Cryptocurrency Fraud

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The attorneys at Whistleblower Partners have been advocating for cryptocurrency whistleblowers and fraud victims for years. We have a broad experience in all types of crypto fraud and are familiar with the many ways these digital assets have been used to defraud investors and individuals. Whistleblower Partners attorneys have the breadth and depth of experience needed to manage these difficult and complex cases.

Cryptocurrencies are digital assets that can be traded, sold, purchased, and used to buy goods and services. Crypto comes in the form of tokens or coins. In recent years, the crypto markets have exploded in size, leading to an equally large growth in crypto fraud. U.S. regulators are taking a tough approach to stopping crypto fraud, and many of the U.S. whistleblower reward programs may apply.

What is crypto?

Cryptocurrencies are digital assets that have claimed value based on a system agreed upon by the crypto users. Generally, this system takes one of two forms: “proof of work”—meaning that you earn each individual coin via solving complex computer problems or other forms of digital cryptography—or “proof of stake”—meaning that an agreed system of ownership dictates who owns what coin. Governments are not involved in either system and the coins and value exist independently of any government.

How is crypto regulated?

Even though the value of crypto is not set by a government, governments still regulate the buying, selling, and trading of crypto. In the U.S., the Securities and Exchange Commission, Commodity Futures Trading Commission, FinCEN, Internal Revenue Service, and various state government agencies all take a leading role in regulating cryptocurrencies.

The SEC brings enforcement actions related to the trading of cryptocurrencies that are securities. For example, each digital token that is ultimately a stand-in for owning a part of a crypto company may be regulated as a security, if U.S. investors are affected by it.

The CFTC brings enforcement actions related to trading on the futures markets for cryptocurrencies as well as for false statements concerning the value, use, or security of certain crypto tokens, including Bitcoin.

FinCEN brings enforcement actions related to the failure of crypto companies to fulfill their anti-money-laundering compliance obligations. Most crypto companies qualify as “money services businesses,” meaning they have to comply with the Bank Secrecy Act if they operate within the U.S.  FinCEN will bring actions when these companies fail to meet these obligations, including failing to accurately collect know-your-customer and source-of-funds data and to file suspicious activity reports when suspicious activity is detected.

The IRS will bring actions when individuals and companies fail to pay owed taxes from crypto trades or other transactions.

What are common crypto frauds?

Crypto may be a new technology, but the common fraud types are not new. The same schemes that plague other securities, currencies, and commodities are commonly found here as well:

  • Failure to Register Securities: when cryptocurrencies are offered to U.S. investors and meet the conditions for security registration, they must do so.  Any failures to do so could constitute securities fraud.

  • Initial Coin Offerings (ICOs): when cryptocurrencies are offered as ICOs and the company does not fully disclose all necessary information to investors, this could constitute fraud.

  • Romance scams: crypto scammers often target individuals through dating apps and social media sites, convincing unknowing individuals to invest in crypto schemes that turn out to be fake. 

  • Pump and Dump Schemes: crypto companies that falsely promote and then secretly sell off their assets.

  • Market Manipulation and Insider Trading: because of the secretive nature of crypto, it is easy to hide ownership information. This makes it a prime target for insider trading and other market manipulations.

  • False advertising and misrepresentations: When companies fail to disclose the real risks in crypto investment schemes, this constitutes false advertising.  When the digital asset is a security or commodity, misrepresentations can also amount to securities or commodities frauds. 

  • Money-laundering compliance failures:  Crypto companies must collect basic information to stop the flow of dirty money through their systems.

What role do whistleblowers play in crypto enforcement?

The SEC, CFTC, FinCEN, and IRS all have whistleblower reward programs for whistleblowers who bring them information related to crypto fraud that results in an enforcement action. Given the size and scope of the crypto markets, these agencies often rely on insiders and other knowledgeable sources to help them pinpoint issues and track and stop fraud.

Representative cases

Whistleblower Partners has handled a wide variety of whistleblower cases involving cryptocurrency fraud. Those cases include romance scams, misrepresentations to investors, mishandling of customer funds and assets, and money laundering. 

These descriptions of cryptocurrency fraud are general in nature and do not constitute legal advice. Cryptocurrency violations are complex and ever-evolving. The attorneys at Whistleblower Partners understand the complicated, constantly changing legal landscape and are happy to discuss any potential matter further.

If you would like more information or would like to speak to an attorney at Whistleblower Partners, please contact us for a confidential consultation.