Caution Urged With Digital Asset And Cryptocurrency Investments

The Securities And Exchange Commission recently released a bulletin on their investor website warning about frauds that incorporate digital assets and cryptocurrency into their scams.

Investing in cryptocurrency such as Bitcoin, Litecoin, Ethereum, and other so-called “digital assets” are a truly 21^st Century way to invest. For someone who is tech-savvy as well as educated with investing, dipping into crypto may be a next-generation investment that offers returns on an investment.

Blockchain-based and without physical currency, digital assets and crypto are only issued and traded electronically, making defrauding investors even easier than before. There is no central overseeing agency, such as the Federal Trade Commission (FTC) or Federal Deposit Insurance Corporation (FDIC.)

Unfortunately, like so-called “pot stocks,” crypto trading has also become a fraudster’s dream.

What Is Cryptocurrency?

This refers to any online-only currency that is used and traded online. The most popular is Bitcoin, and others such as Ethereum are also referred to as “altcoins.”

Cryptocurrencies are also referred to as “digital assets,” because there is no physical currency involved. Everything is online.

An Initial Coin Offering, or ICO, is the same as an Initial Public Offering (IPO) of a stock but for cryptocurrency.

With a basic idea of “decentralization” and generally out of reach from government interference, cryptocurrency offers a transparent but less traceable form of monetary exchange. This also means that any money you put into a cryptocurrency investment will likely not be protected as it would in a bank or other legitimate investment.

Protect Yourself: The Same Old Rules Still Apply

With every “new” type of securities investment, there are still some “old school” rules that you must apply to avoid becoming a victim of fraud.

Cryptocurrency scams proliferate because investors believed what they heard when someone appeared told them about the amazing profits they would make. The “old school” axiom applies here: if it sounds too good to be true, it probably is.

Whether you’re considering investing in cryptocurrency or any other type of commodity, there are certain “red flags” that appear with nearly any kind of investment:

• It just “sounds too good to be true.” If the investment schema just doesn’t make sense, is difficult to understand, or otherwise doesn’t sound right, chances are it’s not genuine.
• Promised “guaranteed returns.” This is one of the biggest, especially with a claim of “little or no risk” and “high returns.” No one can guarantee returns.
• Sellers who are unlicensed and/or unregistered. Both the SEC and FINRA have free tools that allow you to investigate anyone claiming to be an investment professional before you invest with them. Always check the background of anyone with whom you are considering investing.
• They take credit cards! Legitimate brokers do not accept credit cards to pay for investment securities.

Additional Precautions

Cryptocurrencies always have a whitepaper you should read and review carefully. The whitepaper is a foundational document for the currency. It should explain how the offering works, how it’s designed, and of course, how it will make money. The whitepaper should clearly explain these things, but if you read it and feel like it’s not making any sense, that’s a red flag. Again, if it sounds too good to be true, it probably is. And if there is no whitepaper, don’t consider investing.

Is there a published code? Most legitimate cryptocurrencies will make their code open-source, meaning anyone can see and review it. If you don’t read code, that’s OK. But if this particular “crypto” refuses to make their code available, they’re likely hiding something.

The SEC recently filed an action against online crypto trading platform BitConnect after the company defrauded investors around the world out of over $2 billion in a “lending program” that was anything but. The company claimed that their exclusive “volatility software trading bot” would generate high rates of return for their investments. Unfortunately, there were no returns, only the usual scam to exploit investor’s interests in cryptocurrency.

You can review all of the SEC’s investor information on digital assets and ICOs on their website as well.

Are You An Investor In Cryptocurrency Or Other Digital Assets?

Silver Law Group is a nationally-recognized class action law firm representing victims of investment fraud. Our attorneys represent investors in class action lawsuits against issuers in state or federal court and investors in securities arbitration claims against Wall Street firms for stockbroker misconduct.

Scott Silver, Silver Law Group’s managing partner, is the chairman of the Securities and Financial Fraud Group of the American Association of Justice. Contact us for a consultation at ssilver@silverlaw.com or toll free at (800) 975-4345.