Payment Processing and Electronic Payments

Cryptocurrency Fraud Risk Increases

Resources & Self-Education   |   Friday, June 15, 2018

Cryptocurrency Fraud Risk Increases

SEC, FTC & CFTC Increase Scrutiny and Enforcement

By Karl Kronenberger
Founder, Kronenberger Rosenfeld, LLC

Increased cryptocurrency fraud and its attendant risks have spurred the SEC, FTC, and CFTC to scrutinize cryptocurrency activities including Initial Coin Offerings (ICOs).

In a recent interview on CNBC, SEC Commissioner Robert Jackson said that the cryptocurrency market is “full of troubling developments,” . . . “Investors are having a hard time telling the difference between investments and fraud.”

Within the last year, the SEC released several statements about the nature and definition of cryptocurrency assets and their trading platforms. The agency has made it clear how these assets are defined. According to the SEC, in almost all cases, cryptocurrencies are considered securities under federal securities laws.

In its statement, the SEC said, “The federal regulatory framework governing registered national securities exchanges and exempt markets is designed to protect investors and prevent against fraudulent and manipulative trading practices.”

As a result, the pace of ICOs has significantly weakened in 2018. These days, most of the ICOs happen overseas while US attorneys wait for more clarity from the SEC.
 

It Comes Down to The Registered Security

What if someone invested in a Bitcoin offering when it was lower in value? And what if they were lied to? Do they have a legal argument to get their money back?

The short answer is yes.

If it was an unregistered security, and the firm did not remedy that situation, the U.S-based investor has strong grounds to get their money back. All cryptocurrency offerings that are tantamount to securities must be registered with the SEC.
 

Misleading Statements and Outright Lies

The type of fraud often seen in campaigns to “crowdfund” future products with dollars is often seen in ICOs. An example of fraud in conventional crowdfunding campaigns involved one of our consumer clients. They were defrauded in connection with an all-in-one “card” that allowed you to import multiple credit cards into one thin card device.

The so-called marketing benefit was that a consumer would only need “one card” to shop instead of carrying a half dozen. But, the reality of the “one card” solution was something else altogether.

The company owners lied about their ability to develop such a product. The knew in advance of production that their proposed card wouldn’t work in more than half of the credit card processing devices used by merchants in the United States. In short, the company lied to consumers in the crowdfunding campaign, which created the grounds for a fraud action by consumers against the company.

Many cryptocurrency ICOs are similarly built on lies. In fact, we’ve found a surprising number of misleading statements and outright lies in connection with ICOs and bitcoin crowdfunding offerings, and we suspect that government regulators will initiate many enforcement actions in the near future to address the rising amount of fraud in this area.

And when it comes to ICOs from companies based overseas, the risks of getting involved in coin offerings are even higher. Many companies offering ICOs hide the identities of the owners. The fact that they are located abroad, it’s likely the money will never be recovered. And let’s not forget that arbitration in foreign countries is often complicated and onerous.
 

Outright Fraud Spurs The FTC To Get More Aggressive

In March, the Federal Trade Commission announced a lawsuit to shut down the activities of four individuals who were allegedly promoting deceptive money-making schemes with cryptocurrencies. The schemes involved false claims that investors would earn huge returns using cryptocurrencies. A $100 investment would lead to $80,000 in monthly income, the promoters claimed.

In its public statement the agency said, “Fraudsters often attempt to capitalize on the excitement and confusion around hot new technologies, and they are quick to dress up old schemes in the clothes of the latest and greatest innovations.”

The FTC outlined five areas where the agency will expand its mission and continue to focus on consumer protection and fair market competition:

  • Payments: Fraudsters looking for payments in cryptocurrencies, especially in ransomware cases.
     
  • New Schemes: These aren’t just the old schemes dressed up to look like new ones. Instead, they use blockchain and cryptocurrency technology as a fundamental part of the fraud. The FTC brought cases against Butterfly Labs alleging the company charged consumers thousands of dollars for Bitcoin mining computers, failing to deliver them, or were basically useless systems. Another case involved an app for mobile devices. Claiming it was a rewards program, it used the devices’ resources to mine for virtual currencies.
     
  • Defendants’ Assets: Defendants who obtain cryptocurrency assets through misconduct might have to turn them over to the FTC. Other defendants could use cryptocurrency to hide traditional assets from law enforcement.
     
  • Competition Policy: Blockchain technologies and cryptocurrency are poised to disrupt existing industries. It’s not uncommon for incumbent companies to use the regulatory system to slow potential competitors. The FTC has a mission to ensure that regulation won’t define the nature of competition and the products that succeed in the marketplace.
     
  • New Solutions: The FTC can promote the fair use of blockchain technologies to help consumers control their privacy and help prevent identity theft.

Blockchain and cryptocurrencies are fast-moving and rapidly changing technologies with broad implications across many areas of business and consumer activities.

If you or your company have questions about fraud, or how to be compliant with SEC or FTC regulations, please contact me. I look forward to assisting you.

Karl Kronenberger
415-955-1155 , Ext. 114
[email protected]

This entry was posted on Friday, June 15, 2018 and is filed under Payment Processing and Electronic Payments, Internet Law News.






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