In literature, a Potemkin village is a construction (literal or figurative) whose sole purpose is to provide an external façade to a country which is faring poorly, making people believe that the country is faring better. The term comes from stories of a fake portable village built solely to impress Empress Catherine II by her former lover Grigory Potemkin, during her journey to Crimea in 1787. In finance, „Potemkin” is an adjective which is used for fake and fraudulent formations. On the paper, all details are presented well and adequate. However, if you ask further questions and insist on some details you can break the delicate layer and see the unpleasant truth about it.
As the newest era in finance, cryptocurrencies bring brand new dynamics and a new breath of fresh air into the markets coupled with new type of risks. Every day we see new “fake” cryptocurrencies with many aggrieved parties and loss of millions of dollars. When you need to be sure whether a cryptocurrency is an illusion of financial strength or a real opportunity which indicators should you check? Considering new regulations and practices, we certainly have some clues, however a structured control mechanism should be integrated into cryptocurrency markets urgently and investors should be informed about potential risks behind their transactions beforehand. Uncertainty brings extreme praxis as observed in a recent statement by the regulatory body of the UK; FCA – Financial Conduct Authority; banned the sale of all derivatives and exchange traded notes (ETNs) of certain types of crypto assets to retails customers. We also observed the opposite by many governments; not regulating the market and leave investors completely unshielded with their own luck and destiny among financial predators.
In this first part of serial articles on ‘Potemkin Crypto Assets’, we try to visualise the control points for these assets, components of their corporate identities and other variables which should be considered before any investment. During such an observation, the first step should be controlling the registered location of cryptocurrency’s issuer. At this point, offshore cities or islands carry more risk than regular sites. These offshore financial centres provide financial services to non-residents for avoiding corporate taxes, levies, or regulations. They are known also as global tax havens and shadow banking centres which have low or zero-taxation schemes and disproportion between the size of financial sector and regular financial demand. These features may unfortunately also bring money laundering and financing of terrorism. This detail can be checked against the official documents released by crypto asset owners like white-papers, company website and more.
Another control point, which could be derived from mentioned sources, is the founder or the owner of crypto assets. It is expected that these parties should not take part in any financial crime and have clear service records. However, if there is any attempt of money laundering, financing of terrorism, tax avoidance or leaking financial secrecies, crypto assets can be used as a part of this spiral of crime. Analyses show us financial crimes is committed generally as part of a chain; one step brings others. If any part of cryptocurrency’s corporate body has illegal roots, the end will be an inevitable financial loss.
We will analyse different components of “Potemkin Cryptoassets” in the articles to be published in the next few weeks. For any further questions, please reach us via firstname.lastname@example.org or visit our CryptoIndexSeriesTM Platform for better analysis of the crypto market space.
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