As Bitcoin Bubble Loses Air, Frauds and Flaws Rise to Surface

Checking the values of virtual currencies in January. Such currencies have slid more than 50 percent in value from their peaks early that month, bringing various problems to the fore. Geoffroy Van Der Hasselt/Agence France-Presse — Getty Images

SAN FRANCISCO — You did not have to be a technophobe to worry that the virtual-currency boom of the past year papered over plenty of problems.

The scale of those problems is starting to become clear as digital tokens have slid more than 50 percent in value from their peaks in early January, with steep drops on Monday pushing the value of Bitcoin specifically below $7,000.

Hackers draining funds from online exchanges. Ponzi schemes. Government regulators unable to keep up with the rise of so-called cryptocurrencies. Signs of trouble have appeared at nearly every level of the industry, from the biggest exchanges to the news sites and chat rooms where the investment frenzy has been discussed.

On Tuesday, the leaders of the two main regulatory agencies in the United States that oversee the technology, the Securities and Exchange Commission and the Commodity Futures Trading Commission, are to testify before the Senate banking committee about their efforts to police virtual currency markets. In the past two weeks, both have brought major cases, but people in the young industry said regulators had barely made a dent.

Some virtual currency enthusiasts argue that the problems are no different from what has happened in other booms, like the internet bubble of the 1990s. But even true believers say the design of virtual currencies — meant to cut out middlemen and government authorities — has made bad behavior more prevalent amid this particular bubble.

“Cryptocurrencies are almost a perfect vehicle for scams,” said Kevin Werbach, a professor at University of Pennsylvania’s Wharton School. “The combination of credulous buyers and low barriers for scammers were bound to lead to a high level of fraud, if and when the money involved got large. The fact that the money got huge almost overnight, before there were good regulatory or even self-regulatory models in place, made the problem acute.”

The fall from the peaks of early January has been dizzying. The value of all outstanding virtual currencies has been cut by more than half, down over $400 billion as of Monday, according to the website Coinmarketcap.com.

In January, the heads of the main regulators wrote in The Wall Street Journal that the situation presented an unprecedented challenge. “These markets are new, evolving and international,” Jay Clayton, the Securities and Exchange Commission’s chairman, and J. Christopher Giancarlo, his counterpart at the Commodity Futures Trading Commission, wrote. “As such they require us to be nimble and forward-looking.”

Government agencies in the United States have shut down a few notable frauds. Early last month, securities regulators in Texas and North Carolina issued cease-and-desist orders to BitConnect, an operation that had grown to be worth $3 billion.

But those moves only came after BitConnect had operated openly for months, collecting hundreds of millions of dollars from people around the world despite being labeled a Ponzi scheme by many prominent people in the virtual currency industry. BitConnect offered tokens on a decentralized network, similar to Bitcoin, but promised regular payouts to coin holders.

In January, the Commodity Futures Trading Commission shut down My Big Coin, a purported swindle that had attracted $6 million.

But regulators have not gotten near most of the brazen schemes that have popped up in the past year, many of which had been attacked by hackers first, or simply shut down by their operators after money had been raised.

A new virtual currency, Proof of Weak Hands Coin, whose creators referred to it as a Ponzi scheme on Twitter and use a pyramid as a website logo, raised $800,000 before hackers got into its systems last week and drained its funds. Another pyramid scheme, MMM, which was shut down in an earlier incarnation by the Russian government, has been revived thanks to the popularity of Bitcoin and is operating openly, with particular success in Africa

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