Crunch time for US crypto: fraud and executive orders

It’s been a big week for crypto in the US, everyone from President Biden to the SEC to the CFTC is weighing in. We sat down to look at three key moments for crypto that have occurred across the US regulatory landscape this week.

1. The Commodity and Futures Trading Commission (CFTC) charges four operators in $44 million Bitcoin Ponzi scheme

On 8 March 2022, the CFTC filed federal civil enforcement action against four individuals with fraud after finding that they had operated a Ponzi scheme which fraudulently solicited over $44 million of investments in bitcoin.

The complaint alleges that four individuals operated two websites – Ecoinplus and Empowercoin – which were essentially vehicles through which they fraudulently took $23 million of investments in bitcoin. In tandem, three of the individuals also operated JetCoin, which similarly used fraudulent tactics to obtain more than $21 million of bitcoin.

The websites were set up in such a way that customers would hand over their bitcoins to the sites, on the understanding that the professional investors would take their coins, trade them, and return the profits. In reality, however, the bitcoin were either misappropriated or used to make apparent ‘profit payments’ to other customers – these were Ponzi payments.

Commenting on the case, the CFTC’s Acting Director of Enforcement, Vincent McConagle said:

“This case illustrates how fraudsters never tire of devising schemes to separate people from their hard-earned money, and digital asset frauds are no exception”.

2. The Securities and Exchange Commission (SEC) charges siblings in $124 million crypto fraud

On the same day as the CFTC’s action, the SEC charged two siblings with defrauding thousands of investors out of over $124 million by running a fraudulent operation offering securities in “Ormeus Coin”.

Over a period between 2017 and 2021, two siblings offered and sold Ormeus Coin to investors on a crypto trading platform.

At the same time, the siblings set up a marketing operation, Ormeus Global, which offered consumers subscription packages including Ormeus Coin, as well as a bespoke crypto trading program. Through Ormeus Global’s marketing activities, the siblings attended global roadshows, published multiple social media posts as well as press releases and YouTube videos.

The SEC alleges that these marketing activities made false claims, in particular that that Ormeus Coin was supported by one of the largest crypto mining operations. It was further purported that the siblings manipulated Ormeus Coin’s price, misused investor funds for personal gain, and made fictional claims about its revenue.

Commenting on the action, the SEC’s Division of Enforcement’s Melissa Hodgman suggested that the pair had acted as “modern-day snake-oil salesman” adding that the SEC will “continue to vigorously pursue persons who sell securities in schemes to defraud the investing public no matter what label the promoters apply to their products.”

3.  President Biden signs long-awaited executive order for crypto

It’s fair to say that crypto is on the mind of every US regulator this week. Following hot on the heels of both the CFTC and SEC’s enforcement action, the Financial Crimes Enforcement Network (FinCEN) has issued an advisory that some Russian firms may look to evade new sanctions through crypto-related channels. Meanwhile, in the UK, the FCA has published data showing that it investigated more than 3000 unregistered crypto firms last year.

At the time of writing, we await the publication of President Biden’s executive order on crypto – which, it is anticipated, will ask that federal agencies work together to coordinate their approach. It is reported that Biden has signed the order, though the final version is awaited. In the meantime, the White House has published a fact sheet that takes a neutral stance on crypto:

“The rise in digital assets creates an opportunity to reinforce American leadership in the global financial system and at the technological frontier, but also has substantial implications for consumer protection, financial stability, national security, and climate risk. The United States must maintain technological leadership in this rapidly growing space, supporting innovation while mitigating the risks for consumers, businesses, the broader financial system, and the climate.”

In particular, the order asks the Department of the Treasury to work in collaboration with other agency partners to review the current financial system and assess whether or not it is meeting consumer needs. Moreover, it asks regulators to ensure there is “sufficient oversight” and “safeguard against any systemic financial risks” posed by crypto and digital assets. While it does not directly set out new regulation, there is no doubt an implication that new regulations should be considered.

CUBE comment

As with all emerging innovation – from climate change to cannabis – crypto currently remains a consuming melting pot of regulation, guidance and gossip. All of this combined has thus far created a perfect breeding ground for bad actors in the space.

Investors are caught in the crossfire – some cryptos promote themselves as successful, some regulatory messaging suggests that crypto will become the new-normal for financial services. On the other hand, other regulatory activity warns against the risks of crypto – and crypto scams are on the rise. Understandably, consumers aren’t sure what to believe and thus become the unwitting victims of crypto crime. Where there is vulnerability or gray space, criminals strike. In this instance – individuals can barely move for gray space.

What is clear, though, is that regulators, governments and financial institutions are lining themselves up to clarify the landscape and clear up ambiguity. Crypto is no longer a fringe currency embraced by a few online – in fact it is thought that more than 10% of Americans are investing in crypto. Governments and regulators are aware of this and are now acting to ensure this previously libertarian ideal is brought within standard parameters – to be managed, but not to be stifled. Regulation will likely come, or will evolve – perhaps this will be coordinated across agencies. Even better, it may be coordinated across border. Either way, it means more work for the compliance team – and even more regulatory change.