On Monday, the US microblogging giant Twitter Inc (NYSE:TWTR) announced that it was banning advertisement for some cryptocurrency-related activities, including initial coin offerings (ICOs), as well as digital currency exchanges and crypto wallets that are not listed on major markets. The market reaction was hardly surprising – most major cryptocurrencies suffered heavy losses, with Ethereum, the most popular platform for token sales, plummeting to a three-and-a-half-month low on Tuesday.
Twitter’s move marks the latest in a series of bans on crypto-related advertising in social media. Since the beginning of the year, Facebook (NASDAQ:FB), Google, Snap Inc (NYSE:SNAP) and now Twitter have all taken steps to restrict crypto-related ads on their platforms.
Crypto's little (big) problem
These bans point to one thing: cryptocurrencies have an image problem and, in all fairness, it’s well justified. The cryptocurrency space has seen more than enough dubious ICOs, airdrops and outright scams. The market has been rattled by cyber-attacks, exposing vulnerabilities in major exchanges. Smaller altcoins are often targeted by pump-and-dumb schemes. Blockchain projects can attract huge attention with nothing more than a flimsy whitepaper.
These are major issues that need addressing and they are all generating bad publicity for the cryptocurrency sector, which may just be the biggest problem the sector faces, at least in the short term
"As new retail investors enter cryptocurrency, a large portion of them are trading on raw emotion," Timothy Tam, co-founder of crypto-market intelligence platform CoinFi, said in comments to CNBC explaining why the news of the Twitter ban had such a negative effect on the market.
Keep in mind that Sky News had already reported on the imminent ban just over a week prior to the official announcement. However, both the Sky News report and Twitter’s announcement prompted very similar reactions from the market, resulting in steep price declines. This further indicates that the cryptocurrency market is a volatile place, largely driven by emotion. Each new dent in the cryptocurrencies’ image erodes investors’ confidence in the sector and nudges that emotion closer to the negative side of the spectrum.
Regulation cound help...
Last week I wrote about why government regulation, while feared by many in the cryptocurrency space, can help the sector mature and reach its full potential. It can also help with this image problem. By clamping down on crypto-related illicit activities and dubious practices, regulators will make the market a safer place for investors and greatly reduce the number of incidents that can damage its image.
Fortunately, early signs show that global regulators are thinking about tackling these issues. Earlier this month, the Bank of England governor Mark Carney suggested that the UK should focus on regulating “elements of the crypto-asset ecosystem to combat illicit activities, promote market integrity, and protect the safety and soundness of the financial system”. More recently, the UK government took its first step towards implementing that approach by creating a Cryptocurrency Task Force to assess and “understand the risks of crypto-assets, and to consider how to mitigate them, as well as exploring the wider benefits of distributed ledger technology in financial services”.
Meanwhile, the financial leaders of G-20 indicated at their recent meeting in Buenos Aires that they intended to address existing issues in the sector, related to consumer and investor protection, market integrity, tax evasion.
... but can't be the only solution
The implementation of appropriate rules and regulations will go a long way towards improving the sector’s public image. But the industry cannot rely solely on outside intervention
On the same day that the Twitter crypto ad ban was announced, it was also revealed that LitePay, a start-up that was supposed to become the first payment processor for one of the largest digital currencies on the market, Litecoin, was shutting down. The news was announced by the Litecoin Foundation, that had publically backed the project.
“We are greatly disheartened that this saga has ended in this way and we apologize for not doing enough due diligence that could have uncovered some of these issues earlier,” wrote the foundation, which oversees the development of Litecoin. “We are currently working hard to tighten our due diligence practices and ensure that this does not happen again.”
This sentiment was echoed by the LF founder and Litecoin creator Charlie Lee, who apologised “for having hyped up this company” and vowed to “do better due diligence in the future”.
Now I have every confidence that Lee and the foundation will learn from this mistake. However, the fact that this incident happened shows that the industry needs to step up its efforts to improve its standards. Self-regulating organisations such as CryptoUK and the upcoming cryptocurrency exchange trade body in Japan should be the norm, not the exception, while prominent figures in the crypto circles need to realise that their words carry enormous weight within the crypto community.
This brings me to my next point – we, the reporters, analysts, crypto aficionados and investors, that follow this industry, also need to raise our standards, especially when it comes to evaluating potential investments.
“Like everyone else, we got too excited about something that was too good to be true and we optimistically overlooked many of the warning signs,” Lee wrote on Twitter after the announcement of LitePay’s shutdown.
I’ll have a guess and say that many cryptocurrency investors out there have, at one point or another, found themselves in a similar situation, and that’s understandable. This is an exciting new space, after all. However, we need to tone down our excitement, especially when it comes to individual projects. We need to make sure that our excitement is justified by conducting proper research. By doing so we will not only improve our ability to make better crypto-related investments, but we might just help the digital currency sector solve its image problem.
A recent survey, commissioned by website finder.com, showed that 54.09% of the current US crypto holders had chosen their particular coin or token because they did their own research and it came out on top. That’s an encouraging sign, though I still think this percentage needs to be a lot higher.
Disclaimer: I own small amounts of Bitcoin and Ether.