Cryptocurrency fraud soars and stimulates state action

archyde 2021-11-20 10:11

Did “Elon Musk” ask you to send him bitcoins, offering to double your money? Did you receive an official request from the Texas company “Peters Wealth Management” to buy cryptocurrencies? And how about someone on a dating app touting a “great new investment”?

These are all scams related to the latest hot investment: cryptocurrencies. Although legitimate currencies, such as Bitcoin, can offer good, albeit often volatile returns, scammers are adept at separating reckless investors from their money.

State attorneys general and regulatory agencies are cracking down. The Massachusetts and New York attorneys general have issued fines and cease-and-desist orders to stop bogus crypto companies from scamming clients. The Federal Trade Commission (FTC) has collected thousands of complaints about scams like the fake Musk. And some states are considering or have enacted new laws to try and regulate the cryptocurrency market.

The FTC reported in May that consumers sent more than $ 2 million to impersonators posing as Tesla boss Elon Musk in the previous six months. From October 2020 through May, nearly 7,000 people reported losses of more than $ 80 million on that and other fake crypto scams, with a median loss of $ 1,900, according to the FTC.

In a preliminary report from the third quarter of this year, the FTC found that people lost $ 200.8 million to fraudulent cryptocurrency payments, just behind the $ 202.1 million victims lost to illegitimate wire transfers.

Massachusetts Attorney General Democrat Maura Healey last year announced enforcement action against a company that processed payments from a fraudulent cryptocurrency called “PlexCoin,” which itself is the subject of a federal investigation.

In New York, Attorney General Letitia James last month ordered two unidentified companies to cease operations in the state for not being registered and operating outside the law.

Last week, the Texas State Securities Board issued a cease and desist order against a bogus company that the agency claims is fraudulently offering cryptocurrency mining investments. The owners of Treasure Growth Investments had been offering “lucrative” returns in very short periods of time: returns of 10% in 30 days and 80% in 120 days, depending on the order. However, the funds went directly to the directors’ bank accounts, according to the order. There have been no arrests.

“All the figures show that cryptocurrency fraud has increased significantly during the pandemic,” said Joe Rotunda, chief enforcement officer for the Texas State Securities Board, which regulates the stock market in the state. Rotunda is also vice president of the enforcement section of the North American Securities Administrators Association, a membership group that includes every state in the United States.

Investigations across the country have grown significantly since 2019, when there were 67 digital asset fraud investigations across all 50 states, he said. A year later, the number of investigations had almost doubled to 125.

“I know this: We saw a rapid increase targeting consumers during the pandemic.”

Part of the growth in scams, Rotunda said, may have to do with people losing their jobs and needing the kind of quick money that crypto scammers tout. In addition, he added, people are more present on social media and see more scam ads.

But much of the growth has to do with interest in the legitimate profits of cryptocurrencies, such as Bitcoin. One bitcoin was worth about $ 6,000 before the pandemic, but its value has increased tenfold, peaking near $ 70,000 earlier this month. Investors see that growth, he said, and think that all crypto investments will have a similar one.

In other states, measures have been taken to enforce the law, and bills to regulate, control or manage the cryptocurrency market have also passed through the legislatures. A survey by the National Conference of State Legislatures (NCSL) found that more than 30 states considered bills in legislative sessions this year that deal in some way with the regulation of cryptocurrencies.

For example, the NCSL survey showed that Arkansas and Kentucky enacted laws defining digital currency under the state’s money services or transmission statutes. Florida considered similar legislation, but died in this session. In Indiana and North Dakota, lawmakers added coverage for virtual currencies under their unclaimed property laws.

Nebraska this year became the second state to create a special bank-like institution to govern virtual currencies and other digital assets. Wyoming was the first, in 2019, and Texas also enacted a new law earlier this year. Nebraska Governor Pete Ricketts, a Republican who is the son of Joe Ricketts, founder of brokerage firm TD Ameritrade, signed the legislation into law.

The new law requires separate financial institutions to hold the cybercurrency, with the requirement that the currency traded in it must be incorporated in the United States and provide ownership and other information to the bank. It is designed to provide more transparency and stability to the cryptocurrency market, its promoters say. Existing banks can also open crypto divisions under the law.

