A deep dive into the murky world of crypto fraud - ICLG.com

Is the world of crypto cut out for fraudsters, or will the sector settle down once regulation catches up...

Is the world of crypto cut out for fraudsters, or will the sector settle down once regulation catches up with the tech and bad actors are weeded out?

The cryptocurrency universe, while fizzing with potential, has unfortunately attracted its fair share of nefarious actors. Unlike traditional financial markets, the decentralised nature of crypto creates an environment ripe for exploitation, with several egregious cases of crypto fraud that have not only defrauded investors of billions but also eroded trust in the entire ecosystem.

THE QUEEN OF DECEPTION

OneCoin, a name now synonymous with crypto fraud, stands out for its sheer scale and audacity. Founded in 2014 by the enigmatic Ruja Ignatova, dubbed by some quarters of the Fourth Estate as the Crypto Queen, OneCoin promised a revolutionary new cryptocurrency with a purportedly fixed value, in contrast to the volatile nature of established coins. However, from the very beginning, the project was shrouded in secrecy. Technical details about the supposed blockchain technology were scant, with the mining process remaining an enigma. Despite these glaring red flags, aggressive marketing tactics and the allure of high returns attracted millions of investors worldwide. Flashy presentations featuring Ignatova's charismatic persona further fuelled the hype, but cracks began to show in 2017 when Ignatova vanished without a trace. Authorities around the world soon launched investigations, revealing OneCoin to be a colossal Ponzi scheme, with investors having unknowingly poured billions of dollars into a fictitious entity, providing a textbook example of the dangers of investing in projects with a lack of transparency and an overreliance on charismatic leadership.

A WOLF IN CRYPTO'S CLOTHING

Another case difficult to ignore is that of BitConnect, a lending platform launched in 2016 that preyed on investors' hunger for high yields. It promised stratospheric returns through a proprietary "volatile software program" that supposedly generated profits from Bitcoin market fluctuations. However, a closer look revealed the platform's true nature – yet another classic Ponzi scheme. BitConnect simply paid out existing investors with funds from new entrants, creating the illusion of profitability. The platform also employed aggressive recruitment strategies, targeting individuals of limited financial literacy through online forums and social media. These tactics, coupled with the promise of unrealistic returns, proved highly successful in luring unsuspecting victims. Regulatory action in the United States ultimately forced BitConnect to shut down in 2017, leaving behind a trail of millions of dollars in losses and serving as a stark reminder of the importance of due diligence before trusting platforms with seemingly outlandish returns.

THE BITCLUB NETWORK AND THE GREENING OF FRAUD

The BitClub Network, operating from 2014 to 2019, delivered a unique twist on crypto fraud. It positioned itself as an eco-friendly mining operation for a fictitious cryptocurrency called Bitclave. Investors were enticed to purchase packages that promised daily returns based on their investment level but, in reality, the supposed 'green' mining operation was entirely fabricated. BitClub Network lacked any legitimate mining facilities, relying solely on the constant recruitment of new members to generate the promised returns. Once again, this exposed the network as a textbook pyramid scheme, exploiting the growing interest in eco-conscious initiatives within the crypto space. Authorities in the United States eventually intervened in 2019, shutting down the operation and revealing the extent of the deceit, with some estimates suggesting more than USD 720 million in investor losses, highlighting the deceptive tactics used by fraudsters to capitalise on emerging trends and exploit environmental concerns.

THE FTX HOUSE OF CARDS CRUMBLES

The collapse of FTX, a major cryptocurrency exchange founded by the now-incarcerated self-styled philanthropist Sam Bankman-Fried, sent shockwaves through the industry in 2022. Having garnered billions in investments and established itself as a leading player, FTX enjoyed a meteoric rise but cracks began to appear as concerns surfaced regarding FTX's financial practices amid an abundance of allegations of opaque business practices, misuse of customer funds and fraud. Further scrutiny revealed a concerning reliance on FTX's affiliated trading firm, Alameda Research, raising red flags about potential conflicts of interest. The situation reached a tipping point in November 2022 when FTX filed for bankruptcy, leaving billions of dollars in customer funds inaccessible.

BUILDING TRUST IN THE CRYPTO FRONTIER

These causes célèbres represent only a fraction of the worldwide incidences of crypto fraud, raising the question as to whether there is something inherent about the crypto space that makes it especially attractive to those with a cavalier disregard for the niceties of the law.

Jared Gianatasio, a partner at Kleinberg Kaplan Wolff & Cohen in New York, thinks not, telling ICLG News: "My view is that the industry is not inherently bad or attracting bad actors. I think that the industry is growing faster than the regulatory environment overseeing that industry, and that the regulatory community is playing catch-up – learning about the industry and how best to regulate it."

Matt Green, a director at London law firm Lawrence Stephens, runs with the same theme, opining: "My view generally of why these companies and exchanges can get themselves into bother is because they – like all of us – are trying to figure it out, and there aren't always the necessary governance or procedures in place, and a lot of the time the people running these companies are quite young and inexperienced."

Much of the conversation about the perils and pitfalls of crypto unsurprisingly centres on the US, and it is certainly the case that legislators and regulators are seeking to rein in some of the industry's excesses. Yet despite the prevalence of bad actors in the crypto sphere, Gianatasio remains confident that "there's a really rich compliance culture in the space, but there's no real guidance or framework".

Green adds: "We all get very excited when there's something new to trade or interact with and, because of bad behaviour, people shout for regulation, and that's fine, but," he continues, "a knee-jerk reaction would be insufficient."

Green predicts that "things will hopefully settle down, regulators will understand the tech a little bit more".

"Some cryptocurrencies will disintegrate and the ones that do survive will have a real value in our economy."

It seems clear, despite Gianatasio and Green's confidence in the future that, as it stands, investors must remain vigilant, conducting thorough research before committing funds to any cryptocurrency or a crypto-related platform. Red flags to watch out for include unrealistic promises of returns, a lack of clarity about underlying technology, and aggressive marketing tactics that rely on hype over substance. Regulatory bodies across the globe are starting to implement stricter measures to combat crypto fraud. However, international cooperation and a unified approach must surely be the way forward, not least because of the borderless, and therefore inherently multi-jurisdictional, nature of crypto.