One Of Last Year's Best
Ethereum was one of last year's top performing cryptocurrencies - rocketing from a price of $8 in January 2017 to more than $1,500 just a year later. It's also being slammed unusually hard in this current "ICO winter", when regulatory uncertainty is haunting the markets for new coin offerings. Ethereum is trading below $500, more than 63% off its all-time high on Jan. 10th, and there is no end to the bloodbath in sight.
While regulators are still trying to wrap their heads around just exactly what cryptocurrencies are - the SEC says they're securities, the CFTC says some are commodities, and the IRS wants to treat them as property - all the subpoena-issuing and regulatory bla-bla has driven crypto prices down across the board, and has understandably hit the blockchain-builder sector particularly hard, since these are the native currencies of the platforms on which ICOs are built.
Open-Minded - Not So Much
While CFTC Chairman Chris Giancarlo was surprisingly open-minded at a Feb. 6th Senate hearing on banking, SEC Chairman Jay Clayton was most decidedly not. He pretty much put his foot down without even caring enough to listen to the other side of the story.
These are the words that sent a chill through the ICO market and started the long, cold, crypto-winter for ethereum and the other cryptocurrencies in the blockchain-builder sector.
Much More Nuanced
The other side of the story was pretty compelling. Some of cryptocurrencies' most ardent defenders came to DC in March to testify in a Congressional financial services hearing focused entirely on ICOs. A researcher from CoinCenter, a Silicon Valley attorney who handles many ICOs, and Coinbase's chief legal and risk officer all gave a much more nuanced picture of the ICO market - noting that each use case is unique and should be evaluated on its own merits.
The bottom line from those with extensive experience in the crypto sector is that trying to define and squeeze ICOs to fit into current US securities laws amounts to nothing more than regulatory "shoehorning" and it will likely have the unintended consequence of innovation and driving some of the most valuable future capital markets overseas.
Digital commodities are scarce items that may have value on open markets as money, as investments, or as inputs for valuable commercial and industrial processes. Promises of future tokens, representing the hopefully profitable efforts of a developer, are securities.
Peter Van Valkenburgh, CoinCenter
Watch Peter Van Valkenburgh of CoinCenter explain to a Congressional Financial Services ICO panel the difference between a digital commodity and a security
Of course what would a crypto-crisis be without the piling on of still more bad news? With all the smart contracts built on the ethereum blockchain, it's of course inevitable that there's some poorly written code out there, but is this shoddy code worth worrying about? Apparently it is.
A research report from Singapore ominously entitled "Finding The Greedy, Prodigal, and Suicidal Contracts at Scale" found that 3.4% of one million smart contracts analyzed on the Ethereum network were susceptible to bugs because of bad code. The research group found 6,239 Ether locked inside dead contracts of which 313 Ether had been sent after the contracts had been killed. Vulnerabilities exposed included:
finding contracts that either lock funds indefinitely, leak them carelessly to arbitrary users, or can be killed by anyone
Worth Worrying About?
Sounds pretty bad, right? Well guess what? It gets worse. Since approximately two-thirds of the $6 billion raised in ICOs in 2017 was in the form of ether, these projects must sporadically cash out some of their ether holdings for fiat currency to cover expenses that can't be paid in crypto. This means there's a lot of ether, several billion dollars worth, just waiting to flood the market.
In fact, because of the public transparency of the blockchain, it's possible to see exactly how much ether is being held in each project's wallet to get an idea of just how bad the situation could be. Clicking on the Image below will take you to a google sheet that lists the amount of ETH held in the wallets of major ICO projects. The total is about $2 billion dollar's worth.
Fortunately the nightmare scenario of all these ICO projects dumping their ether holdings is extremely unlikely, since it is the "gas" that will power their transactions, contracts, and network usage as their blockchain projects develop and mature. In fact, one could argue that the smart ICO teams would be buyers of ether while prices are low.
Images via Shutterstock, Youtube, Google Sheets