Christian Zelder, a New York artist who started investing in crypto to earn some travel money, ponied up $100 — a substantial sum for him at the time — in November 2017 to buy into BitConnect. The new cryptocurrency promised returns of up to 10 percent, which sounded almost too good to be true.
Zelder hoped to turn his $100 investment into $500 or $1,000. But after the price of BitConnect coin peaked at $445 on Dec. 28, 2017, it plummeted to $11.30 on Jan. 25, 2018, according to data from YCharts.
In its indictment of Satish Kumbhani, BitConnect’s founder, the Justice Department alleges that investors like Zelder were victims of “a massive cryptocurrency scheme that defrauded investors of more than $2 billion,” as U.S. Attorney for the Southern District of California Randy Grossman put it in a Justice Department news release.
BitConnect promoters had promised big returns on investments, pointing new investors to the supposed benefits of BitConnect’s lending program. But, according to prosecutors, Kumbhani and his co-conspirators were running a global Ponzi scheme. The founders and their international promoters hyped up BitConnect’s lending program in exchange for a share of the invested funds they obtained — and without disclosing their financial relationship to investors.
Regulators are paying close attention to the proliferation of crypto scams. The Federal Trade Commission estimates that tens of thousands of Americans have lost a total of $1.18 billion to crypto fraud between 2018 and 2022. Grid obtained 23,960 complaints about alleged crypto scams filed with the FTC, through a Freedom of Information Act request. A review showed that again and again, investors large and small have been duped by promises of high returns from seemingly legitimate firms using obfuscatory financial instruments.
Generally speaking, crypto investing is risky, prone to massive swings and often fueled by dramatic hype. That makes it all the more difficult to sniff out a scam, even for those who’ve profited from crypto investing in the past.
“The knowledge that I have now, back in 2017, I did not have that knowledge, so I was just so confused and trying to figure out answers,” Zelder said. “A lot of these scams are getting very elaborate now, too, so it’s kind of hard to detect. Honestly, I’m convinced that just about every crypto could be a scam, and I’m invested pretty big on a lot of these different tokens.”
As Wall Street slid into a bear market this month, traders began dumping their crypto investments, driving down value and even causing crypto companies like Coinbase, Gemini and Crypto.com to lay off workers.
Still, the lure of crypto — promising the potential for life-changing returns — remains. And so do scams.
As cryptocurrency fraud and theft reports have made headlines and complaints have piled up in recent years, federal regulatory agencies, including the SEC and the Labor and Treasury departments, have begun to assess the risks of the space, issue guidance and enforce applicable laws and regulations.
Victims of cryptocurrency scams can file reports with agencies like the SEC or the FTC or sue alleged crypto fraudsters. But lawsuits cost a lot of money, which many victims do not have, and can take years to resolve.
As cryptocurrency scams proliferate, regulators, courts and lawmakers are establishing a framework for holding alleged cryptocurrency scammers responsible. But the nature of the crypto industry and the patchwork of existing regulations and case precedent make that a complicated proposition.
Crypto and scammers are a perfect match
Of course, scams are not unique to crypto — they’ve long succeeded within the confines of the traditional financial system. Take, for example, the 2013 movie “The Wolf of Wall Street” — based on the true story of financial firm Stratton Oakmont engaging in a pump-and-dump scheme to falsely inflate the price of penny stocks. (Jordan Belfort, the co-founder of Stratton Oakmont — who served 22 months in federal prison for securities fraud and money laundering — is now a self-styled cryptocurrency guru.)
A common refrain among crypto enthusiasts is “do your own research,” but that doesn’t mean that newcomers are equipped to spot fraud. At the time that Zelder lost money in the BitConnect collapse, he admitted, he didn’t have great money management skills, and he didn’t fully research the BitConnect project. He just needed some money.
“Nobody gets into crypto for, like, the technology; it’s mostly for financial gains,” Zelder said, noting that he wasn’t prepared to evaluate the company’s promises himself.
Crypto presents a number of characteristics that appeal to scammers. One of its key traits is, in theory, the lack of a middleman. This means that rather than sending money from one person’s account to another, with the banks serving as the shepherd for that transaction, two people can transact directly with each other. The transaction is documented using blockchain technology, which can be thought of as a digital ledger recording transactions. It is then verified by a network of computers rather than a centralized entity like a bank.
There are many kinds of blockchains and variations on this model, but a core idea is that transactions are irreversible. Once a transaction is complete on the blockchain, there is no going back.
At the same time, it can be difficult for newcomers to spot scams early on. Many cryptocurrency newbies and enthusiasts are drawn into scams believing that they’re investing in a reputable new asset class. Like Zelder in 2017, many don’t dig deeper to try to figure out where exactly their money is going.
