THE BLOG

The Good the Bad and the Ponzi

05/11/2015 10:07 | Updated 04 November 2016

Since digital currencies leapt onto the scene in the early 1990s, they have been steadily gaining traction in the financial sector. The economic crisis in Greece and the recent slowdown in China's growth have given credibility to digital currencies as an alternative to traditional fiat currencies and led people to look for more innovative methods of transaction.

But unsurprisingly, given the tendency of human beings to view the unknown with caution, there is still a high level of scepticism around these new currencies. This suspicion is not totally unfounded; a simple internet search of digital currency will point you to trading platforms that have been exposed as fraudulent Ponzi schemes. They lack regulatory oversight and attract fraudsters preying on people who are unfamiliar with this revolutionary new sector. Indeed, that is why we submitted our thoughts to the UK Government's consultation on digital currency regulation, to help shape this sector for the better.

As with any method of payment, digital currencies bring their own risks; but they do also provide a significant number of advantages for consumers. These include an increase in the privacy and security of transactions. At LEOcoin we have always strived to bring digital currencies to the masses and believe that, if fully equipped with the knowledge to be able distinguish between a legitimate currency and a Ponzi scheme, consumers can make the most of the benefits that come with trading with digital currencies.

When considering using digital currencies therefore, it's good to make yourself aware of the most common Ponzi scheme indicators. The US Securities and Exchange Commission (SEC) recent guidance on fraudulent schemes provides a useful starting point for identifying these dangers;

Firstly, beware of any scheme offering massive returns on small investments. Much like any investment, investing in digital currency carries an element of risk, but this level of risk is just a reality of economics. However, approached appropriately it can reap rewards - and the same applies to digital currency.

Secondly, digital currencies that fluctuate wildly should be treated with a fair amount of caution. As digital currency is a new market, it is has experienced considerable fluctuation as a whole. That is why we've been pleased to see our own LEOcoin hold relatively stable. The digital currency market is volatile, that is why we have founded ours off the back of a broad user base to give it stability.

Thirdly, avoid digital currencies that have no dedicated public platform. If you come across a digital currency that does not appear to exist on a public exchange, like LEOcoin is on the LEOxchange, it is most likely a scam or has no value. American attorney Kevin Thompson has said in his recent piece on Ponzi schemes, "the whole point of cryptocurrency is to be OPEN and operate in a TRUSTLESS environment". But that rather tars the legitimate currencies with the illegitimate brush. In a fraudulent scheme the value of coins tends to be determined in a system that is closed; the value of the coin can therefore be manipulated. Legitimate digital currencies like LEOcoin and Bitcoin, on the other hand are traded publically on exchanges, as the public users police the system through the ledger.

Finally, a Ponzi scheme pays supposed returns to existing investors from funds contributed by new investors, and often manipulates the price of their cryptocurrency internally, increasing the price over time based on alleged "market demand". In these systems, there is typically one operator who manages the transfer of these funds. Instead look out for a currency like LEOcoin which, as with other legitimate digital currencies, is traded between individuals through a decentralised peer-to-peer network. Capitalising on LEO's existing membership of thousands, LEOcoin had an established base of users, who were trading amongst themselves. We then made the decision to open it up to the wider public by launching the LEOxChange launch in April 2015.

Like many revolutions the road can be fraught with bumps, and the digital currency revolution is no exception. With the good, there can often the bad; and as with any new financial product the door is open to misuse. That is why those of us working in the legitimate digital currency space must be transparent and accessible with our users. With this aim in mind, LEOcoin launched the LEOcoin Foundation, a non-profit organisation, earlier this year. The foundation acts as an enabler for public participation in the use of legitimate digital currencies, and aims to strike a balance between innovation and the responsibility to protect consumers.

Fully equipped with the right tools, consumers can fully capitalise on this emerging technology. The bad does not need to outweigh the good here; digital currency, if traded legitimately, has the potential to fundamentally transform the way business is done across the world.