Thinking of Investing in Cryptocurrency?

A cryptocurrency or crypto is a digital asset that is secured by cryptography. It is designed to work as a medium of exchange where individual coin ownership records are stored in a ledger in a form of a database. It allows for online payments that are denominated in terms of virtual "tokens".

The first cryptocurrency was Bitcoin and it was soon followed by several competing ones such as Litecoin, Peercoin, Namecoin, Ethereum, Cardano, and EOS. The current value of all the existing cryptocurrencies is estimated at around $214 billion. The exchange rate between cryptocurrency and fiat money fluctuates widely because the market prices for cryptocurrencies are determined by supply and demand.

The legal status of cryptocurrencies is still a matter of debate among regulators and lawmakers. Although using crypto as a legal tender is allowed in some countries, it is restricted or even banned elsewhere. The main concern behind the restrictions on the use and trade of cryptocurrency is the lack of central control, which has led several regulators to issue warnings.

Demetri Benzaintes, junior associate, commented “as the popularity of and demand for online currencies has increased, so have concerns that such an unregulated person to person global economy may become a threat.” He further warns “the semi-anonymous nature of cryptocurrency transactions makes them well-suited for a host of illegal activities. Cryptocurrency networks display a lack of regulation that has been criticised as enabling criminals who seek to evade taxation and anti-money laundering regulations.”

Transactions that occur through the use and exchange of cryptocurrencies are independent of the formal banking systems and therefore can make tax evasion simpler for individuals. At the same time, the partial anonymity of cryptocurrency transactions is often used in relation to fraudulent scams.

One relatively new scam consists of fraudsters setting up fake trading websites that do not provide genuine trading facilities. First, clients are encouraged to set up a trading account. Then, they are encouraged by the scammers to ‘invest’ using cryptocurrency and they are shown high profits supposedly generated by these fake trades. When the client wants to make a withdrawal of their significant profits, they are directed to a seemingly genuine ‘bank’ to set up an account. That ‘bank’ is actually fake and forms part of the overall scam. Further payments are requested to encourage the client that the withdrawal will be processed. When the ‘bank’ transfer fails, an alternative method of payment is suggested using another fake website for a courier company, but this also requires further payments to release the funds. Finally, when the transfer is again held up, clients are told they require to obtain an international trading certificate, which they also have to pay for. There are many more steps in place for as long as the victims continue to make further payments to the fraudsters.

These types of criminal scams are becoming increasingly common and the use of social media platforms appears to give the scammers some form of credence to the claims of quick profits.

While traditional financial products have strong consumer protections in place and are overseen by regulators such as the Financial Conduct Authority (FCA). There is no regulatory intermediary with the power to limit consumer losses if cryptocurrencies are lost or stolen. One of the features that cryptocurrency lacks in comparison to credit cards, for example, is consumer protection against fraud, such as the chargeback facility. There is no guarantee that cryptoassets can be converted back into cash, which leaves consumers at the mercy of supply and demand in the market.

According to the FCA, consumers should be prepared to lose all their money if they invest with brokers promising high returns from cryptocurrency trading. Investors should understand the financial risks involved, as cryptocurrency investments are unlikely to be covered by the Financial Services Compensation Scheme, which would cover losses of up to £85,000. Defrauded investors cannot rely on the Financial Ombudsman Service either.

One of the major issues with cryptocurrency scams is identifying the true beneficiary of the money that has been paid. In modern cryptocurrency systems, a user's “wallet”, or account address, has a public key, while the private key is known only to the owner and is used to sign transactions. Fund transfers are completed with minimal processing fees, allowing users to avoid the fees charged by banks for wire transfers. Although crypto wallets are not completely anonymous, tracing the true recipient is difficult. Criminals can use services which hide their IP addresses to prevent their browsing history from being traced and use multiple wallets.

Even though cryptocurrency has an air of secrecy, every transaction is publicly available and can potentially be linked to a specific exchange. A Norwich Pharmacal Order (“NPO”) could also provide a means of discovering the identity of the wrongdoer by forcing intermediaries to disclose the private details of their customers. If the cryptocurrency exchange is regulated, a Bankers Trust Order could also be a useful tool for defrauded investors in their attempt to trace their lost funds.

The experienced lawyers in Giambrone’s financial and banking litigation team believe that a robust approach and a concerted effort to clarify the “grey” areas and close the loopholes that exist with regards to cryptocurrencies, together will a high-level campaign to inform and warn potential investors on how to recognise and avoid scams would assist in the fight to prevent cryptocurrency scams.

Our lawyers strongly advise anyone contacted “out-of-the-blue” and offered a high return investment opportunity on cryptocurrency or who sees an advert on social media offering a similar opportunity should think very carefully before getting involved. Giambrone’s lawyers are highly knowledgeable in dealing with financial fraud and can provide advice if you suspect that you have been scammed or you broker is evasive when you attempt to withdraw your funds.

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