As investments into and trading of cryptocurrency become more mainstream, the prosecution of related criminal offenses and civil litigation stemming from cryptocurrency transactions are also rising. While many people invest into cryptocurrency as a means of diversifying their portfolios and because of the attractiveness of the potential financial upside, others invest in cryptocurrency because they view it as a less-regulated commodity that the government has less control over and information about. Regardless of which camp you fall into, it is important to understand your risks when investing in and trading cryptocurrency, and to understand that cryptocurrency transactions are not in fact beyond the reach of law enforcement and regulators.
In addition, if you create or operate a cryptocurrency exchange platform or act as a cryptocurrency provider, you must be aware of actions that could give rise to criminal or regulatory investigations, as well as litigation from dissatisfied customers.
Cryptocurrency is a decentralized digital currency kept in a digital “wallet” that uses encryption to regulate production and trade. There are thousands of cryptocurrencies including Bitcoin, XRP, and Ethereum, which are some of the most well known. Trading of cryptocurrencies is recorded on a blockchain, a type of decentralized ledger that is public. Each transaction is encrypted, but fraud can still occur.
While still considered a relatively volatile market, cryptocurrency is becoming more mainstream with some businesses announcing programs to accept crypto as payment.
As a newer technology where government regulations are still developing, cryptocurrency has attracted fraud. Cryptocurrency fraud refers to any act of fraud that involves the use of cryptocurrency or relates to the creation of trade of cryptocurrency.
Initial coin offerings (ICOs) are a method of raising funds for a new cryptocurrency, app, or other crypto service. Whenever a material misrepresentation or omission is made in connection with an ICO, issuers may be liable for fraud.
Cryptocurrency marketing scams can take many forms including fake celebrity endorsements, phishing scams in which individuals are blackmailed into sending cryptocurrency payments, “pump and dump” scams where a multitude of traders are induced to buy a coin in a short period time to artificially increase the price and then the perpetrator sells a large holding to cash in while the value plummets, and more.
Any fake website that collects cryptocurrency or falsely purports to be a trading platform may be guilty of cryptocurrency fraud. The entire website need not be fake. If some representation, option, or function of the platform induces users to take action or not take action based on a material misrepresentation or omission, the platform may be charged with fraud.
In early April 2022, the Securities and Exchange Commission (SEC) announced new initiatives to register and regulate cryptocurrency exchanges. Currently, many cryptocurrency exchanges hold customers’ assets in their custody. The SEC announced plans to explore separating out asset custody to protect investors.
While further regulations of cryptocurrency are surely on the horizon, providers and trading platforms must still be aware of and compliant with their existing legal obligations.
At Delahunty & Edelman LLP, our team of deeply knowledgeable and experienced attorneys provide counsel to cryptocurrency providers and trading platforms regarding disputes, investigations, and compliance. We are equipped to help you address indications or allegations of money laundering, asset custody issues, and insider trading, as well as disputes with customers and compliance with current and emerging SEC regulations.
If you are a cryptocurrency provider or trading exchange facing allegations of fraud, asset theft, tax evasion, or any other type of criminal offense, or if you have been accused of using a cryptocurrency platform to further a fraudulent scheme, our team of attorneys at Delahunty & Edelman LLP can help you.
As former federal prosecutors with significant private-sector and law enforcement experience, our attorneys are deeply familiar with government investigations and all stages of litigation involving fraud allegations. Cryptocurrency fraud claims in particular require the counsel of an attorney who understands the technology.