The perfect cryptostorm

To fully understand the incredible story behind the cryptocurrency and blockchain craze of 2017-2021, we must explain the unique setting in which events played out, setting the course for the collision. One component amplified the other, multiplying the effect, thus creating a perfect cryptostorm. Unfortunately, that storm took a toll on trust in the industry and caused financial losses.

The cryptocurrency industry is a one-hit wonder. But what a wonder that is! Bitcoin presents the true marvel of human engineering of money. It has withstood the test of time and resiliency, becoming the worldwide recognised use case for digital gold. We witnessed newly coined terms such as ‘crypto-rich’. In response, a whole new payment industry emerged, forged by the desire of the legacy financial organisation to stay relevant in the new era. 

Moreover, alongside the new fast-digital payment industry, which was delivering miracles on financial inclusion of the unbanked, the retail investing industry was a new form of capital inflow. The emergence of online trading companies, backed mainly by larger institutional investors, was recognised as a risk for the retail users and overall consumer protection rights.

Unanswered risks, the new hype around the change in the financial industry, and the emergence of inexperienced investors were the ingredients for the perfect storm in the cryptocurrency industry. Add human greed to that mixture and it becomes the perfect cryptostorm.

The perfect cryptostorm

The necromancers that summoned this cryptostorm, are quite vividly depicted in the latest Netflix documentary drama, ‘Bitconned’, which aired this January after two years of production. In 2017, the Centra Tech company raised USD 25 million in investments in their main product: a VISA-backed credit card, allowing people to spend their cryptocurrency at any retail store across the USA.
Centra Tech’s CEO, CTO, and other executives had a Harvard Business School background or an MIT engineering degree. The new headquarters in downtown Miami was full of young, bright people, and 20,000 VISA cards were produced. However, none of this was real. Everything was a (not so cleverly) staged mirage.

The court case concluded in 2021, handing jail time sentences to the people involved. The documentary is led by one of three prominent persons behind Centra Tech, Ray Trapani, who collaborated with the federal investigation on the case. In the film, he explained in detail how two young scammers working at a car rental company raised millions in an ICO, having only a one-page website. 
Once it started, the storm did not calm down for years. The story of Centra Tech from 2017 was replicated time and time again, culminating in the collapse of, at the time, the world’s second-largest company in the industry: FTX, an online cryptocurrency exchange. As we read from publicly presented pieces of court evidence, in the cases against Celsius, Luna and FTX, the crypto companies spent funds custodied by their investors.

How did crypto scam companies utilise the above ingredients?

By promising the right thing at the right moment. Internet users witnessed the financial sector’s transformation and bitcoin’s success. They could easily be convinced that a new decentralised finance infrastructure is on the verge, which will be supported by the lack of a regulatory framework. At the same time, giving them a fair chance to participate in the industry beginnings and become the new crypto millionaires, which was the main incentive for many. If people behind the open-source cryptocurrency (bitcoin) could create the ‘internet of information’,  the next generation of cryptocurrency engineers would surely deliver the ‘internet of money’. However, again, it was false. It was, in fact, a carefully worded money-grabbing experiment.

All the above ideas still stand as a goalpost for further industry developments. Moreover, we must admit that the initial takeover of the industry by scammers, fraudsters, and, in some cases, straightforward sociopaths will taint the forthcoming period of developments in this industry.

In contrast to bitcoin, the creators of almost all cryptocurrencies that came later were incentivised by the financial benefits of ‘tokenisation’ rather than by secure and trustworthy technology. The term tokenisation was supposed to describe the emergence of fast-exchanging digital information (tokens) that could help trade digital products and services, promising the possibility of a ‘creators’ economy, micropayments, or unique digital objects. But in reality, it was merely copying analogue objects to the digital world and charging money for that service. Stocks, bonds, tin cans, energy prices, cloud storage, and dental appointments were all promised to be tokenised, while the term ‘blockchain’ was the ultimate hype word. People soon realised that not all digital artefacts had value solely by being placed on a blockchain. That was the case with projects that honestly intended to build the product (token or cryptocurrency) rather than just sell vapourware and go permanently offline the moment they got busted. As with any other technology, time will show the most efficient and rational use of blockchain.

Could this happen again for online financial services? 

Chances are meagre, certainly not to happen on this scale. Financial agencies worldwide have prepared a set of comprehensive laws and authorities to detect such fraudulent companies much faster and more efficiently. Financial regulations are negotiated with much more success on a global scale. Intergovernmental financial organisations and their bodies have equipped the regulators with the tools to comprehend how technology works and what can be done on the consumer protection side. Also, the users have had their fair share of schooling. Once bitten, twice shy.

For any other technology developed and utilised mainly online, the chances are always there. Users can now easily be engaged directly, via a mobile app, with companies that promise the next technological innovation. All they have to do is to carefully word our societal dreams into their product description.