Fraud cases in California highlight the need for a regulatory crackdown on crypto
The California Department of Financial Protection and Innovation (DFPI) announced last month that it had issued cease and desist orders to 11 entities for violating California’s securities laws. Some of the highlights included allegations that they offered unqualified securities as well as material misrepresentations and omissions to investors.
These breaches should remind us that while crypto is a unique and exciting industry for the general public, it is still an area full of potential for bad players and fraud. To date, government crypto regulation has been minimal at best, with a distinct lack of action. Whether you’re a full-time professional investor or just a casual fan looking to get involved, you need to be absolutely sure what you’re getting into before getting involved in a crypto opportunity.
California has been toying with setting up a crypto-specific business registration process for those looking to do business in the state. The proposed framework was vetoed by Governor Gavin Newsom as the resources required to establish and enforce such a framework would be prohibitive for the state. Although this type of compliance infrastructure has not been adopted yet, it points to concerns that regulatory authorities have regarding the crypto industry.
There seems to be a pattern that new industries, especially those that receive as much international attention as crypto, are particularly vulnerable to fraud. One only has to go back as far as the legalization of cannabis to find the last time California had to deal with fraudulent schemes on this scale.
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It seems inevitable that California, known for being a first mover in regulation and compliance, will create some form of crypto-specific compliance infrastructure in the name of consumer protection. If history is any indication, once California drops the framework, other states will follow suit.
Federal and state representatives have attempted to draft bills to establish financial standards for crypto with little success to date. At the federal level, Senators Cory Booker, John Thune, Debbie Stabenow and John Boozman sponsored a bill to authorize the Commodities Futures Trading Commission (CFTC) to act as the regulatory body for crypto, while Senators Kirsten Gillibrand and Cynthia Lummis co-sponsored a bill to establish clearer guidance on digital assets and virtual currencies. Lawmakers have even turned to tech luminaries like Mark Zuckerberg to weigh in on crypto fraud.
None of these or other similarly crypto-focused bills are expected to pass in 2022, but this level of bipartisan cooperation has been unprecedented in recent times. The cooperation should reflect only the extent of the need for a regulatory framework. Put another way, Democrats and Republicans talking to each other about anything should stop the press, but the fact that they are co-sponsoring several bills should tell us that there is a monumental need for guidance.
How should one approach investing in the crypto space if the authorities are not going to establish controls for crypto? There are some general points that one should consider if presented with a crypto investment opportunity.
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When considering an opportunity, do your due diligence! Don’t take someone’s word for it without some level of material backing. If crypto is not an area of expertise, contact professionals who have qualified experience. Be sure to use crypto monitoring and blockchain analysis tools, if possible, as part of the vetting process.
A common strategy for scammers is to put undue pressure or artificial timelines on a potential closing. Slow down the process and take all the time necessary to make an investment decision.
If it sounds too good to be true, it probably is. As overplayed as the cliché may be, it brings up a valid point. There have been cases of schemes offering to pay initial and ongoing dividends for all new investors brought in and for additional dividends to be paid from investors that the new investors bring in. If this sounds like a pyramid or multi-level marketing scheme, that’s because it is. Terms like “No risk investment” are also thrown around. Ultimately, if no one knows where the opportunity is coming from, watch out.
While crypto can be a fun and electrifying topic with many legitimate opportunities, there are bad players who will take advantage of the lack of government oversight and the excitement of over-enthusiastic or under-educated investors.
Zach Gordon is a Certified Public Accountant (CPA) and Vice President of Crypto Accounting for Propeller Industries, serving as CFO and advisor to a portfolio of crypto and Web3 clients. He has been named a Forty Under 40 CPA, sits on the Digital Assets Committee of the NYSSCPA and has worked with crypto clients in a variety of capacities since 2016.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
