This is why the SEC should look at the Cryptocurrency Exchange Token model

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Published on 11/08/2022


The cryptocurrency industry has attracted brilliant minds and creative financiers, but at the same time, the industry has attracted crooks and fraudsters. Some major scandals include the explosion of stablecoins TerraUSD (UST) and Luna – a catastrophic event that nearly wiped out $45 billion in market capitalization within a week. Luna served as the primary support asset for Terra. Another crypto blowup was with Celsius Network LLC, which attracted massive institutional investor capital. A court-appointed examiner and a committee of Celsius creditors are looking into whether the crypto lender used depositors’ money to meet other people’s financial obligations — a kind of ponzi scheme. WestCap Group, which raised money from public funds and other investors, reduced the value of its fund’s $150 million investment in Celsius by 85%. Canadian pension giant Caisse de depot et placement du Quebec (CDPQ) also lost money in Celsius.

On October 21, 2021, a press release was written stating: “WestCap and CDPQ believe that Celsius is a world-class company in size and scope and will continue to be a leader at the forefront of the industry in terms of innovation and regulatory acceptance.” ” said Laurence A. Tosi, founder and managing partner at WestCap. “While the current regulatory focus is new, Alex Mashinsky and Celsius’ ethos has long echoed the sentiments regulators are trying to convey regarding consumer protection. Celsius is committed to working constructively with regulators to better understand the dynamic crypto space, protect retail customers from fraud and undue risk, and create general consumer knowledge to enable informed investment decisions.”

Celsius could now officially be considered a ponzi scheme by judges in the United States. That would mean that public pension money was tricked into investing a company that perpetuates a criminal ponzi scheme. Like fiat currencies, the value of digital tokens is demand and its use.

Binance and FTX Group are in doubt as the disclosure has occurred in an owner-related hedge fund called Alameda Research that holds large amounts of FTX’s original token – FTT.

How do these schemes grow?

1. CREATE A TOKEN WITH A CHARISMATIC OR INTERESTING FOUNDER
Digital tokens are different from cryptocurrencies and are essentially pieces of code on a blockchain. Often, the creators of digital tokens check the majority of them before pushing them out. To get the token out, a charismatic founder needs to be front and center, and a PR agency would have to shop the speaker around at all the major industry events. Creating a compelling backstory would also entice investors.

2. TO CREATE A MARKET AND PUMP DEMAND
To increase the price of the digital token, cryptocurrency exchanges will have to use market makers. Some examples of this are customers buying digital tokens using the assets of exchange customers. And if the related hedge fund or exchange holds most of the digital tokens, there would be fewer tokens to pump up.

3. MARKET TO MARKET
On paper, cryptocurrency exchanges can show growth in assets as these digital tokens increase in value on the company’s balance sheet. These investors will also use their digital tokens or cash to acquire other competitors, blockchain companies or “cryptowash” it to other startups.

4. FINDING INVESTORS
Cryptocurrency exchanges can target investors such as venture capital funds, Web3.0 investors, pension funds, sovereign wealth funds to deposit into preferred stocks or make large loans secured by the digital token.

5. GO MAINSTREAM
As U.S. dollars flow into a company, the company can begin using that money to work on hiring experts, lobbying politicians, naming stadiums, airing ads, and sponsoring investor conferences.

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