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Web of deception’
Most investors are not fully aware of the inherent risks in cryptoassets

Web of deception’

An idiom that many believe will last forever goes like this: “Oh what a tangled web we weave/when first we practise to deceive”. 


This phrase may sound “Shakespearean” but it is actually attributed to an early nineteenth century Scottish author, Sir Walter Scott.  Simply, this idiom, in few words, describes how a lie or dishonest act could initiate a series of problems and complications, sometimes seemingly unending. The fact is, because the world is full of people who are ever ready to deceive others, this idiom will certainly last forever! Or, it should last forever.

I have set off this week relying heavily on this idiom to make my point or two, because on Monday, June 5, 2023, U.S regulators made statements in a case they had filed against an individual and a company that was based, in part, on deceit.

 The regulators filed a suit against Binance, a cryptocurrency exchange—and its chief executive officer Changpeng Zhao—alleging a “web of deception” in the modus operandi of the company.

Following a series of investigations, the US Securities and Exchange Commission (SEC) listed 13 charges against Binance and Zhao.

The allegations included artificial inflation of the company’s trading volumes, diversion of customer funds, failure to restrict U.S. customers from its platform, misleading investors about its market surveillance controls, among others.

According to the SEC, from almost three years ago, until June 2022, a trading firm owned and controlled by Zhao, Sigma Chain, engaged in so-called wash trading that artificially inflated the trading volume of crypto asset securities on the Binance US platform, the SEC also alleged. Sigma Chain spent $11 million from an account on a yacht, the SEC said.

"We allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law," SEC Chair Gary Gensler said in a statement. Both Binance and Zhao have denied the charges.

Guess what happened to the crypto industry when the allegations were made public? Well, bitcoin came under a lot of pressure, securing its lowest in almost three months.

This case has a long way to go, and like the crytomarket, we must all be ready for the twist, and sometimes scary turns along the period. However, what turned my head when l read the story was the strong words that the regulators had used in their allegations.

In fact, the documents made available, per reports, stated clearly what the possible deceit could be—and some of them had been stated above.

In the broader sense though, the case calls into question some of the practices within the crypto industry.

 For instance, most investors are not fully aware of the inherent risks in cryptoassets and many have actually taken positions, recognising profit in the process whereas the underlying assets may not be worth the paper the contracts are written on.

 As I explained in the November 19, 2022 edition of this column, cryptocurrency games are no child’s play. In 2022, for instance, there were a number of high profile collapses of major crypto businesses, with founders of these companies suffering the consequences in the end.

Sam Bankman-Fried, described as a 30-year-old billionaire, “prodigy”, and “eccentric genius” within the crypto ecosystem, on November 8, 2022, was forced to sell his crypto empire due to cash crisis.

 Commenting on the development, the Wall Street Journal (WSJ) wrote that: “The young 30-year-old billionaire was just before that day considered the tutelary figure of the crypto sphere.

A sort of godfather to turn to when things go wrong”.

“He owed this image to his tour de force during the summer to bail out and save crypto firms struggling due to a credit crunch caused by the sudden collapse of the cryptocurrencies Luna and UST or TerraUSD, two tokens issued by the Terraform Labs platform,” WSJ added.

As l explained in the November 19, 2022 edition of this column, “at one point Bankman-Fried was valued at US$15.6 billion but following the developments on November 8, 2022 there were conflicting reports about his net worth.

While some measured his net financial position at below US$1 billion, others said he could have lost it all, given the uncertain nature of the market”. Okay, by the “rulebook” can this also be described as deception or just the market behaving like the market? The usual blip?  Whichever way you may look at it Bankman-Fried has also had his day in a Federal Court in the United States of America.

Significantly, what one needs to understand is that cryptoasset risk is real so you must take a look before a deep dive.

Take the case of bitcoin, which hit a three-month low on June 5, 2023 when the US regulators filed a suit against Binance and its leader. As the signature crypto asset, bitcoin’s volatility has always served as a proxy for gauging market movement. In the latter part of 2021, it started a price decline that lasted for a while, culminating into a 70 per cent decline at some point.  

Understandably, a number of high-profile firms have failed to live up to expectations in the crypto industry- because of the market turbulence-, just as we have also experienced corporate failures of great magnitude in the “traditional” businesses that we are used. So, what normally accounts for the collapse of businesses? 

To deal with the broad nature of corporate failure, one may have to look at a number of factors. Businesses, just like individuals, may run into liquidity challenges.

In simple terms, if you are not able to cover key obligations when they fall due, it could be a sign of some cash problem, a recipe for failure too.

It means that you are not “liquid” enough to meet your obligations. For instance, if the school fees are due, and you are not liquid enough to cover the expense, it becomes a challenge, isn’t it? Well, economic agents act in similar ways, even though the magnitude of challenge differs. Or the weight of the problem is not the same.

But where it is uncovered, through investigations, that underhand dealings, deception, complete disregard for corporate governance, rules and regulations caused the collapse that is where regulators get irked. Sadly, many schemes in the cryptoasset industry lack the transparency test that would mitigate future allegations of deception.

Your role is simple. Avoid the investment pitfalls that can create challenges for you now, and in the future.  

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