US regulators clamp down on crypto criminals

By bobsguide editorial

12 June 2018

Early this year, in a concerted effort to clamp down on fraudulent firms operating in the cryptocurrency and blockchain market, officials at the US Securities and Exchange Commision (SEC) and the Commodity Futures Trading Commission (CFTC) teamed up.

Since joining forces, the regulators have made it clear they intend to closely govern the world's fastest growing market and offer protection to both corporate and private investors.

“Cryptocurrencies, ICOs and related products and technologies have captured the popular imagination – and billions of hard-earned dollars – of American investors from all walks of life,” SEC chairman Jay Clayton said before the US Senate Committee on Banking, Housing and Urban Affairs at the beginning of February.

“Unfortunately, it is clear that some have taken advantage of this lack of understanding and have sought to prey on investors' excitement about the quick rise in cryptocurrency and ICO prices.”

Regulators have taken aim at predatory practices exercised by a number of crypto fraudsters, levying fines and criminal charges against a number of organisations and individuals that have used the allure of the crypto market to leave unsuspecting consumers out of pocket.

Major cases

January saw the CFTC charge My Big Coin Pay, Inc., its founder Randall Crater and his associate Mark Gillespie of commodity fraud and misappropriation of funds. According to the CFTC filing, the company had solicited more than $6m in funds from investors eager to invest in the company’s cryptocurrency product “My Big Coin” only to have their money used by the founders  to purchase a new home, furniture and other luxury goods. In order to pry investors of their money, the company falsely claimed that its cryptocurrency was backed by gold, and had a partnership in place with MasterCard. “In reality, as alleged, the supposed trading results were illusory, and any payouts to customers were derived from funds fraudulently obtained from other customers in the manner of a Ponzi scheme,” according to a CTFC statement. The case is ongoing.

Around the same time, the US regulator went after CabbageTech and Coin Drop, after CEO Patrick McDonnell allegedly passed himself off as a crypto trading expert, and accepted investors' cash in the form of digital currencies like Bitcoin and Litecoin with the aim of offering investment advice. But instead of improving his clients return on investment, McDonnell shutdown his companies' websites and disappeared with his clients capital. The CFTC is seeking restitution of victims' funds, civil monetary penalties and trading bans in the case filed  against CabbageTech. The defendant has since conceded his legal case with the regulator, claiming he has insufficient finances to fight the CFTC’s “fictitious complaint” in a letter to the New York District Court chief magistrate Roanne Manne.

The SEC recently concluded a case against Centra Tech Inc, co-founders Sohrab Sharma and Robert Farkas. The pair were charged and fined $32m after conducting a fraudulent initial coin offering (ICO) for the company which promised to offer customers access to a credit card that permitted the conversion of multiple cryptocurrencies into fiat currencies. The company’s founders even roped in celebrities including American professional boxer Floyd Mayweather and music producer DJ Khalid to promote the ICO via social media.

Raising awareness

Fraud in the cryptocurrency space has become so rife that the SEC even created a mock ICO site to educate investors on how to avoid being scammed out of their hard-earned cash. HoweyCoins.com mimics a fraudulent coin offering, with anyone opting to “Buy Coins Now” being redirected to an SEC page with information aimed at educating investors.

“Fraudsters can quickly build an attractive website and load it up with convoluted jargon to lure investors into phony deals,” said Owen Donley, chief counsel of the SEC’s Office of Investor Education and Advocacy. ““But fraudulent sites also often have red flags that can be dead giveaways if you know what to look for.”

The US isn’t the only market where cryptocurrencies are coming under fire from authorities worried about fraudulent activity. Regulators in China, Japan, France, Germany and the UK are all looking to create a formal legal framework for the cryptocurrency market. In fact, the actions by the SEC and CFTC show regulators interest in expanding scrutiny to companies involved in the trading and issuing of cryptocurrencies.

Elsewhere there is a growing consensus that financial regulators should impose the same entry requirements and regulatory standards applicable on mainstay exchanges like London Stock Exchange (LSE) and NYSE Euronext. After all, the rules are there to protect investors, but also the market itself, as a market without credibility will struggle to survive.

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