Investors Should Beware Of Potential Cryptocurrency Investment Rip-Offs


Bitcoin has reached the mania stage, starting 2017 trading at $1,000 before almost hitting $20,000 last month and then falling to $10,000 on Tuesday.

The skyrocketing price of bitcoin and other cryptocurrencies has attracted scads of speculators looking to make a quick buck, setting off alarm bells for securities regulators.

The Securities and Exchange Commission, which we believe has been going easy on corporate America and Wall Street under the current administration, has been surprisingly tough on cryptocurrencies.

The Commission kicked off the year by warning investors that they should “exercise caution” with cryptocurrencies like bitcoin, noting that state and federal regulators may not be able to recoup any lost investments from illegal actors.

Last month, the SEC halted an Initial Coin Offering, or ICO, of an online food review company – Munchee – for failure to register as a security offering with the SEC.  The registration requirements provide investor protection with disclosure and financial information about the company and its principals.

“The SEC shut down plans by a startup food review site to raise money by selling digital tokens,” according to CNN Money. “The startup planned what’s known as an initial coin offering, an arrangement that is drawing increased scrutiny from the feds. Based in San Francisco, Munchee was trying to raise $15 million to improve its app, but the SEC said that would have been similar to issuing securities without properly registering with regulators.”

Meanwhile, the Commodities Futures Trading Commission, another federal agency and the regulator for high risk derivatives, is looking to regulate bitcoin and other cryptocurrencies as commodities.

“Bitcoin is going mainstream via the futures market, and the U.S. regulator that allowed it to happen has a message: buyer beware,” according to an article last month on Bloomberg News. “The U.S. CFTC issued a statement in December detailing “the risks of virtual currency trading” and urged investors to educate themselves before buying into an asset class that has surged more than 1,700 percent this year.”

And FINRA, the first responder for investor fraud, warned investors last month about stock manipulation and investment fraud in connection with companies associated with cryptocurrencies such as bitcoin.

“Unrealistic predictions of exponential returns and unsubstantiated claims made through press releases, spam email, telemarketing calls, or posted online or in social media … may be signs of a classic ‘pump and dump’ fraud,” FINRA said, noting that people touting such deals are typically unlicensed.

FINRA is concerned that retail Mom and Pop investors could be investing in pump and dump schemes and need to do their due diligence before investing. State securities regulators have also expressed their concern.  The Massachusetts Securities Commissioner is warning investors about speculative and fraudulent cryptocurrency investments.  The Alabama Securities Commissioner is concerned that investors are “betting the farm” and taking out mortgages on their homes, tapping home equity lines and using credit cards to jump into the bitcoin mania.

Investors need to catch their breath and make sure that they are doing their homework prior to making any cryptocurrency investments.

The cryptocurrency space may offer potentially lucrative opportunities for investors willing to take the risk. But Mom and Pop investors should tread very carefully. Unfortunately, cryptocurrency mania is another opportunity for investment fraud and investors to lose their shirts.

Zamansky LLC is a New York law firm which represents investors in court and arbitration cases against securities brokerage firms and issuers.  The firm may represent investors in cases against companies mentioned in this blog.  Zamansky LLC also represents investors in arbitration cases against UBS and other brokerage firms regarding Puerto Rico bonds and UBS closed end bond funds and other investments.