This is Why the SEC Should be Looking at the Cryptocurrency Exchange Token Model
Posted on 11/08/2022
The cryptocurrency industry has attracted brilliant minds and creative financiers, at the same time, the industry has attracted crooks and swindlers. Some major scandals include the blow up of the stablecoin TerraUSD (UST) and Luna – a catastrophic event that nearly wiped out US$ 45 billion in market capitalization within a week. Luna served as the primary backing asset for Terra. Another crypto blowup was with Celsius Network LLC, which attracted massive institutional investor capital. A court-appointed examiner and a committee of Celsius creditors are seeing if the crypto lender used depositor money to meet the financial obligations of others – a type of ponzi scheme. WestCap Group, which raised money from public funds and other investors, marked down the value of its fund’s $150 million investment in Celsius by 85%. Canadian pension giant Caisse de depot et placement du Quebec (CDPQ) also lost money in Celsius.
On October 21, 2021, a press release was written stating, “WestCap and CDPQ believe Celsius is a world-class business in size and scope, and will continue to be the leader at the forefront of the industry in regard to innovation and regulatory acceptance,” said Laurence A. Tosi, Founder and Managing Partner at WestCap. “While the current regulatory attention is new, Alex Mashinsky and Celsius’ ethos has long echoed the sentiment regulators are trying to put forth in terms of consumer protections. Celsius is committed to working constructively with regulators to better understand the dynamic crypto space, protect retail customers from fraud and undue risk, and create general consumer knowledge to allow for thoughtful investment decisions.”
Celsius could now be official considered a ponzi scheme by judges in the United States. That would mean public pension money was tricked into investing a company perpetuating a criminal ponzi scheme. Like fiat currencies, digital tokens value is in demand and its usage.
Binance’s CZ and FTX Group’s Sam Bankman-Fried are in a Twitter spat as Alameda Research’s balance sheet was revealed to a crypto news site. Alameda Research was founded to be holding large amounts of FTT – FTX’s native digital token.
How do these schemes grow?
1. CREATE A TOKEN WITH A CHARISTMATIC OR INTERESTING FOUNDER
Digital tokens are different from cryptocurrencies and are essentially bits of code on a blockchain. Often the creators of digital tokens control the majority of them before pushing them out. To get the token out, a charismatic founder must be at the center plot and a PR agency would need to shop that speaker around at all the major industry events. Creating a compelling backstory would also lure in investors.
2. CREATING A MARKET AND PUMPING DEMAND
To increase the digital token’s price, cryptocurrency exchanges will have to use market makers. Some examples of this are for customers to buy digital tokens using the exchange customers’ assets. And if the related-hedge fund or exchange holds most of the digital tokens, there would be fewer tokens to pump up.
3. MARK TO MARKET
On paper, cryptocurrency exchanges can show growth in assets as those digital tokens increase in value on the corporation’s balance sheet. These investors will also use their digital tokens or cash to acquire other competitors, blockchain companies, or “cryptowash” it into other startups.
4. FINDING INVESTORS
Cryptocurrency exchanges can target investors such as venture capital funds, Web3.0 investors, pension funds, sovereign funds into paying into preferred equity or make large loans collaterized by the digital token.
5. GO MAINSTREAM
As U.S. dollars flow into corporate entity, the corporation can start using that money to work on hiring experts, lobbying politicians, naming stadiums, putting out ads, and sponsoring investor conferences.