February 22, 2024

It’s been a tough couple of months for some people who have had it easy for a long time. A growing number of cryptocurrency operations may eventually face some consequences for their alleged illegal actions.

On Monday the Capital Market Commission charged 11 people behind Forsage calling it a $300 million Ponzi scheme disguised as a smart contract system. This was less than a week after the New York Times reported that crypto trading platform Kraken was being investigated by the Treasury Department for violating US sanctions against Iran. And just days before that, the FBI and a US Attorney in New York sued three former Coinbase employees for confidential transactions.

Which agency is responsible for regulating cryptocurrencies it is not clear. Both the Commodity Futures Trading Commission and the SEC claim jurisdiction here. The SEC, however, seems particularly interested in going after encryption schemes that fall under its purview – which appears to be most of them.

“The SEC is in the middle of an ongoing attack on crypto companies from every direction,” John Reed Stark, a cybersecurity expert and former SEC enforcement attorney, told Recode. Stark noted that the agency has developed Crypto unit and SEC Chairman Gary Gensler has made no secret of his belief that many cryptocurrencies are securities and that he intends to regulate them as such.

So even though it’s warm outside, we’re in the middle of a crypto winter that may never end. During the pandemic, the cryptocurrency market rose to $3 trillion, helped by new platforms that made investing fairly easy for almost everyone. Since last November, however, the market has plummeted. Now it’s worth it about a third from what it was at its peak, and there is no indication that the value will recover significantly anytime soon. The crash has devastated some of the companies operating in this space — and their customers, too.

Now, the law is coming for some 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 cryptocurrency lending platforms fall through the cracks, there are no safeguards to ensure investors are made whole. Two cryptocurrency lending platforms, Celsius and Voyager, went bankrupt in July and their customers can ever get their money back. Some supposedly safe crypto investments called “stablecoins,” which are pegged to the value of a fiat currency like the US dollar, have also proven to be not very stable at all. Last May, the value of the stablecoin Terra fell steeplydragging the Luna coin, whose value was connected to Terra’s, down with it. Luna was once worth as much as $116. Now, it’s worth a fraction of a cent.

But as investor losses mount and the expanded crypto arms of enforcement agencies go to work, it looks like a day of reckoning is finally coming for some of these companies, which operate 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 loose with them.

“The arrogance and hubris in the crypto realm is so limitless,” Stark said. “They’re always combative, combative and they call the SEC incomplete.”

“I’ve never seen anything like this and I’ve been practicing for over 30 years,” he added.

Then again, the SEC is just one of many government agencies going after crypto. And when a lot of people lose a lot of money, the government is going to pay even more attention. But there may not be much it can do for some people, 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 driving up 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 took advantage of many of these people.”

It didn’t help that some of their favorite celebrities approved these projects, or that some of these companies were apparently so flush with cash that they could buy advertising space to the max accurate performance in town. It also didn’t help that crypto became as easy to buy as one 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 we’ll 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: “trades, platforms, anything you want to call them.” And he believes that it and any other services investigating the world of crypto will get a lot of help, possibly from people within it.

“When companies start getting into these kinds of things, you find people who want to be whistleblowers or become whistleblowers,” Stark said. “And when criminal prosecutors start sniffing around, people can become informants very quickly.”

Molly White, who has recorded various Web3 failures Web3 is going greathe’s still not so sure that increased scrutiny, investigations and charges will bring about real change.

“The insider trading charges seem 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,” he said. “It worries me how slowly these actions are coming out in an industry where people can commit fraud after fraud in between.”

“I’ll believe there’s progress when I see it,” he said.

If regulators can’t make that progress in court, perhaps at least all the attention the crypto crash has received will discourage potential investors from putting money into a volatile market they don’t really understand and offer them few protections.

“I think these crackdowns can help keep the public away from cryptocurrencies,” Binder said. “There will be some companies that try to ‘go 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 won’t do much, however, for people whose dreams have already turned into nightmares. White said that while some of the previous crypto loss stories were more entertaining and the victims less sympathetic (see:All my monkeys are gone“), this is no longer the case. “Now we see people writing letters to a bankruptcy judge about how they are financially ruined and suicidal,” he said.

Or as Binder put it, “We have a few people who won the lottery and a ton more who lost everything.”

This story was first published in the Recode newsletter. Register here so you don’t miss the next one!

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