Legal Review: Cryptocurrency is the New Front in the Fight Against Fraud

By Washington, D.C. criminal defense attorney Shawn Sukumar with Price Benowitz, LLP.

Anyone that has turned on the nightly news in the last year has likely heard the word “Bitcoin,” and probably in the context of the incredible increase in value it was experiencing. For many individuals, this may have been the first they had heard of cryptocurrency. It is unlikely to be the last.

Cryptocurrency is the term used to describe any form of currency that only exists in digital form, and that uses algorithms to generate units of the currency and encryption to track and document transactions conducted using the currency.

It is not issued by any government or central bank, meaning that its value is most analogous to equities like stock in a corporation. The value of a unit of cryptocurrency is, generally speaking, based on what a buyer is willing to pay for one unit, much like a share of stock.

Currencies issued by central banks or governments have a set value and that value is backed by the government. This is what is known as “fiat currency”.

“The concepts underlying what constitutes a security, a public offering, a trading platform, and myriad other securities concepts are complex and very often fact specific,” said Shawn Sukumar, a D.C. fraud lawyer with the law firm of Price Benowitz, LLP, in Washington, D.C. “Generally, due to the manner in which cryptocurrency is traded however, it falls under the purview of the Securities and Exchange Commission (SEC) in the United States.”

The SEC has several mandates, including investor protection and oversight of the numerous security and commodity markets operating in the United States. Fulfilling these mandates requires the SEC to take steps to evaluate new and developing markets, and to try and intervene when securities or markets or the actors in those areas act in a manner contrary to the public interest.

Bitcoin’s meteoric rise led to a rush to create the next big cryptocurrency, and like all situations where investors are ready to hand over money to be part of the next boom, opportunities arise for criminals to attempt to defraud unsuspecting individuals.

The SEC has recognized this possibility and has taken steps to inform consumers about the possibility of fraud. Specifically, the purely digital nature of the cryptocurrency coupled with the fact that it is generated through an algorithm makes validation of new or emerging cryptocurrencies incredibly difficult.

Bad actors, however, have an uncanny ability to create a website and an app and then push valueless or even nonexistent cryptocurrency on naïve consumers, and then disappear after they receive funds but before they can be identified.

The SEC encourages investors to ask questions of themselves, the platform and the investment itself prior to beginning, including encouraging investors to see if the platform in question is registered with the SEC, whether the platform holds user assets, what sort of protections are provided for user information as well as any assets the platform may hold, and how prices are set on the platform, among other questions.

Investors that take the time to research prior to investment will undoubtedly save themselves the stress of uncertainty at a later date, even if they are unable to save themselves the stress of a fluctuating investment.