Nebraska State Senator Michael Flood, a Republican who introduced the bill and guided it through to passage, said “good” cryptocurrency players “want to rush into regulation and be at the forefront of this industry for the reasons. correct “. However, cryptocurrency companies have lobbied against federal regulation.

The youngest testified before the legislature in favor of the state measure, he recalled, but banks were wary of anything that could undermine confidence in the banks. However, they made up their minds in the end, Flood said in a telephone interview.

Flood compared cryptocurrency to the “points” that accumulate in a hotel’s rewards system. “It is not backed by cash, it is a commodity,” he said. “If a hotel chain says it takes 60,000 points to reserve a room one day and 40,000 the next, that’s what determines its value.”

Kelly Lammers, director of the Nebraska Department of Banking and Finance, said in an interview that the law, which took effect last month, was “written specifically to identify customer concerns and address fraud issues.”

“It allows someone who wants to do legal business a way to work with a regulated entity and do it in a way that identifies their transactions,” Lammers said. “They would have their activities on a central blockchain in a regulated environment.”

Blockchain, the technology behind the scenes of cryptocurrency, is a digital record of transactions that is maintained across multiple computers that are linked in a user-to-user network.

Lammers said that regulating the cryptocurrency market could put off some investors who value the savagery of the current cryptocurrency universe and the opportunity to quickly win and lose large amounts of money. But, he said, the new banks would provide a level of security to investors looking for that. Although cryptocurrency banks do not insure deposits as ordinary banks do with cash, they will provide a level of supervision.

In Texas, Gov. Greg Abbott, a Republican, this year signed a law that states that the buyer of a virtual currency obtains the rights to that currency from the previous owner. The law also subjects cryptocurrency to the same state business code that applies to other ordinary transactions.

Christopher Leach, an attorney for the Financial Practices Division of the Federal Trade Commission, said in an interview that one of the reasons cryptocurrency scams are so fashionable now is that the Bitcoin currency is very much in vogue.

“Casual readers … see that people can make a lot of money very quickly. Obviously, they can also lose a lot of money very quickly, but that sets the stage.

“Once you are hungry for an asset class, there are people who can use time-tested scam techniques: high-yield promises, double or triple money stuff,” he said.

Cryptocurrency payments are not like credit card payments, he noted. Once the payment is made, there is no way to get the money back if the scammers disappear.

And they disappear.

“It’s a major issue,” said Steve McNew, senior managing director and global head of the blockchain and cryptocurrency practice in the Houston office of FTI Consulting.

FTI helps states and financial institutions track fraud. McNew said scammers lure investors with promises of big returns and produce reports for clients on “how well you are doing. They hook you well on the feeling of security and that you are going to be a millionaire very quickly. Then they seduce you. so you can invest again. “

“At some point, the investor wants to make a withdrawal and the fake company says they have to pay an ‘exit commission’ and some taxes, and as soon as that happens, the money is no longer available,” McNew said. “Then the game is over.”

With a couple of states at the helm, and the federal government also studying the market, McNew said it is only a matter of time before the entire sector is regulated. “We will get it,” he said.

The crypto industry is spending heavily to shape federal regulation, according to OpenSecrets, a nonprofit group that tracks money in politics. The sector spent $ 2.4 million on lobbyists between January and August. One of their goals was to try, unsuccessfully, to block the inclusion of a new IRS cryptocurrency reporting standard in the federal infrastructure bill. The industry is on track to nearly double the $ 2.8 million it spent on lobbying in 2020, the group said.

Neeraj Agrawal, director of communications at the Coin Center, a nonprofit research and activism center that calls for less regulation to “preserve the freedom to innovate” in the cryptocurrency market, said in an interview that the coin “is already regulated. “.

“It is illegal to commit fraud using cryptocurrencies,” he said. He suggested that the government fit the cryptocurrency into its current regulatory structure.

But many of the new investors in the cryptocurrency market may not understand much about the current regulatory structure, or the currency itself, for that matter, said Rotunda, the Texas regulator.

“My mother pays for food with her checkbook,” Rotunda said. “She goes to a physical bank. And now, the word ‘Bitcoin’ is in her vocabulary.”

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