U.S. security regulators have taken a tougher stance in recent months with cryptocurrency firms. But instead of protecting investors from fraud, they could be coming down so hard that they’re sending startups offshore.
In December 2020, the U.S. Securities and Exchange Commission brought the hammer down on Ripple Labs, accusing the company in a lawsuit of raising $1.3 billion in unregistered securities offerings. At issue is whether initial sales of the company’s cryptocurrency XRP constituted investments. The SEC claims they do. The company argues they do not. This is one of many nettlesome and costly regulatory disputes for cryptocurrency firms in the U.S. that could be causing them to rethink setting up shop here. Although the government has a strong interest in trying to bring some order to the Wild West world of crypto, there is rising fear that regulators might actually be strangling innovation — and worse, sending crypto firms fleeing to other less watchful jurisdictions.
Regulators “run the risk of offshoring or chilling this activity,” observed Katie Haun, a former federal prosecutor who blazed trails in investigating fraud in digital currency. Now working as a partner at venture capital firm Andreessen Horowitz, Haun recently told interviewer Tim Ferriss that China may start to take a lead in cryptocurrency development as more entrepreneurs seek opportunities outside the U.S. That shift could become a “national security threat,” she said. “I’m starting to see the beginning of it happening already,” Haun told Ferriss. In the case of Ripple, the SEC might be completely over-stepping its bounds, or so the agency’s former chair Mary Jo White has said. Ripple’s XRP, created in 2013, now trades around the world, similar to bitcoin and ethereum. The SEC has declared both are currencies, not investments, and not subject to the same expensive and time-consuming registration and disclosure requirements. White, now in private practice, was hired by Ripple to fight the lawsuit. She told Fortune Magazine that the agency made a bad call in bringing the case, that it is arbitrary, and that it is emblematic of a struggle to develop an appropriate regulatory framework. The jury is still largely out on the question of whether cryptocurrency should be viewed as a currency, an investment, or just a gamble. The SEC is still trying to find a shoe that fits, White said.
“There’s no way to sugarcoat it,” she told Fortune. “They’re dead wrong legally and factually.”
While some genuine digital currency firms may be facing overly-harsh regulation, recent fraud cases reveal that investors face considerable risks from the peddling of specious digital coins, making appropriate regulatory enforcement all the more important. Just last week, John McAfee, the founder of an eponymous antivirus software company, was charged along with his bodyguard with securities fraud over a purported “pump-and-dump” scheme involving cryptocurrencies. The pair are accused of using McAfee’s Twitter account, which has approximately 1 million followers, to recommend buying Reddcoin and Dogecoin. McAfee claimed not to hold a stake in these coins, but secretly bought up large quantities along with his bodyguard. They cashed out when prices rose, netting millions of dollars, according to federal prosecutors.
The SEC has also sued McAfee for fraudulently promoting initial coin offerings, and he has been arrested for tax evasion. These were hardly isolated incidents. Every day seems to turn up more news of digital currency scams, which investors, unfortunately, seem all too eager to pour money into. And it’s getting worse as technology moves offshore. Nigeria, already a well-known launchpad for email-based financial fraudsters, is becoming a “den of cryptocurrency scams,” according to an Israeli analytics firm, Whitestream. Perpetrators in Lagos have used social media platforms like Instagram to lure victims with photos depicting lavish lifestyles, resembling “influencer” accounts. When would-be cryptocurrency buyers make their investment, scammers quickly liquidate the funds.
In another recent case, a Serbian man was arrested and charged by U.S. authorities with fraud over multiple alleged cryptocurrency-based schemes. He is accused of developing fake platforms and pitching them to bitcoin investors using fabricated reports describing them in glowing terms. According to prosecutors, about $7 million was siphoned away from U.S. investors through the schemes, and laundered through an account in the Philippines.
The American Association of Retired Persons has issued strenuous warnings to its members about cryptocurrency scams, in light of retirees being frequently preyed upon by fraudsters. The group advised older Americans to look out for signs of new takes on age-old cons, like Ponzi schemes and classic “pump and dumps.” An additional risk with crypto is that it is subject to much more dramatic swings in value than government-backed currencies.
“It’s possible for a smart investor to make a big profit,” the group said. “But the prospect of quick riches can blind some people to the risks and enable crooks to lure them into scams.”