Combine that with the pseudonymous nature of crypto — people don’t always go by their actual names — and the fact that wallets, which hold crypto, have just a string of alphanumeric characters associated with them rather than a name, address or Social Security number, and there are any number of factors that scammers can abuse.
Among the red flags common in U.S. cryptocurrency scams: crypto projects founded by pseudonymous teams, projects that aren’t audited by a reputable firm and projects that promise fantastical returns, said Michael Rosmer, CEO and co-founder of DeFiYield, a digital asset management company. (DeFiYield also houses the REKT Database, which tracks scams, hacks and exploits involving cryptocurrency projects that allow cryptocurrency owners to lend or transact in cryptocurrency using code instead of banks.)
As wealth inequality continues to rise and real wages have decreased, it’s not hard to see crypto’s appeal as one of the few ways normal people can (and sometimes do) accrue life-changing wealth. But that also serves to make it even riper for scams.
“If the numbers are too good to be true, probably, in some way, it is,” Rosmer said.
Regulators, courts and politicians take notice
Crypto’s explosive growth has attracted a lot of attention from lawmakers. While many see crypto as speculative at best and dangerous at worst, others see an opportunity.
The variety of fraudulent activities happening in the crypto space has resulted in multiple state and federal agencies engaging in “a turf war” to determine which elements of it fall within their jurisdiction, said Omid Malekan, an adjunct professor at Columbia Business School who teaches classes on cryptocurrency.
In response, the crypto industry is stepping up its congressional lobbying efforts, spending $9 million in 2021. A bipartisan group of representatives sent a letter to the SEC earlier this year questioning the agency’s investigations of cryptocurrency firms, according to CoinDesk.
Publicly chiding the SEC for its scrutiny of the cryptocurrency space could establish these lawmakers’ reputation as pro-crypto, Malekan said. Besides hoping to attract donations from the crypto sphere, lawmakers might also wish to appease the industry because they view it as a job-growth opportunity and tax-revenue generator, he said. Some, like Rep. Ritchie Torres (D-N.Y.), have found the arguments for cryptocurrency convincing, he added.
Others, including Sen. Elizabeth Warren (D-Mass.) and Rep. Brad Sherman (D-Calif.), have sharply criticized the cryptocurrency industry. At a December session of the House Financial Services Committee, Sherman grilled cryptocurrency executives from Coinbase, FTX and other firms.
And Warren has said that while the traditional banking industry (one of her core focuses) hasn’t “served the American public well,” the cryptocurrency industry remains an unregulated system where “scammers and cheats and terrorists mix in with ordinary consumers.” In March, she introduced a bill aimed at curtailing the use of cryptocurrency to evade Russian sanctions.
Agencies such as the SEC, the Financial Industry Regulatory Authority and the Secret Service are hiring more investigators and litigators, as well as devoting more resources to investigate the expanding crypto industry. (In a statement to Grid, the FTC declined to say whether it planned to engage in more enforcement actions against cryptocurrency criminals, but a spokesperson for the agency pointed to its previous efforts to recover lost funds for cryptocurrency scam victims.)
But even as lawmakers and federal agencies look to get tough on crypto scammers, the industry is seeing an uptick in hacks and thefts as well as socially engineered phishing attacks that spread on Twitter, Discord, Facebook and other social media platforms, said Howard Greenberg, president of the American Blockchain and Cryptocurrency Association.
How can victims seek justice?
Ways to hold scammers accountable are often time-consuming and costly, with no guarantee of success. And while legislation and regulation can limit the space in which scammers are able to thrive, it remains to be seen how much the fraudulence can be curtailed.
And many scam victims don’t have the resources to hire attorneys or other professionals to investigate on their behalf. “Right now, I think there’s more smart attorneys covering up for bad behavior than there are plaintiffs’ attorneys” defending victims, said John Jasnoch, a partner at Scott & Scott and the plaintiff’s attorney in the Ethereum Max case. (Celebrities and entrepreneurs like Elon Musk, Kim Kardashian, Paul Pierce, Floyd Mayweather, Khaled “DJ Khaled” Khaled and Clifford “T.I.” Harris Jr. have been sued in recent years for their involvement in cryptocurrency schemes.)
“Some of these entities that have really made a lot of money have hired some very sophisticated counsel,” Jasnoch added. “In order to make a difference, the plaintiffs’ bar is going to have to step up our game.”
