Difference between revisions of "Cryptocurrency fraud"

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Blockchain, Cryptocurrency and Initial Coin Offering (ICO) Fraud and SEC Whistleblower Program
=='''Blockchain, Cryptocurrency and Initial Coin Offering (ICO) Fraud and SEC Whistleblower Program'''==
Though blockchain technology and cryptocurrencies can help prevent fraud, they can also be used to perpetrate fraud. As the SEC warned in a recent investor bulletin, “[f]raudsters often use innovations and new technologies to perpetrate fraudulent investment schemes” and “it is relatively easy for anyone to use blockchain technology to create an ICO that looks impressive, even though it might actually be a scam.” The CFTC has also warned about virtual currency fraud in a new CFTC Whistleblower Alert.


Under the SEC Whistleblower Program, the SEC will issue whistleblower rewards to individuals who provide original information about wrongdoing that leads to successful enforcement actions with total monetary sanctions in excess of $1 million. In exchange for the valuable information, the SEC will pay the whistleblower 10 to 30 percent of the total monetary sanctions collected as an award. Since 2011, the SEC has paid nearly $1 billion in awards to whistleblowers. The largest SEC whistleblower award to date is $114 million.
Though blockchain technology and cryptocurrencies can help [https://www.cpajournal.com/2017/07/07/blockchain-emerging-solution-fraud-prevention/ prevent fraud], they can also be used to perpetrate fraud. As the SEC warned in a recent [https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-16 investor bulletin], “[f]raudsters often use innovations and new technologies to perpetrate fraudulent investment schemes” and “it is relatively easy for anyone to use blockchain technology to create an ICO that looks impressive, even though it might actually be a scam.” The CFTC has also warned about virtual currency fraud in a new CFTC Whistleblower [https://www.whistleblower.gov/sites/whistleblower/files/2019-05/Virtual%20Currency%20WBO%20Alert%20-%202019.05.07.pdf Alert].


Under the SEC Whistleblower Program, the SEC will issue whistleblower rewards to individuals who provide original information about wrongdoing that leads to successful enforcement actions with total monetary sanctions in excess of $1 million. In exchange for the valuable information, the SEC will pay the whistleblower 10 to 30 percent of the total monetary sanctions collected as an award. Since 2011, the SEC has paid nearly '''$1 billion in awards to whistleblowers.''' The largest SEC whistleblower award to date is $114 million.
=='''ICO and Digital Currency Violations'''==


ICO and Digital Currency Violations
The most common securities law violations that the SEC warns about with ICOs and digital currencies are:
The most common securities law violations that the SEC warns about with ICOs and digital currencies are:
# Theft and misuse of investor funds;
# A failure to register the coins/tokens as securities, e.g., SEC v. Kik Interactive, Inc.;
# Market manipulation schemes, such as pump-and-dump virtual currency schemes;
# A failure to maintain adequate internal controls; and
# A failure to disclose risks associated with these investments.


Theft and misuse of investor funds;
A failure to register the coins/tokens as securities, e.g., SEC v. Kik Interactive, Inc.;
Market manipulation schemes, such as pump-and-dump virtual currency schemes;
A failure to maintain adequate internal controls; and
A failure to disclose risks associated with these investments.
The digital asset market is growing exponentially and there no sign that it will slow down soon. As such, the SEC Office of Compliance Inspections and Examinations listed “Cryptocurrency, Initial Coin Offerings, Secondary Market Trading, and Blockchain” as examination priorities for 2018 and 2019.  The SEC indicates that its areas of focus will include:
The digital asset market is growing exponentially and there no sign that it will slow down soon. As such, the SEC Office of Compliance Inspections and Examinations listed “Cryptocurrency, Initial Coin Offerings, Secondary Market Trading, and Blockchain” as examination priorities for 2018 and 2019.  The SEC indicates that its areas of focus will include:
* Whether financial professionals maintain adequate controls and safeguards to protect these assets from theft or misappropriation; and
* Whether financial professionals are providing investors with disclosure about the risks associated with these investments, including the risk of investment losses, liquidity risks, price volatility, and potential fraud.
=='''Many Initial Coin Offerings (ICOs) and Digital Assets are Securities and Therefore Subject to Rules Prohibiting Offering Fraud'''==


Whether financial professionals maintain adequate controls and safeguards to protect these assets from theft or misappropriation; and
whether financial professionals are providing investors with disclosure about the risks associated with these investments, including the risk of investment losses, liquidity risks, price volatility, and potential fraud.
Many Initial Coin Offerings (ICOs) and Digital Assets are Securities and Therefore Subject to Rules Prohibiting Offering Fraud
U.S. federal securities laws apply to ICOs and digital assets when they have the characteristics of an “investment contract.” According to the U.S. Supreme Court’s 1946 Howey decision, an “investment contract” exists when:
U.S. federal securities laws apply to ICOs and digital assets when they have the characteristics of an “investment contract.” According to the U.S. Supreme Court’s 1946 Howey decision, an “investment contract” exists when:
# A person invests money
# In a common enterprise
# With a reasonable expectation of profits derived solely from the efforts of others.


A person invests money
In a common enterprise
With a reasonable expectation of profits derived solely from the efforts of others.
On April 3, 2019, the SEC released its Framework for ‘Investment Contract’ Analysis of Digital Assets, which explains the application of Howey to digital assets. Using this test, many ICOs and digital assets will be considered securities – but not all – in which case, whistleblowers disclosing fraud or other violations of the federal securities laws in connection with the ICOs or digital currencies may be eligible for SEC whistleblower awards.
On April 3, 2019, the SEC released its Framework for ‘Investment Contract’ Analysis of Digital Assets, which explains the application of Howey to digital assets. Using this test, many ICOs and digital assets will be considered securities – but not all – in which case, whistleblowers disclosing fraud or other violations of the federal securities laws in connection with the ICOs or digital currencies may be eligible for SEC whistleblower awards.