Surge in Cryptocurrency Crimes: More Charges May Be Coming

First conceived in the early 1980s, the “blinding” algorithm developed by cryptographer David Chaum remains the foundation for private, decentralized financial exchanges. Cryptocurrencies like Bitcoin, perhaps the most well-known of coins or tokens, can be used to engage in for virtually any private financial exchange outside of established monetary systems. The use of such alternative currencies have, in recent years, grown exponentially.

Although cryptocurrencies have proven useful to consumers (and while the potential uses of cryptocurrencies are swelling), they have also created new opportunities for a variety of frauds and other financial offenses and, thus, are the subject of a growing number of criminal prosecutions. Moreover, cryptocurrencies and their marketplaces have recently come under significant regulatory scrutiny from governmental agencies like the U.S. Securities and Exchange Commission (SEC).

In a word, the growth of cryptocurrencies has generated a parallel growth of cryptocurrency crimes and regulatory violations. To help their clients, lawyers must both understand cryptocurrencies and their unique marketplaces understand the framework by which securities are regulated.

Growth in Cryptocurrency Crime

According to CipherTrace’s Q2 2019 Cryptocurrency Anti-Money Laundering Report, theft, misappropriation of funds and other cryptocrimes are on the rise. Among other things, CipherTrace noted that perpetrators of cryptocrimes scammed approximately $4.26 billion in 2019 – a huge amount standing alone and sharp increase from prior years. Offenders were largely insiders who caused investors and exchange users to incur significant losses. One cryptocurrency Ponzi schemer alone defrauded users out of $2.9 billion in crypto assets. CipherTrace’s reports, though, are limited to validated thefts and losses. Unreported and/or unknown thefts may account for still more victims and losses.

Cryptocurrency and Regulatory Violations

Regulators were initially slow to catch-on to the cryptocurrency marketplace. But they are finally starting to catch-up and intensify their regulatory efforts.

In particular, in March 2018 the SEC announced that online platforms for cryptocurrencies must register with the SEC because they operate like traditional public exchanges. Indeed, some of those platforms even call themselves exchanges, which creates the impression that they are registered with the SEC when, in fact, they might not be.

The SEC has also been active in filing enforcement actions and initiating administrative proceedings against businesses and individuals who violate its cryptocurrency rules and regulations. For example, in early 2019 the SEC announced the initiation of proceedings against Kik, a Canadian social media business, for conducting a purportedly illegal $100 million securities offering of digital tokens. The SEC alleged that Kik sold the tokens to U.S. investors without registering their offer and sale as required by the U.S. securities laws. In another example of the SEC turning up the heat, in August 2019 it filed suit against Veritaseum and its CEO for making material misrepresentations and omissions in its 2017 initial coin offerings (ICO) – the agency’s second-largest cryptocurrency-related matter ever.

In a word, the existence of cryptocurrencies and cryptocurrency marketplaces, as well as the use of digital currencies for financial transactions, creates a new layer of regulatory concern for businesses and individuals who use such financial products. They must be aware of the risks associated with such business practices and the regulatory requirements of the growing cryptocurrency industry. It simply does not matter how a token or coin is characterized. Likewise, it does not matter how a buy/sell platform is described. If the tokens are treated as securities and the platforms operate like exchanges, they are subject to SEC regulation.

Cryptocurrency and Modern Law Firms

Many law firms are becoming more involved in cryptocurrency-related litigation and the development of blockchain technology and new cryptocurrencies. By doing so, law firms are better able to serve clients who want to utilize this technology themselves. These firms can also attract clients who are just becoming involved with crypto-technology. Indeed, businesses that use blockchain technology and cryptocurrencies need lawyers who understand the technology, its regulatory implications and its risks.

Protass Law PLLC Focuses on Securities and Regulatory Proceedings

Businesses and individuals facing scrutiny by the SEC or any other regulatory agency will no doubt benefit from contacting a lawyer knowledgeable in securities regulations, blockchain technology and cryptocurrencies. Harlan Protass is just such an attorney – he is a seasoned securities litigator who routinely handles complex financial and crypto-related cases.

At Protass Law PLLC, we seek to protect and defend clients involved in civil and criminal proceedings related to the public securities markets and the more modern cryptocurrency markets. With 25 years of experience, Harlan Protass has the depth of experience and technological understanding that clients operating in crypto-related markets need to avoid regulatory action, fines and even criminal charges.

Contact Protass Law PLLC today at 212.455.0335 or through the online form.