Zelder would like to see more support for crypto scam victims from cryptocurrency trade organizations; having the government step in to assist crypto scams feels like a departure from crypto’s anti-government origins, he said. Though the Department of Justice’s case against BitConnect has been ongoing for over a year, Zelder is somewhat optimistic about the prospect of finding a resolution. Following his conversation with Grid, he received word from the DOJ explaining his rights regarding the BitConnect case and noting the fact that many criminal cases are resolved via plea agreement between the U.S. State’s Attorney’s Office and the defendant.
For cryptocurrency scam victims unsure of where to start, John Reed Stark, former chief of the SEC Office of Internet Enforcement and professor at Duke Law School, recommends reporting the scam to the FTC, the Federal Communications Commission, their congressmembers and their state financial services regulator. In doing so, they should compile all the evidence in chronological order to explain what happened.
Even with evidence of cryptocurrency fraud, bringing charges against alleged cryptocurrency scammers can be difficult due to the anonymity of the scammers themselves, the complexity of the scam, and the limits of applicable regulations and case law in the U.S.
Cryptocurrency scammers may operate anonymously online, making them harder to find, but government agencies generally could find out who they are — because they want to be found, Stark said. It’s hard to pitch a new investment opportunity in secret, so the cryptocurrency scammers must solicit their schemes to find potential takers, he pointed out. Even so, who they purport to be online isn’t always who they actually are.
But it may be getting harder for scammers to hide their identities. Citing the case against Larry Harmon, who pleaded guilty in 2021 to operating a bitcoin money laundering service called Helix from 2014 to 2017, government agencies are starting to understand how cryptocurrency transactions are obfuscated and laundered, Sarah Paul, U.S. head of corporate crime and investigations at Eversheds Sutherland and former assistant U.S. attorney for the Southern District of New York.
To that end, the federal government has millions of dollars’ worth of contracts with Chainalysis, a blockchain analytics firm that analyzes and traces cryptocurrency movement.
In the traditional financial services sector, regulators often go to financial institutions and require them to open their books to see whether they are violating regulations, which makes it difficult for them to catch violations in real time, Malekan said. Spotting violations in the crypto space could, in theory, be possible given that crypto transactions are publicly listed on the blockchain transactions. But regulating the industry requires government agencies to learn about how blockchain technologies work, and some agencies are coming around to understanding the industry, he said.
But because Congress has passed few laws that pertain directly to cryptocurrency and there’s little court precedent on the issue so far, bringing cases to court is a challenge, he added.
To clear up the regulatory confusion, state and federal lawmakers have been introducing new legislation. The Infrastructure Investment and Jobs Act President Joe Biden signed into law last year contained provisions for reporting digital assets to the IRS. Biden also signed an executive order calling for regulatory agencies to assess the cryptocurrency industry, the National Conference of State Legislatures found that multiple states have proposed legislation on cryptocurrency, and more than 30 cryptocurrency bills were proposed in Congress last year, according to Forbes. This month, Sens. Kirsten Gillibrand (D-N.Y.) and Cynthia Lummis (R-Wyo.) introduced the Responsible Financial Innovation Act, which aims to create a regulatory framework for the cryptocurrency industry.
Until more thorough regulatory legislation is passed, prosecutors and regulators should be resourceful when looking for applicable laws and collaborate with regulatory agencies and other countries to hold alleged cryptocurrency fraudsters accountable in the U.S. and abroad, said Claire Nolasco Braaten, an associate professor in criminology and criminal justice at Texas A&M University-San Antonio. If, for example, a cryptocurrency company is operating an unlicensed money transmitting business or an exchange and is making false statements on its website, it could be prosecuted for selling cryptocurrency without registering with the SEC, she said.
If regulators and the criminal justice system fail to address cryptocurrency fraud, people within and outside of the cryptocurrency space will be at risk, Stark said.
“I’ve always been the one who has sympathy towards victims no matter what level of sophistication they have,” Stark said. “Everybody can get duped. … And these are professional salespeople. And maybe you’re in a desperate situation where you’re trying to feed your family, or you’ve lost your job, or the pandemic hits you hard. For me, that’s the kind of people that these investment companies’ products cater to.”
Despite his losses, Zelder remains bullish on cryptocurrency. In recent weeks, the price of cryptocurrencies like Bitcoin and Ether cratered, but Zelder views the dips as an opportunity to buy more cryptocurrency and plans to invest more in crypto over the next five years.
“You can never really identify what will be a scam or what is a scam in the crypto space,” Zelder said. “Everything is fair game in a sense, until someone really puts the law into place, which is so backwards of what crypto is supposed to be.”
Anna Deen contributed to this article. Thanks to Lillian Barkley for copy editing.