CFTC Clobbers Cryptocurrency Con Man
Last week, the CFTC announced that a federal court entered a nearly $600 million default judgment against a British man who used bitcoin to defraud more than 1,000 people worldwide. The judgment is yet another indication that the CFTC will vigorously police cryptocurrency fraud.
The CFTC filed a complaint against Benjamin Reynolds and his bitcoin trading and investment company, Control-Finance, back in 2019. Reynolds’ scheme was simple. He told customers he would skillfully invest their bitcoin, and then simply pocketed the bitcoin for himself.
Reynolds used a website and social media accounts to lure investors, promising guaranteed daily trading profits generated by a team of “expert” virtual currency traders. Although Reynolds made no trades, he provided investors with sham “Trade Reports,” account balances, and profit figures to keep them hooked. He also constructed a Ponzi-like scheme called the Control-Finance “Affiliate Program,” which offered investors bonuses and escalating profits in return for customer referrals. Reynolds encouraged investors to gin up those referrals by sharing links with friends and family on social media.
Ultimately, Reynolds’ investors, including 169 Americans, lost most if not all of their bitcoin investments through the scam. According to the CFTC, defendants created single-use wallet addresses to receive customers’ bitcoin deposits, then moved those assets into pooled wallet addresses under Reynolds’ control. Over the course of six months in 2017, defendants fraudulently obtained at least 22,191 bitcoin, worth $143 million at the time, then abruptly shut down operations.
While defendants were ordered to pay $143 million in restitution and $429 million as a civil penalty, the court’s order was issued in Reynolds’ absence; his location is unknown. The default judgment permits authorities to pursue all accessible assets to satisfy the judgment, but the CFTC has warned that it may not be able to recover funds.
Cryptocurrencies, which are not legal tender and exist only online, have exploded in popularity. With significant increases in cryptocurrency values since June 2020, the total market capitalization of cryptocurrencies is now estimated to exceed $1 trillion. Bitcoin, the first decentralized cryptocurrency, entered the cultural imagination in 2017 when its price skyrocketed to nearly $20,000—a record shattered by the current price of nearly $60,000.
As with any financial instrument, cryptocurrencies offer utility to the scrupulous and unscrupulous alike. People legitimately use crypto to make quick payments and avoid transaction fees. They also buy it as a pure investment, hoping the value rises (and that they haven’t invested with a fraudster). But corrupt actors are also using crypto to scam unwitting investors and evade existing financial laws, doing everything from misrepresenting initial coin offerings to skirting registration requirements to using crypto for money laundering.
Cryptocurrency Regulation & Enforcement
Several federal agencies are on the beat regulating cryptocurrency and protecting investors—and each agency relies on whistleblowers to assist their efforts.
- The CFTC, which snagged Reynolds, regulates crypto as a commodity under the Commodity Exchange Act and has made cryptocurrency enforcement a top priority.
- The SEC, which regulates crypto as a “security,” has likewise prioritized crypto enforcement.
- Where cryptocurrency is used in money laundering and violations of the Bank Secrecy Act are involved, the Department of the Treasury’s new Anti-Money Laundering Whistleblower Program provides an avenue for reporting violations.
- And not to be outdone, the IRS regulates crypto as an asset, allowing it to pursue tax evasion on crypto investments, and goes after crypto-based money-laundering crimes through its Criminal Investigation Division.
As the crypto markets continue to expand—and fraudsters continue to game the system—expect each agency to welcome tips from whistleblowers.
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