Is Bitcoin, Cryptocurrency Investing A Scam? Legal Experts Offer Clarity

Bitcoin, and cryptocurrency in general, has a serious reputation problem. Many people still associate these digital currencies with black markets, scams and other criminal activities. When the online loan marketplace LendEDU asked 786 Americans last September if it is illegal to own bitcoin in the United States, more than 47 percent were unsure. More than 10 percent said bitcoin ownership is unlawful. (It’s fine.) The common myths that cryptocurrency is “unregulated” or predominately used by criminals are being slowly disproven by statistics.

The British analytics firm Elliptic recently published a global markets report stating “only 0.61 percent of the money entering conversion services during the four years analyzed were verifiably from illicit sources.” Basically, less than one percent of surveyed bitcoin transactions on popular cryptocurrency exchanges came from criminal activity. But that doesn’t mean the whole cryptocurrency industry is perfectly lawful. Lucrative growth is drawing a variety of bad actors to the cryptocurrency ecosystem.

The U.S. Commodity Futures Trading Commission leveled multiple lawsuits against cryptocurrency investment schemes this week, two of which were filed in New York. One of the cases involved an investment company collecting more than $1.1 million worth of bitcoin from hundreds of people, claiming to pool them for trading commodities interests then allegedly misappropriating the funds. CoinDesk reported another New York defendant branded himself as a cryptocurrency expert and promised his trading tips could yield 300 percent returns.

US Securities and Exchange CommissionThe seal of the U.S. Securities and Exchange Commission hangs on the wall at SEC headquarters in Washington, D.C., June 24, 2011. Photo: Reuters/Jonathan Ernst

So far a lot of the regulatory focus has been on the Ethereum-based tokens used in initial coin offerings, some of which may classify as securities. But most legal experts agree a variety of laws apply to all cryptocurrencies, including bitcoin. A crime is still a crime, regardless of whether the scammer commits it with bitcoin, ICO tokens, or spoons. There’s no need to ask if spoons themselves are a scam.

“Whether or not something is a security doesn’t change the question of are you making full and frank disclosure about what you’re selling?” Emma Channing, CEO and general counsel of the blockchain-oriented advisory firm Satis Group, told International Business Times. “Detailed, accurate disclosure is critical..I think that we will continue to see more and more federal enforcement. Not just from the SEC, but also from the Federal Trade Commission and other federal agencies.”

On Thursday, the U.S. Securities and Exchange Commission’s investment management division director, Dalia Blass, published his concerns about cryptocurrency market volatility. He listed at least 31 questions about how blockchain-based mutual funds or exchange-traded funds (ETFs) would establish relatively stable prices, plus store and safeguard assets.

“There are a number of significant investor protection issues that need to be examined before sponsors begin offering these funds to investors,” Blass wrote. The SEC wants these answers before it can consider more than a dozen newly proposed investment products related to cryptocurrencies. “Regulators are becoming more familiar with digital tokens,” Joshua Ashley Klayman, chair of the Wall Street Blockchain Alliance Legal Working Group and an attorney at Morrison & Foerster, told IBT. “I think we’re going to see more banks getting involved.”

Reuters reported the SEC denied a request last March by Cameron and Tyler Winklevoss, Mark Zuckerberg's infamous twin rivals who now own the Gemini bitcoin exchange, to list a crypto-centric ETF. Bitcoin’s current price dip may actually be a good thing for people who want to make bitcoin-based products. Surging markets make it easier for bad actors to trick buyers with tales of quick riches. Over the past few months, new bitcoin futures contracts showed how institutional players can work with bitcoin-based investment products despite volatility. Eric Ervin, co-founder of Reality Shares Inc., told Bloomberg he expects regulators to approve a bitcoin ETF by summertime if prices continue to settle.

“I really think that in 2018 we’re going to see a tremendous growth in the number of tokens that come out and say ‘I’m a security,’” Klayman said. “Just like the KODAKCoin did. I also think we will see a growing number of alternative trading systems and platforms on which tokens can be traded, which will give them greater liquidity.” She added it is highly unlikely that bitcoin itself will be deemed illegal. To the contrary, the cryptocurrency market is now more legally and technically secure than ever before.

“We also see the volatility can be quite great in certain stocks. A lot of startups, for example, fail. So their stocks might go to zero," Klayman said. "The fraud that some might use to sell a digital currency might be illegal. But you have to remember that the token is just a string of numbers on a digital, distributed ledger. That’s all bitcoin is. It’s just a string of numbers.”

The SEC teamed up with CFTC to issue a joint statement on Friday, saying: “When market participants engage in fraud under the guise of offering digital instruments – whether characterized as virtual currencies, coins, tokens, or the like – the SEC and the CFTC will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws.”

The nonprofit Coin Center in Washington D.C. praised this move. “This joint statement is important because the CFTC is the regulator with jurisdiction over digital commodities like Bitcoins and some other virtual currencies and the SEC is the regulator with jurisdiction over tokens that are securities,” executive director Jerry Brito wrote via the center’s blog. “They'll need to continue to work together to draw distinctions between those fields of our technology, and are off to an excellent start.”