More and more businesses and consumers across the globe are adopting cryptocurrencies for investing and as a form of payment for goods and services in daily transactions. While most consumers are not yet using cryptos in everyday transactions, this is changing quickly as more savvy merchants adopt them and as entrepreneurs and organizations jump on the bandwagon.
According to a recent World Economic Forum report, 10% of the global gross domestic product is expected to be stored on blockchain technology by 2027. And the number of businesses accepting cryptocurrencies continues to rise, for example, Overstock.com, Expedia and Shopify have all begun accepting cryptocurrencies as a form of payment for goods and services.
The problem with this rapid increase of adoption and evolving technology is the lack of regulation in most countries. The decentralized nature of cryptocurrencies has made them popular for criminals who want to make their transactions difficult to trace, making it vulnerable to such abuse as offshore financial crimes like tax avoidance, bribery, and money laundering. In the past years we have seen that cryptocurrency fraud or abuse has become a dominant topic of discussion for government enforcement agencies, with numerous panels addressing its various forms, the hype and the reality, the many ways it can facilitate fraud, and efforts to rein in its abuse.
The SEC, CFTC, and IRS have all taken steps to educate the public on the risks of cryptocurrency scams. The SEC has also been working with their international counterparts to target fraudsters abroad. Still, educating investors is only one part of the solution, the other part, and most important, is to enforce the law in this new space.
The SEC, CFTC, and IRS all assert regulatory control over cryptocurrency under certain circumstances. For example, for the SEC, a given cryptocurrency must qualify as a security or the “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.” As the SEC has established before, all securities offered and sold in the United States must be registered with the Commission or must qualify for an exemption from the registration requirements. In addition, any entity or person engaging in the activities of an exchange must register as a national securities exchange or operate pursuant to an exemption from such registration.
In 2018 a Massachusetts federal judge ruled that the CFTC indeed has authority to fight fraud in the booming virtual currency market. As the virtual currency sector has grown, the CFTC enforcing its Commodity Exchange Act sought to use its authority to crack down on fraudsters who promise investors that they can get rich quickly by buying their cryptocurrency. But to do so, the CFTC needs to convince the courts that virtual currencies are “commodities” within the Commission’s authority to regulate.
On the other hand, the IRS has taken the position that cryptocurrency investments are assets that should be treated like any other for tax purposes. This treatment permits the IRS to tax returns on crypto investments. And through its Criminal Investigations Division, the IRS also pursues money-laundering crimes committed with cryptocurrency.
With the help of whistleblowers programs providing high-quality information and identifying misconduct and holding wrongdoers accountable, agencies will keep a level playing field for all market participants. It is very clear that government agencies are prioritizing their enforcement, encouraging whistleblowers to come forward. Whistleblowers can also take advantage of the various whistleblower reward programs offered by the SEC, CFTC, and IRS and potentially share in any government recovery.
The most common types of crypto crimes are:
Financial Crimes: Crypto’s instant transactions, portability, and international reach mean that it can be used as a new tool for the furtherance of tax avoidance, money-laundering, and bribery.
Scam Initial Coin Offerings: The first offering of a particular cryptocurrency for sale, called an Initial Coin Offering or ICO, can be a means of preying on the unsophisticated. Some ICOs are completely fabricated, with phony bios of nonexistent team members and technical whitepapers copied from other, legitimate cryptocurrencies.
Pump and Dump Schemes: Crypto can provide a new variation of the classic pump and dump scheme, where owners of stock try to drive the price up before selling off their holdings at an artificial peak. In the crypto world, this is common at the ICO stage, or even beyond, whenever false claims can hype up demand and permit the originators or dominant holders of the cryptocurrency to earn massive phony profits.
Ponzi Schemes: Crypto investments can also be used as the vehicle for a traditional Ponzi scheme, where new adopters are necessary to give artificial returns to the early adopters. Given that crypto is widely misunderstood, it can be the perfect cover for a bogus scheme.
Traditional Theft: Crypto also provides criminals new opportunities for theft. They can hack investors’ crypto wallets and steal their currency; they can set up fake wallets to bilk counterparties, and they can set up phony crypto exchanges to steal customers’ money.