It has been a rough few months for some people who have had it easy for a long time. A growing number of cryptocurrency operations may finally face some consequences for their alleged illegal actions.
On Monday, the Securities and Exchange 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 investigated by the Treasury Department for violating US sanctions against Iran. And just a few days before that, the FBI and a US District Attorney in New York three former Coinbase employees indicted for insider trading.
Which agency is responsible for regulating cryptocurrency? is not clear. Both the Commodity Futures Trading Commission and the SEC claim jurisdiction here. However, the SEC seems particularly interested in pursuing crypto schemes under its purview – and most of them appear to be.
“The SEC is in the midst of an ongoing attack on crypto companies from all directions,” John Reed Stark, a cybersecurity expert and former SEC enforcement attorney, told Recode. Stark noted that the agency has extensive his 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 midst of a crypto winter that may never end. During the pandemic, the cryptocurrency market exploded to $3 trillion, aided by new platforms that made investing easy enough for almost anyone. However, since November last year, the market has plummeted. It’s worth it now about a third from what it was at its peak, and there’s no sign the value will bounce back anytime soon. The crash has devastated some of the companies operating in this space — as well as their customers.
Now the law is coming for certain crypto companies and their leaders. But it remains to be seen what eventual impact many of these companies and the people behind them will suffer.
Unlike traditional banks, when crypto lending platforms fail, there are no safeguards to ensure that investors are fully made up. Two crypto lending platforms, Celsius and Voyager, went bankrupt in July, and their customers may never get their money back. Some supposedly secure crypto investments, called ‘stablecoins’, which are pegged to the value of a fiat currency such as the US dollar, have also been proven not to be very stable at all. Last May, the value of stablecoin Terra plummeteddragging the Luna coin, whose value was linked to Terra’s, get rid of it. Luna was once worth a whopping $116. Now it’s worth a fraction of a cent.
But as investor losses mount and enforcers’ expansive crypto arms get to work, it looks like a day of reckoning is finally coming for some of these companies, who have been operating in a low-regulation space. The outright scam clearly didn’t follow the rules. But reportedly, some of the more legit companies have also played fast and loose with them.
“The arrogance and hubris in crypto is so immeasurable,” said Stark. “They are always belligerent, belligerent and call the SEC sketchy.”
“I’ve never seen anything like it and I’ve been practicing for over 30 years,” he added.
Again, the SEC is just one of many government agencies going after crypto. And when many people lose a lot of money, the government will 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 pumping up symbolic values, so many people wanted to go in without understanding anything about space,” said Matt Binder, a reporter for Mashable who also hosts scam economy, a podcast devoted to crypto and web3 scams. “And the industry benefited from a lot of those people.”
It didn’t help that some of their favorite celebrities endorsed these projects, or that some of these companies apparently had enough cash to buy the most advertising space expensive show in the city. It also didn’t help that crypto became as easy to buy as a ATM transaction. And it really didn’t help that a lot of people started using crypto knowing little, but assuming they would get the same protection as from more regulated institutions like traditional banks and investment companies.
Stark predicts that we will see more action against these crypto firms in the coming months and years, with the SEC focusing its efforts not on the small scammers, but on the gatekeepers they use for their scams: “trade exchanges, platforms, whatever you want. they call.” And he thinks it and all the other agencies investigating the world of crypto will get a lot of help, possibly from people in it.
“When companies get into this sort of thing, you get people who want to be whistleblowers or become complainers,” Stark said. “And when prosecutors start poking around, people can become informers very quickly.”
Molly White, who has recorded several Web3 outages at Web3 is just going greatis not yet sure that the increased scrutiny, investigations and charges will lead to real change.
“The cost of insider trading feels like a drop in the bucket compared to the amount of insider trading that is clearly known to take place at Coinbase and elsewhere, but at least it is something,” she said. “I’m concerned how slowly these actions are coming out in an industry where people can commit scam after scam in the meantime.”
“I will believe there is progress when I see it,” she said.
If regulators can’t take those advances in court, at the very least all the attention the crypto crash has received will discourage potential investors from putting money into a volatile market that they don’t really understand and offers them little protection.
“I think this crackdown could help keep the public away from crypto,” Binder said. “There will be some companies trying to become ‘legitimate’, but in the end they are still a crypto company, selling the dream of getting rich through speculative asset trading, with no real real product or service.”
That won’t matter much to the people whose dreams have already turned into nightmares, though. White said that while some of the earlier crypto loss stories were more amusing and the victims less sympathetic (see: “All my monkeys are gone”), that is no longer the case. “Now we see people to write letters to a bankruptcy judge about how they are financially ruined and contemplating suicide,” she said.
Or as Binder put it, “We have a few people who have won the lottery and another ton who has lost everything.”
This story was first published in the Recode newsletter. Register here so you don’t miss the next one!