This article is a compilation of Liang Wenhui and Chen Nanxi, members of the Block Science and Technology Research Award Program project team. This series will continue to launch a series of articles.
Investor Warning: Beware of Digital Asset Fraud and "Encrypted" Trading Websites
The Office of the Investor Education and Publicity of the US Securities and Exchange Commission (OIEA) and the Customer Education and Outreach Office (CFTC) of the Commodity Futures Trading Commission warned investors to scrutinize investments in websites that claim to operate digital currency-related consulting and trading businesses. opportunity. These sites often contain fraudulent “danger signals”, including high returns and risk-free commitments.
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SEC and CFTC staff have recently observed fraudulent scams where fraudsters use digital assets and cryptocurrency information trading as a cover. In some cases, the fraudster claims to invest the client's funds in a proprietary encrypted trading system or digital currency pool. The fraudster promises a high return (eg 20-50%) and gives a low risk or no risk guarantee.
After an investor makes an investment, a digital asset such as Bitcoin is usually used, and the fraudster will completely stop communicating with the investor under certain circumstances. These fraudsters can quickly remit funds overseas, and customers have little chance to get them back. Sometimes, the fraudster also instructs the investor to pay an additional fee (such as the so-called tax) to withdraw the false "profit" obtained from the investment. This is a classic example of a prepaid fraud scam that requires investors to pay false fees before receiving investment income, cash, stocks or warrants.
On April 24, 2019, the Oregon State Attorney's Office announced the prosecution of two Nigerian citizens, Onwuemerie Ogor Gift (aka Onwuemerie Ogor) and Kelvin Usifoh, for a conspiracy to defraud, eleven wire fraud offences, and one Conspiring to launder money. The indictment accuses the defendant of participating in the fraud scheme. They raise bitcoin investments through certain websites. These websites promise investors a 20-50% return on investment and enjoy “zero risk” and immediate withdrawals. The indictment further alleges that although an investor filed a claim on the website, the defendant allowed the victim to deposit more bitcoin to obtain investment income and never returned any funds to the victim. The indictment clearly states that the defendant is affiliated with three websites: wealthcurrency.com, boomcurrency.com and merrycurrency.com.
We urge investors to pay attention to the following warning signs of investment fraud:
"Promised" high return on investment . All investments are risky and investors should question any so-called promised gains. Be wary of anyone who promises a high return on investment, especially if there is little or no risk. Statements such as “no risk”, “zero risk”, “absolute safety” and “guaranteed profit” are all signs of fraud.
Complex terminology and incomprehensible language . Fraudsters often use sophisticated new technologies to implement investment plans. They can claim that their technology is highly confidential. Investors should always suspect an incomprehensible investment with an excess return promise. Sometimes, the language used by fraudsters, including spelling, grammar, and typographical errors, can confuse the description—a dangerous sign that warns that “investment” is a scam.
Unlicensed seller . Many investment frauds involve unauthorized individuals or unregistered companies. You can check the license and registration status by logging into Investor.gov.
Unbelievably perfect . If the investment sounds too good to be true, then it may not be true. Keep in mind that investing in high returns usually involves more risk.
Unsolicited proactive marketing . Unsolicited marketing can be part of a fraudulent investment plan. Be extra careful if the investor receives unsolicited communications about investment opportunities – communications that are not required and who do not know who the sender is. Fraudsters may use fake names and misleading photos, and even if they operate abroad, they can provide a US phone number.
The pressure must be purchased quickly . Fraudsters may try to create a false sense of urgency to attract investment. Take the time to research these investment opportunities before handing over your money. Before making any investment, investors should carefully read the materials provided by the other party and verify the authenticity of each statement about the investment. For more information on how to research investments, read OIEA's published Ask Questions. Investors need to investigate the individuals and companies that provide the investment and view their background on Investor.gov and contact the state's securities regulator. In addition, investors can view the history of CFTC's enforcement discipline online and access the Red Directory, which contains entities that have been identified as requiring registration, but they are not properly registered in the CFTC. Investors can also use SALI to find information about the SEC who has already made a judgment or issued a ruling in a lawsuit.
If an investor has invested in a possible fraudulent product or is required to pay additional funds to benefit from the investment, it needs to report to the SEC or CFTC in a timely manner.
