STATE WARNS THAT CRYPTO COIN FRAUDS ARE RAMPANT
State sweep finds 32 companies selling unregistered investments.
So-called digital coins might live up to their hype someday of being integral to commerce of the future, but in the interim the term “cryptocurrency” already has a more dubious distinction — it’s become the most common buzzword used in investment scams statewide.
Crypto-related potential swindles have surpassed schemes involving oil and gas assets, real estate and stocks in recent months as the most popular means by which fraudsters are attempting to separate Texas investors from their money, according to Joe Rotunda, director of enforcement at the Texas State Securities Board.
“It is everywhere,” Rotunda said of the scams tied to various digital currencies. Unscrupulous promoters “are trying to get as much money as they can as quickly as they can” while the sector remains hot.
Rotunda’s agency isn’t attempting to regulate the actual cryptocurrencies. Rather, it has been aiming to crack down on various fraudulent “investment programs” and other schemes touted as either providing exposure to digital coins or based upon them.
A four-week sweep by the State Securities Board, designed to collect data and get a handle on the scope of crypto-related investment offerings in Texas, turned up 32 companies marketing securities through online advertisements or social media without proper registration, according to the securities board.
More than half didn’t provide potential investors with physical addresses, and a number were guaranteeing specific investment returns — some as high as 40 percent per month, according to the securities board.
The state agency has taken enforcement action against seven of those companies because of information turned up during the sweep, which began Dec. 18. Investigations are ongoing into the bulk of the remaining firms, Rotunda said, as are inquiries into two dozen or so additional crypto-related schemes identified
before and after the sweep.
Bitcoin, the most popular cryptocurrency, soared nearly 2,000 percent last year to hit an all-time high above $20,000 in December.
The huge run-up set off a frenzy among investors worldwide looking to get in early on the next hot virtual coin or token, as well as among entrepreneurs and companies angling to capitalize on the enthusiasm.
But the price of many cryptocurrencies — including bitcoin, which was trading recently around $6,850 — has fallen since then.
The U.S. Securities and Exchange Commission tamped down some of the fervor by beginning a wide-ranging inquiry into so-called “initial coin offerings,” a form of crowdfunding used by many of the newly minted companies. Regulators in some states also have been attempting to rein in potentially fraudulent crypto-related investment schemes, with the Texas State Securities Board among the most active.
But the slide in cryptocurrency prices has yet to translate into a decline in the number of potential scams aimed at capturing the imaginations of would-be Texas crypto investors, Rotunda said.
Promoters of fraudulent crypto schemes “can point to a six-month period last year” during which bitcoin climbed dramatically, he said. “They look at that and say, ‘That’s real (and) that can happen again.’ As long they can point to real-world facts, fraudulent promoters are going to be able to lure” investors.
Some cryptocurrency enthusiasts have acknowledged that the sector has become a draw for scam artists, and they’ve said they welcome regulatory scrutiny to root them out. Still, they’ve also said a certain amount of fraud is inevitable in a budding new sector with a promising new technology.
“I think it’s prudent for the SEC to let people know that they are watching,” said Joseph Lubin, co-founder of the cryptocurrency Ethereum, during South By Southwest last month. “I think that will enable better behavior (and) I think it is very healthy.”
The Texas State Securities Board did find some crypto-related investment companies operating legally in Texas during its fourweek sweep, Rotunda said, although he said that “all the toxic companies” made it difficult to find them.
Among other traits, such legitimate operators either weren’t selling securities or had specific exemptions from licensing requirements. They also weren’t hiding their businesses addresses or the names of their executives and backers, Rotunda said, and they weren’t marketing investment products broadly over the internet to everyone or making “pie-inthe-sky” promises regarding returns.
“There are legitimate firms out there, and we have nothing against this type of offering,” he said. “Our concern is that (the cryptocurrency sector) is just attracting the fraudsters.”