Famed investor Warren Buffett has a saying about the aftermath of periods of unfettered market enthusiasm: “You never know who’s swimming naked until the tide goes out.”
That idea appears to be particularly pertinent for bitcoin BTCUSD, +12.44% and the cryptocurrency market, which has recently seen a number of allegations of fraud and dubious activity pop up as virtual currencies faced their most severe slump in months.
On Wednesday, BitConnect, an investment platform linked to the so-called blockchain, announced that it was shutting down, resulting in a more than 90% decline in the coin pegged to its business, known as “BCC”.
Read: How trading bitcoin could actually ruin your mental health
There have been a number of allegations leveled at the lending and exchange platform, which offers crypto loans, and had targeted a certain return using the company’s proprietary trading algorithms.
An article on New York magazine’s website described BitConnect in this way:
| Still, while many were openly calling BitConnect a scam for months, the site seemed to be going along swimmingly until the sudden downturn in the cryptocurrency market, which saw most major currencies lose around 20 percent of their average value. Ponzi schemes work great when money is coming in, but tend to fall apart when that same money wants to leave. |
For its part, the BitConnect community through its blog said it planned on launching a “new superior system as an exchange that will support several cryptocurrencies as soon as possible and BCC will be listed immediately.”
BitConnect representatives didn’t immediately reply to a request for comment.
Meanwhile, on Friday, the Commodity Futures Trading Commission charged Cabbage Tech run by New York-based Patrick K. McDonnell with “fraud and misappropriation” linked to purchases and trading of bitcoin and litecoin, a faster, albeit less popular, version of bitcoin.
The commission also charged one Colorado man with trying to dupe 600 investors out of $1.1 million in bitcoin.
The recent charges and the questions swirling around BitConnect come after a severe slide earlier in the week erased some $400 billion in the market value of virtual currencies and yanked bitcoin to a value below $10,000 for the first time since December. Although the market has since seen a slight bounce back—a single bitcoin was valued at $11,200, according to CoinDesk on Friday—the downturn underlined the Wild West nature of a nascent financial sector that has been described as the biggest speculative bubble in modern history and a haven for illicit activity.
Check out: Why bitcoin is now the biggest bubble in history, in one chart
Fresh talk of fraud in the bitcoin world also comes about five years after Federal authorities arrested Ross William Ulbricht, then 29, seizing the Silk Road website on charges that it was a money-laundering operation pegged to bitcoin.
Read: 5 key reasons bitcoin, other cryptocurrencies have lost a stunning $370 billion in 10 days
“I welcome this kind of crackdown for bringing down fraud,” said Marco Abele a ex-Credit Suisse executive and founder of Swiss-based blockchain company TEND.
“I think it is very good for the industry. I think its necessary. otherwise it will not be recognized as a sustainable industry,” he said.
Crypto participants say they expect that 2018 to be a year of major change when it comes to sussing out fraud and bad actors.
Last year, the Securities and Exchange Commission, which has been critical of so-called initial coin offerings, said it had created a task force to protect retail investors from ICOs and fraud-related activities in crypto and blockchain, the underlying distributed-ledger technology that underpins virtual currencies. ICOs are a form of fundraising using blockchain technologies that has rapidly grown popularity, and drawn regulatory attention.
Simon Yu, CEO at StormX, a blockchain company tied to microtasks, said most in the digital-asset community welcomes more scrutiny from the government.
“As more companies get flagged and shutdown, the industry will become more normalized,” he said.
On Thursday, the SEC also said in a letter that it wouldn’t approve exchange-traded funds that hold cryptocurrencies until investor protections are addressed. “In addition, a number of recent media reports have highlighted a range of possible vectors for potential manipulation of cryptocurrency markets. Although some funds may propose to hold cryptocurrency-related products, rather than cryptocurrencies, the pricing, volatility and resiliency of these derivative markets generally would be expected to be strongly influenced by the underlying markets,” the report read.