish (through the prospectus) potential investors with records of its previous performances.

An investor must be able to see a pattern from such historical information and use this to make an informed decision. Fennell expects the same principles to be applied with respect to the whitepaper. He encourages potential token buyers to look out for the following when examining a whitepaper:

“What stage are they at before seeking raise. It used to be easy just to raise money off a whitepaper and nothing else.” 

While it may not possible for a crypto start up to have a long trading history, it makes sense for co-founders of a project to elaborate on what they have already done and the resources they have already expended. If there is nothing on that perhaps this could be a hint to stay away.

There is no crypto regulation while consumer protection laws are yet to be amended to encompass the crypto market. As a consequence, a lot of crypto projects that seem unrealistic, from either a legal or a technical stand point, continue sprouting.

To avoid falling for such projects, Fennell suggests following a safety in numbers approach when investing in tokens although he cautions there are risks associated with this approach too.

“Obviously seeing the hype behind a project, if you (are) a noob and looking to throw money, follow the crowd (Reddit, Bitcoin Talk, Telegram, etc). However, understand there will be a dump too.

As a last point, the GBA Founder encourages potential buyers of tokens to take time to study and understand the concept of tokenomics. Understanding this will better equip even the inexperienced ones with the knowledge needed to navigate this market.

Dissenting views

There were some dissenting views however. Jude Zambarakij, is a co-founder at Brand Fort and a member of the EOS community. He was one of the few to articulate their opposition to the notion self regulation as the answer to the challenges that face this industry.

Zamabarakij says the solution to the scourge of scammers in the crypto industry lies in a model regulation that is outside crypto industry, specifically the one used for stock markets in advanced countries like United States or Germany.

Zambarajiks believes that any self-regulatory pan-African solution whether it be through the self-regulation schemes proposed by ADAF or some other pan-African effort is destined to only work as a short-term band aid. He went on to offer a counter model which he concludes will work. He said:

 “A regulation was passed in a major a developed country such as the USA or Germany requires all companies listed on public stock exchanges registered in the country in question to give 1% or 0.1% of their annual or quarterly profits as dividend rewards to stock holders.

“In this scenario argues, if a company grew from one year to the next its stock dividends would automatically grow. And companies would either pay dividends using 1% or 0.1% of their profits or risk being delisted on all the stock exchanges they are currently listed on.”

Zamabarajiks further asserts that dividends that come out of 1% of a company’s annual or quarterly profits would be far more effective at indirectly combating crypto scams by reducing speculation in every financial industry than only 0.1% of a company’s annual or quarterly profits.

Zamabarajiks sees no chance of similar regulations being passed in any African country because of what he termed democratic plutocracies where low-income and middle-class citizens are given opportunities to complain about the decisions made by the wealthiest members of society.

Self-regulation is more practical in the short-run concludes Zamabrajiks but he concedes that his unorthodox views will never be taken seriously.

As this debate continues, it remains to be seen if regulators on the continent are going to take on board some of the views expressed here.