Crypto investment fraud is any scheme whereby an individual or company is knowingly and intentionally providing potential investors with false or misleading information with the sole purpose of defrauding the investor. Crypto investment fraud can take many different forms, and includes deceitful tactics by individuals, financial advisors, traders, or other market participants that are detrimental to unsuspecting and trusting investors.

Although there are numerous crypto investment fraud schemes, the two most common methods to perpetrate crypto investment fraud are:

  • Fraudulent initial coin offerings (ICOs) /  Fraudulent cryptocurrencies
  • Cryptocurrency Ponzi schemes
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Fraudulent ICOs and Cryptocurrencies

Companies and individuals use ICOs as a mechanism to raise capital and to participate in investment opportunities. ICOs have an innate risk of fraud and manipulation which is largely attributable to the lack of regulations surrounding these crypto assets, especially when compared to the more traditional capital markets (i.e. IPO)

When you, or your organization unknowingly decides to invest in questionable ICOs and/or crypto assets, the potential dubious nature of these investments can be recognized by the presence of several red flags or indicators, as listed below:

  • The absence of public information regarding the designers and developers of the ICOs and/or crypto asset
  • Revealing that the designers and developers have been directly and explicitly involved in other ICO and/or crypto related scams
  • The company in question does not offer whitepapers
  • The whitepapers that the ICO makes public do not lay out the goals, strategy, background, concerns and/or timelines for the implementation of any DLT related projects
  • The whitepapers do not address each question that a potential investor may have. These questions could include: What is the anticipated competitive advantage of this investment? What are the specific goals? What plan will be implemented in order to achieve these goals? Is full disclosure an issue?
  • After conducting a thorough analysis into the viability of a crypto investment, it appears too good to be true
  • An obvious lack of transparency

Cryptocurrency Schemes

Cryptocurrency Ponzi Schemes

A Ponzi scheme is a fraud that is perpetrated by an individual or company against unsuspecting investors under the guise of the promise of high and consistent returns generated through acceptable and legal means. In reality, the returns and dividends are sourced from other unsuspecting investors. The Ponzi scheme will continue to defraud its victims until the majority of the investors demand full repayment (their principal), and that these perpetrators are able to find others to invest in their scam.

A lack of common understanding regarding the principles of cryptocurrency and the staggering returns of early investors in the cryptocurrency space served to embolden fraudsters by establishing new platforms and foundations to perpetrate more intricate Ponzi schemes. In the early stages of a Ponzi scheme, the promised ‘returns’ are often plentiful and paid out in an expeditiously manner in order to induce additional investment by investors. It can also be assumed that satisfied investors will encourage others to consider this opportunity as one that can not be ignored.

In due course, the Ponzi scheme will ultimately collapse. This can occur when investors or the proper authorities put the pieces together, or because the perpetrators find themselves unable to recruit enough new investors to keep the operation afloat. More often than not, though, a substantial amount of damage has been done. By the time the fraud is exposed, the perpetrators will have either spent much of the illegally obtained funds for their own personal benefit disappeared with their newfound wealth. In any case, it is often difficult – if not impossible – for investors to recoup the funds that they have invested in the Ponzi scheme.

Members of the nagel + associates team have worked extensively on high-profile cases, including involving alleged Ponzi schemes, in Canada and the United States. They also possess an in-depth understanding and awareness into the finer points of crypto assets, block lattices, blockchains and distributed ledger technology.

There are several red flags related to Cryptocurrency Ponzi schemes, including:

  • High yield returns on an investment with little to no risk;
  • Consistent returns on an investment regardless of the overall market conditions;
  • Unlicensed sellers;
  • Inconsistencies and frequent errors in the paperwork provided to investors;
  • Overly complicated or secretive investment strategies; and
  • A failure to receive expected payments and encouraging investors to ‘roll over’ acquired profits.

Charlie Ponzi was a lifetime criminal; his most recent plot was a ‘get rich quick’ scheme involving cryptocurrency. Charlie advertised and promoted his unique investment opportunity that revolved around Bitcoin and a supposed arbitrage opportunity that he had concocted. Investors would unknowingly trade Bitcoin through an API ‘bot’ that Charlie had developed on various cryptocurrency exchanges.

Charlie promised investors up to a 10% yield per week on their principal investment, and that the profits would subsequently be reinvested to purchase and sell Bitcoin on various exchanges. This would allow investors to take advantage of the arbitrage opportunity that he had uncovered.

After multiple complaints from investors who were not receiving the payments that they had been promised, they decided to hire a forensic consulting firm to take a closer look into the subtleties of this ‘investment opportunity’.

The forensic consulting firm quickly uncovered the illegalities of Charlie’s charade. Charlie never bought or sold any Bitcoin. He had been paying previous investors with money obtained from new investors, and using the rest of the money to maintain a lavish lifestyle that he would not otherwise be able to afford.

Relevant Evidence:

  • Banking Records, financial statements, contributions and withdrawals
  • Accounting Records
  • Signed contracts and agreements
  • Whitepapers
  • Customer accounts

To determine whether you or an individual/organization that you represent may be susceptible to crypto investment fraud, take the following brief survey: