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Cryptocurrency Fraud Is the Exception, Not the Rule


Cryptocurrency and blockchain technology are groundbreaking, but their early stage status means they are susceptible to drawbacks like scams and illicit activities. Notable among these is the pump-and-dump schemes.

To address the rise in deceptive coin offerings, tech giants such as Facebook and Google have imposed bans on crypto ads. Additionally, regulatory bodies like the U.S. Commodity Futures Trading Commission and the Securities and Exchange Commission are closely scrutinizing cryptocurrencies for price manipulation and various forms of fraud.

The pump-and-dump schemes are not exclusive to the cryptocurrency space. However, the increased interest in blockchain technology, combined with a lack of widespread understanding, has made the industry more susceptible to such fraudulent activities. Social media channels like Twitter, Telegram, and Reddit further amplify the reach and speed of these schemes.

These schemes operate by artificially inflating the trading volume of a coin to entice others to purchase it at excessively inflated prices, allowing the perpetrators to sell off their holdings for substantial profits.

Amid the prevalence of fraudulent activities, the SEC developed the HoweyCoins website to help investors identify signs of a crypto scheme. Additionally, the crypto community takes a firm stance against initiatives like Bancor’s Twitter giveaway, which was accused of normalizing the language and promotional techniques commonly exploited by scammers.

While it is important to pressure cryptocurrencies to validate their credibility, it is also crucial to recognize that for every scam, there are numerous instances of cryptocurrencies and blockchain technology being harnessed responsibly to foster opportunities, stimulate economies, and bring about positive change.

Various Types of Crypto Scams

Cryptocurrency has gained a reputation as a way to make quick financial gains, drawing individuals who may not fully comprehend the technology or its implications.

The meteoric rise of Bitcoin in late 2017 was driven by a handful of influential actors rather than genuine investment demand. This led to a surge in new currencies, wallets, and exchanges, many of which were inadequately planned or downright fraudulent.

In addition, authentic services often fall prey to fraudulent imitations. For instance, an app posing as MyEtherWallet, a widely used service for storing Ethereum and other coins, surged to the top of Apple’s App Store charts in December 2017 before its fraudulent nature was exposed. While these scams are unrelated to cryptocurrency or blockchain and are essentially a form of phishing, they contribute to a pervasive negative perception of cryptocurrency as a whole.

Despite the prevalence of scams, individuals should not be deterred from investing in cryptocurrency. The fundamental principles of sound investing, such as monitoring trends, diversifying, and enduring volatility, are equally applicable to the crypto sphere. Sound research and scrutiny are essential before committing funds to any project, whether on the blockchain or not.

Given the numerous investors falling victim to market manipulation fraud, regulatory intervention was inevitable.

Ramping Up Regulation

Although government policies have struggled to keep pace with cryptocurrency, regulators are now taking decisive and punitive actions against pump-and-dump schemes in the crypto space.

In the United States, most state and federal regulators assess crypto projects on a case-by-case basis. For instance, the CFTC’s prosecution of Patrick McDonnell for fraud and misappropriation of funds illustrates this approach. McDonnell purported himself as a cryptocurrency investment expert, reportedly promising clients returns of up to 300 percent. However, upon receipt of payment, he would cease all communication without delivering anything in return. The ruling in the McDonnell case treated cryptocurrency as a commodity, enabling the CFTC to assert jurisdiction over entities involved in related schemes.

Similarly, the legal dispute involving Maksim Zaslavskiy and the SEC pertained to an alleged ICO scam. Approximately 1,000 individuals invested in Zaslavskiy’s project, only to discover that no token or digital asset had been issued to investors, and no genuine blockchain technology was involved in his ICO. The ruling in the Zaslavskiy case classified cryptocurrency as a security, potentially prompting regulators to focus on registration issues, posing a potential hazard for entities launching ICOs without adhering to the SEC’s registration requirements.

These cases highlight regulators’ experimentation with various legal theories and practices, with their judgments setting the precedent for future enforcement in an arena where regulations lag behind technological advancements.

The Road to Legitimacy

Achieving consensus on the future direction for cryptocurrency across different jurisdictions is challenging. Nonetheless, outlining a basic framework for a legitimate blockchain project is essential.

Enterprises considering an ICO launch should first ensure compliance with the SEC’s requirements for a security offering. It is crucial to note that the SEC has never sanctioned any crypto-related assets for trading and listing. Caution is warranted when encountering an ICO claiming to have SEC approval. Building a more robust and dependable investment framework starts with anticipating regulations in advance. Historically, legislation and regulation have typically trailed behind technological innovations. Therefore, innovators can save time and reduce friction by proactively leading the way responsibly.

One of the key criteria for publicly traded companies endorsed by the SEC is transparency, a fundamental principle that drove the creation of blockchain-based transactions. Organizations should operate openly and accountably while collaborating with regulatory authorities in all jurisdictions where they intend to operate. Establishing trust among cryptocurrency investors, professionals, and the wider global community hinges on this principle.

While advocates of cryptocurrency have championed its potential for deregulation, decentralization, and anonymity, the widespread prevalence of fraud in inadequately regulated environments highlights the necessity for controls. Although there may be differing opinions on the extent of regulation in the cryptocurrency space, it is universally acknowledged that trust among investors, professionals, and regulators is essential for a functional system of investment and exchange to be sustained.

As cryptocurrency continues to evolve, it is critical to support initiatives that contribute positively to society while calling out those attempting to exploit the system. By collaborating with regulators and investing in enterprises that add value to the world, the perception of cryptocurrency can be transformed.

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