CFTC and SEC issue investor warning: be wary of websites related to digital assets
The Office of the Commodity Futures Trading Commission (CFTC)'s Office of External Affairs (OEA) and the Securities and Exchange Commission (SEC)'s Office of Investor Education and Promotion (OIEA) jointly issued an investor warning warning: focus on digital assets with fraudulent attributes and The "Cryptographic Currency" trading website, this warning reminds investors to carefully study which business and digital asset business consulting and trading websites, and make the best adjustments before investing. These sites often contain "danger signals" that hide fraud, including promises of high returns and no risk.
The CFTC and SEC staff have recently focused on investment scams in which fraudsters use digital assets or "cryptocurrency" advisory services and transactions as a guise to attract investors. In some cases, the fraudster lied about investing the client's funds in the fraudster's own encrypted trading system or investing in the mining pool, and the fraudster promised a high guaranteed return with minimal or even close to zero (eg 20-50%) ).
After the investor completes the investment, the fraudster will quickly lose contact and the investor will not be able to contact them (mostly using investments like bitcoin). These fraudsters can quickly remit investors' funds overseas, meaning that investors have little chance of getting back. Sometimes fraudsters lead investors to pay extra fees (such as so-called transaction taxes) as a necessary step in extracting dividends, usually from fictional "profits." This is a typical prepaid fraud that requires investors to pay fictitious fee names before receiving proceeds, withdrawals, stocks or warrants.
Early warning signal that is strongly associated with investment fraud
The SEC and the CFTC jointly urge investors to pay close attention to all these early warning signs of investment fraud:
1. Guarantee "high return on investment"
All investments are risky and investors should question any so-called “committed returns”. Be wary of any individual who promises to provide a high return on investment, especially if the risk is minimal or even no risk. Therefore, pay close attention to signs such as “no risk”, “zero risk”, “absolute capital preservation” and “guaranteed income”.
2, complex terminology and obscure wording
Fraudsters use criminal methods to emphasize the use of complex and high-tech to implement investment plans. And they advertise their technology is highly confidential. Therefore, investors should always be suspicious of investments that are unconventional and promise to exceed returns. Sometimes scams can be implemented by wording, such as spelling, grammar, and typographical errors that can be confusing.
3. Practitioners without a business license
Many investment frauds involve individuals who are not licensed to do business or unregistered companies. Please check the license and registration status of these practitioners (Investor.gov) on the official channel of the SEC.
4, the sky will not fall off the pie
If the investment plan sounds very good and unbelievable, it is likely to be a trap. So please keep in mind that risk and return should be proportional.
Regulatory Guidelines: Ways to Prevent and Learn from Identifying Investment Fraud
More information can be obtained by:
1. Investor Education Sector
Investors are invited to visit CFTC's dedicated investor education website (CFTC.gov/bitcoin) to learn about bitcoin and virtual currency, including podcasts, brochures and CFTC's special interpretations for investors (not legally binding):
1) How much is the risk of virtual currency trading?
2) Buy your digital currency or tokens carefully
3) Beware of the price collapse of the dealer after using the false news to pull the cash
4) The National Tax Administration (IRS) approved that no virtual currency was included in the Individual Retirement Account (IRA) program
2, RED List
Traders are invited to browse the RED List to learn about offshore entities that are not registered with the CFTC but are clearly required to register for legal operation.
3. Telephone/mail route
Call CFTC at 1-866-366-2382 if necessary; or submit an opinion using the online form (https://forms.cftc.gov/Forms/TipsAndComplaints.aspx) or send an email to email@example.com
4, news mail
Subscribe to the official newsletter to receive updates from CFTC on digital currency investments. (https://service.govdelivery.com/accounts/USCFTC/subscriber/new)
5. Official social media
Follow CFTC's official Twitter account (Twitter @CFTC) and CFTC's Facebook updates. (https://www.facebook.com/cftcgov/)
Encrypted currency fraud losses and solutions
The emergence of new technologies is often accompanied by unpredictable risks. Due to the anonymity and concealment of cryptocurrencies, criminal acts such as fraud are always present. The US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) issued a warning to investors in April 2019, prompting investors to be wary of those claims to be related to cryptocurrency transactions, and promise to get a good return with very low risk. Investment opportunities. The warning listed a total of six "danger signals", warning investors not to believe in excess returns and risk-free guarantees, carefully read the terms of the transaction and check the other party's qualifications before the transaction to identify investment fraud and prepaid fraud.
According to blockchain analysis company Cipher Trace's latest research, in the first quarter of 2019, cryptocurrency hackers and fraud caused losses of up to $1.2 billion, including $195 million for the Canadian exchange's Quadriga CX and more than $850 million for the Bitfinex exchange. loss. Cipher Trace said in his "First Quarter of 2019 Cryptographic Money Anti-Money Laundering Report" that the loss in the first quarter of 2019 is expected to exceed 70% of the total loss of $1.7 billion in 2018. These represent only visible losses, and the actual amount of loss may be much higher.
