Crypto Firms' Native Tokens Conceal Significant Risk Investors Should Beware

Illustrative Image | source The native tokens of cryptographic companies such as FX, Celsius Network, etc have turned out to be an artfully used trap for hunters, at least that is what the reports of the regulatory authorities indicate.

Crypto firms' own cryptocurrencies play a significant role in their development, as they allow companies to attract new investors and users Thanks to the capital obtained in this way, they can expand their business activities.

The risk of native tokens However, the problem arises when such companies stop playing fair and start buying such tokens in bulk through their sister companies Such is the case with Celsius Network, according to Shob Pillay's report.

Shob Pillay is an investigator appointed by the bankruptcy court to examine Celsius' business practices According to the report, Celsius Network was using its native CEL token to fuel its own growth.

Not only did she offer it on the open market for purchase, but she bought it right away The rising value of the token attracted other interested parties.

Thanks to this, Celsius was already able to earn $32 million in sales in 2018 The company's founders, Alex Mashinsky and Daniel Leon, also benefited from the increase in the value of the tokens, who, thanks to the increased interest in CEL tokens, were able to sell part of their shares in the mentioned token for decent amounts.

By the time they filed for bankruptcy, Alex Mashinsky sold his stake for at least $68 7 million and Daniel Leon for $9.

7 million Celsius Network spent at least $558 million to buy its own token.

Such a practice paid off handsomely for CN, when the value of its CEL token skyrocketed by more than 14000% between March 2020 and June 2021 alone Thanks to the artificial increase in the value of the CEL token, the value of Celsius Network itself also increased hand in hand.

That it was just an inflated bubble was clearly demonstrated in July 2022, when CN went bankrupt The crash of the FTX stock exchange is a warning.

A similar situation also occurred in the case of FTX and Alameda Research FTX issued its native FTT token, which it used as collateral against billions in loans.

Likewise, sister company Alameda Research used this token as collateral The consequence of such a strategy was fully manifested at the moment when the value of the FTT token plummeted.

The lenders quickly discovered that both Alameda Research and FTX were essentially empty boxes, and that the FTT token is just a worthless asset In addition, exactly as in the case of Celsius Network, FTX and its sister company Alameda Research manipulated the price of their own native FTT token.

According to the Securities and Exchange Commission (SEC), Alameda Research engaged in automated purchases of FTT tokens through various platforms, thereby not only fueling the rising value of the FTT token, but also artificially increasing the value of the collateral for the loans provided Thanks to this, she was able to take out much larger loans, which was subsequently reflected in the attractiveness of investors and users.

Gary Gensler, Chairman of the SEC, was quite apt about these practices in a press release when he stated that: “FTX and Alameda planned to manipulate the price of FTT to prop up the value of their house of cards Regulators are becoming vigilant In September of last year (2022), the crypto-credit company Nexo also came under the radar of American regulators.

She was accused by the authorities that her cryptographic interest-bearing accounts represented unregistered securities The matter went so far that a lawsuit was even filed against Nexo in eight federal states.

The content of one of the lawsuits is interesting Specifically, the Kentucky Department of Financial Institutions states that Nexo was the sole holder of 95.

9% of all NEXO tokens as of July 31, 2022 The lawsuit further states that without the inclusion of the net position in NEXO tokens, the liabilities of the Nexo Capital subsidiary would exceed its assets.

In the case of this subsidiary, it can be assumed that some unfair business practices may be taking place A spokeswoman for Nexo said that Nexo is cooperating with regulators, and that the data provided to the Kentucky regulator's investigation relates to a separate position of one of the Nexo Group entities.

At the same time, she added that: "NEXO tokens represent less than 10% of the company's total assets, which in turn exceed the company's liabilities, even if we exclude the company's net position in NEXO tokens " The crypto market segment has had a challenging year (2022).

decline in asset values, such as shares, but also into crypto-assets such as tokens, NFTs, etc Due to the risky nature of cryptocurrencies or blockchains themselves, many investors have decided to limit their exposure to these assets, or to withdraw and use the already invested funds for other purposes.

a general collapse in the value of the entire market and the subsequent collapse of many projects The better-secured companies wrote off much of their previous profits, others saved their business only at the cost of layoffs and closing branches or establishments.

Greater regulation awaits the cryptographic segment The topic of regulation of the cryptographic sector also came to the forefront of the discussion Last year's events forced regulators across the country to become more active.

The most striking are the SEC interventions in the United States of America It is quite logical, because the biggest players in the cryptographic market are based in the USA.

It is not surprising that the voices for greater, but above all, more timely regulatory interventions are getting stronger, so that a similar situation, which happened in the case of FTX, does not happen again The leader among regulatory authorities in the case of the American market is clearly the Securities and Exchange Commission (SEC).

In the course of the last year, it began to exercise its powers much more towards the cryptographic entities there The SEC has taken a number of enforcement actions against crypto firms in the past year.

One of the disputes, for example, concerned the crypto exchange Kraken and the staking services offered by the exchange Last week, the SEC announced that it had settled the dispute with this crypto exchange.

The case of the FTX crypto exchange from the end of last year will probably further support these regulatory efforts The regulatory authorities are already signaling that they intend to police the cryptography segment with a tougher hand.

Voices are especially growing after the tightening of supervision over the native tokens of individual trading companies Native tokens like shares Even if such a native token is not completely analogous to shares, investors often judge the value of a cryptographic company according to it, just like in the case of shares, and it is the imaginary tip of the scales, whether investors decide to invest in the given company or not.

It can be simply said, that the increasing value of the token will attract many more investors and create a positive image of the company In addition, crypto exchanges often offer discounts or other rewards to users who buy their tokens.

As some cases from last year proved to us, native tokens can be easily abused to manipulate the price and create a false image of the company It's one of the things experts warn investors against.

The other thing is that native tokens are often thinly traded, which can cause their volatility Austin Campbell, an assistant professor at Columbia business School, commented on the issue: “If someone has their own proprietary token, by definition has confidential information about it, and then actively trades it, it raises a lot of questions about insider trading.

US Senator Sherrod Brown, as chairman of the Senate Banking Committee, called for greater oversight of cryptocurrencies by financial regulators following the collapse of FTX, one of the world's largest crypto exchanges, in November of last year An investor who wants to invest in the native token of one of the cryptographic companies should find out as much as possible about the entire company and the token itself that such a company offers for sale before making such an investment.

Rapid growth is very tempting, but it can also be a fast track to losing your entire investment The cryptographic sector is not subject to the same regulatory framework that is applied to the stock market.

Although native tokens often serve as publicly traded shares of a company, they are not subject to the same regulations, and an investor should always keep this in mind when investing in such a token Ing.

Zbyněk Kalousek Studied economics and management at Masaryk University in Brno In the past, he was engaged in the analysis of financial markets.

He returns to this activity after a short pause Co-founder of a company that deals with consulting and accredited education.

He cooperates with several other companies He perceives the world of cryptocurrencies as a progressive part of the market, which offers a lot of opportunities, but at the same time presents a lot of pitfalls, from decentralization, an apolitical approach, to high volatility of exchange rates, to the increasingly difficult mining of cryptocurrencies.

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