Into the Unknown: The Rise of Cryptocurrency Fraud

Welcome to the February 2018 edition of our newsletter!  In this issue, we’ll examine how the meteoric rise of cryptocurrencies has created a market less understood than traditional currencies or other investments – and how fraudsters have begun to exploit this situation.

The Digital Wild West: Investing in Cryptocurrencies

Few investments have shown the volatility that Bitcoin, Ethereum and other cryptocurrencies have demonstrated within the last year, despite Bitcoin having been used for almost a decade.  Cryptocurrencies are used as an alternative to traditional currency and the value of each is maintained in a ledger within an ever-evolving accounting finance system known as blockchain.  Yet for many investors, all they needed to understand was that Bitcoin, and other cryptocurrencies were a new frontier where parties with enough fortitude and foresight could strike it rich.

Scammers Seize Upon Investor Insecurity, Greed to Promote Cryptocurrency Fraud

Although many individual investors have seen the complex, highly computerized nature of cryptocurrency transactions and deemed them too risky, fraudsters have learned how to exploit the tension between caution about the unknown and the desire for big investment gains.  Some purported investment advisers have offered schemes to solicit investments in cryptocurrencies that would then be pooled and later invested in fiat currency as a means of providing upside gains and managing downside risk.  In at least one instance, prosecutors have alleged that such schemes, designed to play upon both the fear and greed of investors, were used to fund a more traditional fraud: a Ponzi scheme.

In other instances, nascent cryptocurrencies appear out of nowhere and may vanish – with an investor’s monies – just as quickly.  Regulators are starting to catch up, with the U.S. Securities & Exchange Commission investigating cryptocurrencies marketed as investments, and the U.S. Commodities & Futures Trading Commission investigating those traded as commodities.  As regulations – and both civil and criminal law – seek to impose conditions upon cryptocurrencies beyond market forces alone, potential investors and their advisers are best served by relying on tried and true tools of researching the persons beyond the investment and gauging their credibility and reputation.  No matter what new technology arrives, for now at least, humans are driving that engine, with all of their flaws and virtues steering this uncharted journey.  If clients insist upon exploring new and unproven areas of investment, an experienced researcher can help identify potential areas of concern before investments or other decisions are made.