The unregulated nature of internet cyber currencies is putting investors at risk, says Daniel Broby, Director of Strathclyde's Centre for Financial Regulation and Innovation (CeFRI).
The warning comes on the back of unprecedented volatility in the exchange rates of such cryptocurrencies.
Bitcoin, one of many hundreds of cryptocurrencies, has a thirty day standard deviation of daily returns of 5.32% against the US Dollar. Despite the fact this means its value has been extremely volatile, its appreciation has been such that it has attracted speculators.
Speaking at a Fintech and Auditing Network event in London recently Mr Broby warned of the dangers of some of the fundraising rounds for digital currencies.
In attendance at the event, organised by Newcastle and Durham Universities, was Adam Afriyie MP, Chairman of the Parliamentary Office of Science and Technology.
Mr Broby said: "Whilst cryptocurrencies clearly have a future, not all will succeed. The public should be wary of considering such token forms of payment as investments.
Having a clear view that digital money payment is the way forward is not the same thing as saying one can make money out of it.”
CeFRI is a strong proponent of digital payments and transfers and believes the world is fast moving towards a day when this will become the most common money payment method.
Strathclyde Business School has developed its own cryptocurrency as part of its MSc Financial Technology course – the first in the UK. Its ‘Strathcoin’ resides on a Distributed Ledger Testbed and is used for behavioral experiments.
The increasing interest in crypto-currencies has led a number of opportunists to jump on the bandwagon. There are now numerous schemes raising money for what they claim will be the next digital currency or cryptocurrency-backed service. The first fundraising iterations sold coins to investors at a fixed price and fixed valuation.
More recently, innovative new forms of fundraising have emerged, including what are called hybrid Initial Coin Offerings, reverse Dutch auctions, Vickrey auctions, and proportional refunds. These are unregulated fund raising operations and it is these that CeFRi believes the public should be wary of. They do not enjoy financial oversight in the same way that securities do. As there are no protections in place, Ponzi schemes and similar could well develop. Broby believes it is only a matter of time before some “investors” get burned.
Greig Paul, an expert on cyber security at Strathclyde said: “Many of these fundraising schemes are seeking investment in concepts with little more than a whitepaper showing theoretical behavior. Implementation quality is critical, and minor programming errors have led to significant losses of funds in similar cryptocurrency schemes, making these kinds of offerings particularly risky.”