Christian Zelder, a New York artist who started investing in crypto to earn some travel money, ponied up $100 — a substantial sum for him at the time — in November 2017 to buy into BitConnect. The new cryptocurrency promised returns of up to 10 percent, which sounded almost too good to be true.
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BitConnect promoters had promised big returns on investments, pointing new investors to the supposed benefits of BitConnect’s lending program. But, according to prosecutors, Kumbhani and his co-conspirators were running a global Ponzi scheme. The founders and their international promoters hyped up BitConnect’s lending program in exchange for a share of the invested funds they obtained — and without disclosing their financial relationship to investors.
Generally speaking, crypto investing is risky, prone to massive swings and often fueled by dramatic hype. That makes it all the more difficult to sniff out a scam, even for those who’ve profited from crypto investing in the past.
“The knowledge that I have now, back in 2017, I did not have that knowledge, so I was just so confused and trying to figure out answers,” Zelder said. “A lot of these scams are getting very elaborate now, too, so it’s kind of hard to detect. Honestly, I’m convinced that just about every crypto could be a scam, and I’m invested pretty big on a lot of these different tokens.”
Still, the lure of crypto — promising the potential for life-changing returns — remains. And so do scams.
Victims of cryptocurrency scams can file reports with agencies like the SEC or the FTC or sue alleged crypto fraudsters. But lawsuits cost a lot of money, which many victims do not have, and can take years to resolve.
As cryptocurrency scams proliferate, regulators, courts and lawmakers are establishing a framework for holding alleged cryptocurrency scammers responsible. But the nature of the crypto industry and the patchwork of existing regulations and case precedent make that a complicated proposition.
Crypto and scammers are a perfect match
A common refrain among crypto enthusiasts is “do your own research,” but that doesn’t mean that newcomers are equipped to spot fraud. At the time that Zelder lost money in the BitConnect collapse, he admitted, he didn’t have great money management skills, and he didn’t fully research the BitConnect project. He just needed some money.
“Nobody gets into crypto for, like, the technology; it’s mostly for financial gains,” Zelder said, noting that he wasn’t prepared to evaluate the company’s promises himself.
Crypto presents a number of characteristics that appeal to scammers. One of its key traits is, in theory, the lack of a middleman. This means that rather than sending money from one person’s account to another, with the banks serving as the shepherd for that transaction, two people can transact directly with each other. The transaction is documented using blockchain technology, which can be thought of as a digital ledger recording transactions. It is then verified by a network of computers rather than a centralized entity like a bank.
There are many kinds of blockchains and variations on this model, but a core idea is that transactions are irreversible. Once a transaction is complete on the blockchain, there is no going back.
At the same time, it can be difficult for newcomers to spot scams early on. Many cryptocurrency newbies and enthusiasts are drawn into scams believing that they’re investing in a reputable new asset class. Like Zelder in 2017, many don’t dig deeper to try to figure out where exactly their money is going.
Combine that with the pseudonymous nature of crypto — people don’t always go by their actual names — and the fact that wallets, which hold crypto, have just a string of alphanumeric characters associated with them rather than a name, address or Social Security number, and there are any number of factors that scammers can abuse.
As wealth inequality continues to rise and real wages have decreased, it’s not hard to see crypto’s appeal as one of the few ways normal people can (and sometimes do) accrue life-changing wealth. But that also serves to make it even riper for scams.
“If the numbers are too good to be true, probably, in some way, it is,” Rosmer said.
Regulators, courts and politicians take notice
Crypto’s explosive growth has attracted a lot of attention from lawmakers. While many see crypto as speculative at best and dangerous at worst, others see an opportunity.
The variety of fraudulent activities happening in the crypto space has resulted in multiple state and federal agencies engaging in “a turf war” to determine which elements of it fall within their jurisdiction, said Omid Malekan, an adjunct professor at Columbia Business School who teaches classes on cryptocurrency.
How can victims seek justice?
Ways to hold scammers accountable are often time-consuming and costly, with no guarantee of success. And while legislation and regulation can limit the space in which scammers are able to thrive, it remains to be seen how much the fraudulence can be curtailed.
“Some of these entities that have really made a lot of money have hired some very sophisticated counsel,” Jasnoch added. “In order to make a difference, the plaintiffs’ bar is going to have to step up our game.”
Zelder would like to see more support for crypto scam victims from cryptocurrency trade organizations; having the government step in to assist crypto scams feels like a departure from crypto’s anti-government origins, he said. Though the Department of Justice’s case against BitConnect has been ongoing for over a year, Zelder is somewhat optimistic about the prospect of finding a resolution. Following his conversation with Grid, he received word from the DOJ explaining his rights regarding the BitConnect case and noting the fact that many criminal cases are resolved via plea agreement between the U.S. State’s Attorney’s Office and the defendant.
For cryptocurrency scam victims unsure of where to start, John Reed Stark, former chief of the SEC Office of Internet Enforcement and professor at Duke Law School, recommends reporting the scam to the FTC, the Federal Communications Commission, their congressmembers and their state financial services regulator. In doing so, they should compile all the evidence in chronological order to explain what happened.
Even with evidence of cryptocurrency fraud, bringing charges against alleged cryptocurrency scammers can be difficult due to the anonymity of the scammers themselves, the complexity of the scam, and the limits of applicable regulations and case law in the U.S.
Cryptocurrency scammers may operate anonymously online, making them harder to find, but government agencies generally could find out who they are — because they want to be found, Stark said. It’s hard to pitch a new investment opportunity in secret, so the cryptocurrency scammers must solicit their schemes to find potential takers, he pointed out. Even so, who they purport to be online isn’t always who they actually are.
In the traditional financial services sector, regulators often go to financial institutions and require them to open their books to see whether they are violating regulations, which makes it difficult for them to catch violations in real time, Malekan said. Spotting violations in the crypto space could, in theory, be possible given that crypto transactions are publicly listed on the blockchain transactions. But regulating the industry requires government agencies to learn about how blockchain technologies work, and some agencies are coming around to understanding the industry, he said.
But because Congress has passed few laws that pertain directly to cryptocurrency and there’s little court precedent on the issue so far, bringing cases to court is a challenge, he added.
Until more thorough regulatory legislation is passed, prosecutors and regulators should be resourceful when looking for applicable laws and collaborate with regulatory agencies and other countries to hold alleged cryptocurrency fraudsters accountable in the U.S. and abroad, said Claire Nolasco Braaten, an associate professor in criminology and criminal justice at Texas A&M University-San Antonio. If, for example, a cryptocurrency company is operating an unlicensed money transmitting business or an exchange and is making false statements on its website, it could be prosecuted for selling cryptocurrency without registering with the SEC, she said.
If regulators and the criminal justice system fail to address cryptocurrency fraud, people within and outside of the cryptocurrency space will be at risk, Stark said.
“I’ve always been the one who has sympathy towards victims no matter what level of sophistication they have,” Stark said. “Everybody can get duped. … And these are professional salespeople. And maybe you’re in a desperate situation where you’re trying to feed your family, or you’ve lost your job, or the pandemic hits you hard. For me, that’s the kind of people that these investment companies’ products cater to.”
Despite his losses, Zelder remains bullish on cryptocurrency. In recent weeks, the price of cryptocurrencies like Bitcoin and Ether cratered, but Zelder views the dips as an opportunity to buy more cryptocurrency and plans to invest more in crypto over the next five years.
“You can never really identify what will be a scam or what is a scam in the crypto space,” Zelder said. “Everything is fair game in a sense, until someone really puts the law into place, which is so backwards of what crypto is supposed to be.”
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