Cryptocurrency Fraud Soars, Spurring State Motion

Did “Elon Musk” ask you to send him bitcoins and offer you to double your money? Have you received an official-looking invitation to buy cryptocurrency from the Texan company “Peters Wealth Management”? How about someone on a dating app promoting “a great new investment”?

All of these are scams with the latest investment well worth it – cryptocurrency. While legitimate currencies like Bitcoin can offer good, albeit often volatile, returns, scammers are skilled at separating unwise investors from their money.

Prosecutors and regulators are going tough. Attorneys-general in Massachusetts and New York have issued fines and injunctions to prevent counterfeit crypto companies from offending customers. The Federal Trade Commission has collected thousands of complaints about frauds like the fake Musk affair. And some states are considering or have passed new laws to try to regulate the cryptocurrency market.

The FTC reported in May that consumers had sent more than $ 2 million to impersonators posing as Tesla CEO Elon Musk in the past six months. From October 2020 to May, nearly 7,000 people reported losses of more than $ 80 million on this and other counterfeit cryptosystems, with an average 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, second only to the $ 202.1 million victims lost to improper bank transfers .

Massachusetts attorney general Maura Healy, a Democrat, last year announced enforcement actions against a company processing payments for a fraudulent cryptocurrency called “PlexCoin,” which is itself the target of federal investigations.

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In New York, Attorney General Letitia James last month ordered two unnamed companies to cease operating in the state because they were unregistered and operated outside the law.

Just last week the Texas State Securities Board issued a cease and desist order against a fake company that the agency said was fraudulently offering cryptocurrency mining investments. The owners of Treasure Growth Investments had offered “lucrative” returns over very short periods of time – 10% return over 30 days and 80% return over 120 days, according to the order. But the funds went straight to the Principles’ bank accounts instead, the order said. There have been no arrests.

“The numbers all show that cryptocurrency fraud has increased significantly during the pandemic,” said Joe Rotunda, enforcement director for the Texas State Securities Board, which regulates the state’s securities market. Rotunda is also vice chair of the enforcement division of the North American Securities Administrators Association, a constituency that includes all states.

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

“I know this: we saw a rapid surge during the pandemic targeting consumers.”

Part of the surge in scams, Rotunda said, may have to do with people losing their jobs and needing the kind of quick buck that is being touted by the crypto scammers. Also, he added, people are more on social media and seeing more posts promoting the scams.

But much of the growth has to do with interest in the legitimate profits in cryptocurrencies like Bitcoin. A bitcoin was worth around $ 6,000 before the pandemic, but the value has increased tenfold, peaking at nearly $ 70,000 earlier this month. Investors are looking at this growth, he said, thinking that all crypto investments will work too.

Enforcement measures have been taken in a variety of other states and bills regulating, controlling, or otherwise dominating the cryptocurrency market have also been passed through the legislature. A poll by the National Conference of State Legislatures found that more than 30 states in this year’s legislative sessions were considering bills that deal in some way with the regulation of cryptocurrencies.

For example, the NCSL survey showed that Arkansas and Kentucky have passed laws defining digital currencies as part of state money services or transmission laws. Florida considered similar laws, but they died in that session. In Indiana and North Dakota, lawmakers added coverage for virtual currency under their unclaimed property laws.

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This year, Nebraska was the second state to create a dedicated bank-like institution to manage virtual currency and other digital assets. Wyoming was the first in 2019, and Texas passed a new law this year too. Nebraska Governor Pete Ricketts, a Republican who is the son of Joe Ricketts, founder of the brokerage firm TD Ameritrade, signed the bill.

The new law requires separate financial institutions to hold cyber currency, with the currency traded there being chartered by the US and giving ownership and other disclosures to the bank. It should give the crypto market more transparency and stability, say proponents. According to the law, existing banks can also open crypto departments.

Nebraska State Senator Michael Flood, a Republican who introduced and led the bill, said “good” players in cryptocurrency “want to run toward regulation and be at the forefront of the industry for all the right reasons.” However, cryptocurrency companies have campaigned against state regulation.

Younger people testified before lawmakers for the government measure, he recalled, but banks were suspicious of anything that could undermine confidence in the banks. They eventually got around, however, Flood said in a phone interview.

Flut compared cryptocurrency with “points” that were collected in a hotel reward system. “It’s not backed by cash, it’s a commodity,” he said. “If a hotel chain says that you need 60,000 points one day to book a room and 40,000 the next, then it’s worth it.”

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

“It allows someone who wants to do business legally to work with a regulated company and do so in a way that they identify their transactions,” said Lammers. “They would have their activities on a central blockchain in a regulated environment.”

Blockchain, the technology behind the scenes in cryptocurrency, is a digital record of transactions managed on multiple computers connected in a peer-to-peer network.

Lammers said that regulating the crypto market could scare off some investors who appreciate the ferocity of the current cryptocurrency universe and the ability to make and lose large amounts of money quickly. But, he said, the new banking entities would offer some level of security to investors seeking this. While the cryptocurrency banks don’t insure deposits with cash like regular banks do, they do offer some level of supervision.

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In Texas, Governor Greg Abbott, a Republican, signed a law this year that stipulates that the purchaser of a virtual currency will receive the rights to that currency from its previous owner. The law also puts cryptocurrency under the same state business code that applies to other ordinary transactions.

Christopher Leach, an attorney in the Federal Trade Commission’s Financial Practices Department, said in an interview that cryptocurrency fraud is so hot right now because bitcoin currency is so hot.

“Casual readers… see that people can make a lot of money very quickly. Of course, they can also lose a lot of money very quickly, but that is the basis.

“Once you’re hungry for an asset class, you have people who can use proven scam techniques – promises of high returns, double, triple the money,” he said.

Payments in cryptocurrency are not like payments by credit card, he emphasized. Once the payment is made there is no way to get the money back if the scammers go away.

And they go away.

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

FTI helps states and financial institutions detect fraud. McNew said the scammers lure investors with promises of big returns and generate reports for clients about “how great you are. They really tie you into the feeling of security and the feeling that you are going to become a millionaire very quickly. Then they lure you into investing again.

“At some point the investor wants to withdraw and the fake company says the investor has to pay an ‘exit fee’ and some taxes and once that happens the money is no longer available,” McNew said. “Then the device is up.”

With a few states on top and the federal government researching the market as well, McNew said it was only a matter of time before the entire industry is regulated. “We will get there,” he said.

According to OpenSecrets, a nonprofit group that pursues money in politics, the cryptocurrency industry is spending mightily money shaping federal regulation. From January through August, the industry spent $ 2.4 million on lobbying. Their goals included an ultimately unsuccessful offer to prevent the inclusion of a new IRS cryptocurrency reporting rule in the federal infrastructure law. The industry is well on its way to nearly double the $ 2.8 million it spent on lobbying in 2020, the group said.

Rajeev Agrawal, communications director at Coin Center, a non-profit research and advisory center that calls for less regulation to “preserve the freedom to innovate” in the cryptocurrency market, said in an interview that the currency was “already regulated”.

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

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

“My mother pays for her purchases with her checkbook,” said Rotunda. “She’s going to a physical bank. But now the word “bitcoin” is in their vocabulary. “

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