Cipher Trace research shows that the lack of clear regulation is the main reason for the increase in the number of hacking and fraud cases. Combating cryptocurrency crimes is a global and comprehensive problem. Strengthening investor education is a necessary means to prevent fraud, but legislative supervision and multi-party efforts to eliminate illegal activities are the fundamental solution.
Regulators around the world continue to act: In March 2019, the US House of Representatives voted to pass the FinCEN Improvement Act of 2019, which states that government agencies will Working together to use federal resources to track currency flows, including cryptocurrencies; in April 2019, the European Union launched the International Trusted Blockchain Application Association (INATBA) in Brussels, Belgium, with more than 100 members signing new The blockchain alliance charter, which includes global giants IBM, Accenture and Deutsche Telekom, and blockchain companies Ripple, Iota and ConsenSys, will establish and control a decentralized technology by establishing a dedicated framework. As Cipher Trace mentioned in the report, "new global anti-money laundering (AML) and anti-terrorism financing (CTF) regulations will sweep the encryption field next year", I believe that the future cryptocurrency field will have higher transparency and security.
Practice of US regulatory regulations in preventing cryptocurrency fraud
The practice of US regulators in preventing investment fraud can be traced back to 1940. The Investment Company Act stipulates that issuers are obliged not to use “significantly deceptive or misleading” names, and therefore through public law. The mandatory provisions impose binding requirements on the names involved in the investment. Then in 2001, the SEC further clarified the “significant deceptive or misleading name” through the Investment Company Names, requiring companies to ensure that at least 80% of their assets met the descriptions in their names.
Based on the provisions and spirit of the Investment Company Act and the Names Rules, the SEC in April 2019, in its review of digital currency ETFs, required Amplify and Reality stock exchanges to trade index funds (ETFs) to “blocks”. The term “chain” is removed from its name in order to eliminate the misuse of investors by misusing words such as “blockchain”. Other practices of the SEC in alerting investors to fraud prevention include the release of Investor Alerts: Celebrity Endorsements in November 2017, alerting investors to the potential fraud risks of celebrity endorsements for token investment projects.
The investor warning issued by the SEC and CFTC jointly gave a very detailed guide, providing a variety of effective ways for ordinary investors to identify investment fraud.
(1) Ask the right question
Asking the most correct questions can filter out fraudulent projects early in the investment process, and the problem should cover at least three core aspects (https://www.investor.gov/sites/investorgov/files/2019-02/AskQuestions_brochure_508_9-20.pdf ):
1) Product compliance and rates
2) Issuer of investment products
3) Investment income and settlement rules
(2) Viewing the investment company license and the management's personal bad record
To further confirm the reliability of the investment, the legality of the company and management individuals can be verified through three official channels:
1) CFTC: Sanction History Database
In the financial derivatives business such as futures commodities, the CFCCP “Sanction History Database” can be used to check whether the institution or individual is within the sanctions list and whether there are unfulfilled bad records such as the failure to pay the loss compensation. (https://www.cftc.gov/ConsumerProtection/DisciplinaryHistory/index.htm)
2) RED: List of unregistered overseas institutions
If it involves overseas entities providing commodity futures and foreign exchange in the United States, the registration should be verified. The background check can be completed through RED. RED is a list of overseas companies announced by the CFTC that do not meet the CFTC registration requirements. (Registration Deficient LIST, RED : https://smartcheck.gov/redlist)
3) SEC: List of defendants
In the securities business, the SEC provided a “list of defendants” for individuals indicted, including the defendants listed in federal court litigation and administrative litigation. (SEC Action Lookup – Individuals: https://www.sec.gov/litigations/sec-action-look-up)
(3) Consulting the securities regulatory authorities of each state
If public information does not provide sufficient basis for judgment, consulting the securities regulatory authorities of each state is the most efficient way. ( http://www.nasaa.org/about-us/contact-us/contact-your-regulator/).
The key to preventing fraud is to reduce the asymmetry of information and invest more educational resources for investors, to regulate the credibility of information, expand the scope of information disclosure, lower the threshold for access to trusted information, and increase official information through legislation. The access method can effectively prevent fraud.
Article transferred from the public number: block technology research and supervision
Compilation: Member of the Block Technology Research Awards Project Team Liang Wenhui Chen Nanxi
Original from: SEC and CFTC official website