The SEC’s crackdown on fraudulent crypto activity

Now that we are well and truly into the January blues and the Christmas break seems like it never even happened, it’s essential to focus on regulatory objectives that were in place before the break. This includes the ongoing efforts to regulate the cryptocurrency industry worldwide.

With the crypto market still recovering from significant crashes in 2022, regulators are taking a much closer look at the industry. The likes of FTX and BlockFi have raised concerns and sparked a renewed interest in their efforts to regulate the industry. As a result, regulators may be more cautious in their approach.

We are over halfway into January 2023 and the U.S. Securities and Exchange Commission (SEC) has already taken steps to promote transparency in the crypto industry and eliminate fraudulent activity. The SEC has charged Gemini, Genesis and CoinDeal for crypto wrongdoings, highlighting the SEC’s active efforts in flushing out bad crypto actors.

SEC charges Gemini and Genesis for the sale of unregistered crypto securities

On 12 January 2023, the SEC penalised Genesis Global Capital and Gemini Trust Company LLC for the unregistered offer and sale of securities to retail investors through the Gemini Earn crypto asset lending programme.

The SEC Chair, Gary Gensler, stated that Genesis and Gemini “offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors.”

The charges against Genesis and Gemini emphasise that crypto lending platforms must “comply with our time-tested securities laws,” in order to “protect investors,” and promote “trust in markets.” Gensler adds that this is “not optional. It’s the law.”

Key takeaways

• Genesis and Gemini fraudulently acquired billions of dollars worth of crypto assets.

• In December 2020, Genesis and Gemini teamed up to offer Gemini customers the chance to loan their crypto assets to Genesis in exchange for interest payments.

• In February 2021, they offered the Gemini Earn programme to retail investors. Gemini acted as the agent for the transaction and took a fee from the returns paid to investors.

• In November 2022, following the crypto market volatility, Genesis announced that it could not allow its investors to withdraw their crypto assets as it did not have enough liquid assets to meet withdrawal requests.

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement said that “the recent collapse of crypto asset lending programs and the suspension of Genesis’ program underscore the critical need for platforms offering securities to retail investors to comply with the federal securities laws.”

“As we’ve seen time and again, the failure to do so denies investors the basic information they need to make informed investment decisions. Our investigations in this space are very much active and ongoing and we encourage anyone with information about this matter or other possible securities law violations to come forward, including under our Whistleblower Program if applicable.”

The enforcement actions emphasise the SEC’s endeavours in combating financial crime and promoting a transparent and accountable financial services industry. 

SEC charges CoinDeal for crypto scheme and $45 million fraud

On 4 January 2023, the SEC charged the creator of the CoinDeal Crypto Scheme and several individuals in connection with a fraudulent crypto scheme called CoinDeal.

The scheme raised more than $45 million from the sale of unregistered securities to thousands of investors across the globe. CoinDeal falsely claimed that investors could generate substantial returns by investing in a blockchain technology, CoinDeal, which would be sold for trillions of dollars to wealthy buyers.

Key takeaways

• According to the SEC’s complaint, there was no sale of CoinDeal and there were no distributions were made to CoinDeal investors.

• The defendants allegedly misappropriated millions of dollars of investor funds for personal use. The SEC seeks disgorgement plus pre-judgment interest, penalties, and permanent injunctions against all defendants.

• The SEC charged Neil Chandran, Garry Davidson, Michael Glaspie, Amy Mossel, Linda Knott, AEO Publishing Inc, Banner Co-Op, Inc, and BannersGo, LLC for their involvement in the fraudulent investment scheme.

• In June 2022, the U.S. Department of Justice prosecuted Chandran who used the investor funds to purchase cars, real estate, and a boat. Chandran was penalised for wire fraud and monetary transactions in unlawful proceeds for CoinDeal.

• The other individuals were charged with violating the antifraud and registration provisions of the Securities Act and Exchange Act and aiding and abetting.

“We allege the defendants falsely claimed access to valuable blockchain technology and that the imminent sale of the technology would generate investment returns of more than 500,000 times for investors,” said Daniel Gregus, Director of the SEC’s Chicago Regional Office.

“As alleged in our complaint, in reality, this was all just an elaborate scheme where the defendants enriched themselves while defrauding tens of thousands of retail investors.”

Whilst the crypto world is still in its early stages of regulatory development, the SEC’s enforcement actions demonstrate that regulators are taking the necessary steps to protect investors and ensure compliance in the space.

As the market matures, we can expect more enforcements and regulations to ensure transparency, accountability and protection of consumers and investors.

How RegTech can pave the way for a safer crypto world?

Regulatory technology can play a crucial role in preventing crypto crimes such as fraud and ensuring compliance.

As more regulators follow in the footsteps of the EU’s MiCA, there could be a plethora of regulations on the way. Crypto providers and blockchain platforms will need to get prepared to implement new regulations within their policies.

Instead of searching for relevant regulations manually, regulatory technology uses AI and machine learning to flag the regulations that matter most to your firm. What’s more, RegTech can automate the entire end-end compliance process, including monitoring and reporting. To ensure that your firm overcomes the repercussions of compliance gaps, having an accurate trail of reports can help to meet regulator needs.

As more nations take on crypto, the industry will likely leverage RegTech capabilities to improve overall compliance and provide secure transactions that can detect fraud easier.

CUBE comment

The two enforcement actions demonstrate that the crypto market is exploiting investors for personal gain and acts as a veil for crime. It underlines the need for adequate oversight and proper registration of securities to prevent further investors from falling into the same crypto scams.

It is going to be difficult to govern a currency that has evaded the law for so long. However, through the development of clear and comprehensive regulations that can be applied globally, perhaps a crypto haven can be formed. This includes rules for the registration and licensing of crypto, trading, and prevention of money laundering, terrorist financing, fraud, and other crimes.

Governments should work with regulatory bodies from other countries to develop a common set of regulations and standards for the crypto market. With a common understanding, financial stability could be achieved.

And with this, we can achieve a regulated crypto world that ensures reduced illicit activities, consumer and investor protection and increased economic growth.

Keep ahead of emerging regulations by speaking to CUBE.