It’s been a tough few months for some people who have had it easy for a long time. A growing number of cryptocurrency operations may finally face some consequences for their alleged illegal actions.
On Monday, the Securities and Exchange Commission charged 11 people are behind Forsage, calling it a $300 million Ponzi scheme disguised as a smart contract system. That was less than a week after the New York Times published the Kraken cryptocurrency trading platform was under investigation by the Ministry of Finance for violating US sanctions against Iran. And just days before that, the FBI and the US District Attorney in New York charged three former Coinbase employees for insider trading.
Which agency is in charge of regulating cryptocurrencies it is not clear. Both the Commodity Futures Trading Commission and the SEC claim jurisdiction here. The SEC, however, appears to be particularly interested in monitoring crypto schemes that fall under its purview – and it appears that most of them are.
“The SEC is in the midst of a sustained attack on crypto firms from all directions,” John Reed Stark, a cybersecurity expert and former SEC attorney, told Recode. Stark noted that the agency has expanded has its own crypto unit and SEC chairman Gary Gensler he didn’t hide it of its belief that many cryptocurrencies are securities and that it intends to regulate them as such.
So even though it’s hot outside, we’re in the middle of it crypto winter it may never end. During the pandemic, the cryptocurrency market rose to $3 trillion, with the help of new platforms that have made investing easy enough for everyone. However, since last November the market has fallen. Now it’s worth it about a third of what it was at its peak, and there are no signs that the value will recover significantly anytime soon. The crash devastated some of the companies operating in this space – as well as their customers.
Now comes the law for certain crypto companies and their leaders. But it remains to be seen exactly what consequences, if any, many of these companies and the people behind them will face.
Unlike traditional banks, when crypto lending platforms thrive, there are no safeguards to ensure investors are kept whole. Two crypto lending platforms, Celsius and Voyager, went bankrupt in July, and their clients maybe never return their money. It turns out that even some supposedly safe crypto investments called “stablecoins”, which are tied to the value of fiat currency like the US dollar, are not very stable. Last May, the value of the stablecoin Terra headlongdragging the Luna coin, the value of which was associated with Terra’s, down with that. Luna was once worth as much as $116. Now, it’s worth a fraction of a cent.
But as investor losses mount and enforcers’ expanded crypto-weapons get to work, it looks like the day of reckoning is finally coming for some of these companies, which have operated in a space with few rules. Outright scams obviously didn’t follow the rules at all. But some of the more legitimate companies allegedly played fast and losing with them as well.
“The arrogance and hubris in the cryptocurrency space is so beyond measure,” Stark said. “They’re always belligerent, combative and calling the SEC sketched.”
“I’ve never seen anything like it and I’ve been practicing for over 30 years,” he added.
Again, the SEC is just one of them several government agencies going crypto. And when many people lose a lot of money, the government will pay even greater attention. But for some people, it may not do much, as crypto is not regulated like traditional banks and securities – something many crypto investors didn’t realize until it was too late.
“With so much new money raising token values, so many people wanted to get in without understanding anything about the space,” said Matt Binder, a reporter for Mashable who also hosts Scam Economy, a podcast dedicated to crypto and Web3 scams. “And the industry has taken advantage of many of those people.”
It didn’t help that they were some of their favorite celebrities approved these projects, or that some of these companies were apparently so flush with cash that they could buy ad space at the highest expensive show in the city. It didn’t help that crypto became easy to buy ATM transaction. And it really didn’t help that many people got into crypto knowing little but assuming they would have the same protections they have from more regulated institutions like traditional banks and investment firms.
Stark predicts that we will see more action against these crypto companies in the coming months and years, with the SEC focusing its efforts not on small-time fraudsters, but on the gatekeepers they use for their scams: “trading exchanges, platforms, whatever you want to you invite them.” And he thinks it, like all other agencies investigating the cryptocurrency world, will get a lot of help, probably from people within it.
“When companies start dealing with these kinds of things, you get people who want to be whistleblowers or become whistleblowers,” Stark said. “And when criminal prosecutors start talking around, people can become informants very quickly.”
Molly White, who chronicled the various failures of Web3 at Web3 is doing greathe is not yet so sure that increased scrutiny, investigations and prosecutions will lead to real change.
“The cost of insider trading seems like a drop in the bucket compared to the amount of insider trading that is clearly known to be happening at Coinbase and elsewhere, but at least it’s something,” she said. “It worries me how slow these actions are moving in an industry where people can commit fraud after fraud in the meantime.”
“I’ll believe there’s progress when I see it,” she said.
If regulators can’t make that progress in court, perhaps at the very least all the attention the cryptocurrency crash has attracted would discourage would-be investors from putting money into a volatile market they don’t really understand and offers little protection.
“I think these attacks can help turn the public away from cryptocurrencies,” Binder said. “There are some companies that try to ‘be legit’, but at the end of the day, they are still a crypto company, selling the dream of getting rich through speculative asset trading, with no real product or service.”
That, however, won’t do much for people whose dreams have already turned into nightmares. White said some of the earlier cryptocurrency loss stories were more entertaining and the victims less sympathetic (see: “All my monkeys gone”), that is no longer the case. “Now we see people writing letters to the bankruptcy judge about how they are financially ruined and thinking about suicide,” she said.
Or as Binder put it, “We have a few people who hit the lottery and a ton more who lost it all.”
This story was first published in the Recode newsletter. Apply here so don’t miss the next one!