Digital Assets and Options for Blowing the Whistle on Crypto Investment Scams

Many cryptocurrency frauds are masqueraded as legitimate investment opportunities. Crypto fraudsters lure investors with the impossible promise of high return and low risk. If investors or those within crypto exchanges identify red flags emblematic of a fraud scheme, they can hold crypto companies accountable by blowing the whistle – and receive high financial rewards in the process of doing so.

The SEC has previously stated that “Digital assets” include cryptocurrencies, coins, and tokens. Investors purchase digital assets through an exchange. A popular example of a digital asset would be Bitcoin or Ethereum. Non-fungible tokens (NFT) are also a security and digital asset. (see Friel v. Dapper Labs, Inc. et al)

Often, crypto schemes mirror traditional securities fraud – just in a digital space with digital currency. Fraudsters lure investors with the impossible promise of high return and low risk investments. The recent rise in celebrity endorsements of crypto has only made investors more susceptible to falling into fraudulent crypto schemes, despite SEC warnings that celebrity testimony is not a valid grounds for determining whether a cryptocurrency is trustworthy.

Crypto tokens and exchanges are characterized distinctly by different government agencies. They are defined as a security by the Securities and Exchange Commission (“SEC”), as a commodity or currency exchange by the Commodity Futures Trading Commission (“CFTC”), and as a money services business by the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the Treasury. These three agencies have overlapping jurisdiction over crypto-crimes, meaning that whistleblowers with information about crypto-fraud have three potential avenues for reporting.

SEC Whistleblower Reward Program

Under the Dodd-Frank Act, the SEC Office of the Whistleblower administers rewards to whistleblowers who report fraud confidentially to the agency. The purpose of this office and program is to minimize harm to investors, preserve the integrity of US capital markets, and hold accountable those responsible for unlawful conduct under securities law.

Those who voluntarily come forward with original information that leads to an SEC enforcement action with sanctions over $1 million are eligible for awards of 10-30% of those sanctions.

The SEC has asserted jurisdiction over multiple cases of crypo-fraud. In one of the largest SEC crypto cases, the commission charged Samuel Bankman-Fried of FTX fame for fraud. Bankman-Fried had collected $1.8 billion from investors, including approximately $1.1 billion from U.S.-based investors. Many investors’ money was diverted to other accounts where it was spent on lavish houses, undisclosed venture investments, and massive political donations.

In another case, the SEC fined BlockFi Lending $50 million for misrepresenting the risk of their cryptocurrency investment program as well as being unregistered with the commission and offering and selling securities.

CFTC Whistleblower Program

CFTC whistleblowers are likewise entitled to an award when they voluntarily provide original information that leads to a successful enforcement action resulting in monetary sanctions exceeding $1 million. They are rewarded 10-30% of the funds collected by the government in the action.

In a 2021 case, the CFTC fined Tether and Bitfinex approximately $42.5 million for making false and misleading statements about the nature and stability of the currency itself as well as the audit procedures involved.

FinCEN Whistleblower Rewards

Under the Financial Crimes Enforcement Network (FinCEN) Whistleblower Program, individuals who provide original, timely, and credible information about violations of the Bank Secrecy Act (BSA) or other FinCEN regulations may be eligible for a reward. To receive an award, the sanctions must be over $1 million, and awards can be up to 30 percent of the money collected.

When fraud goes unreported, investors lose. Investors already risk losing tremendous amounts of money when they invest at high risk. That risk of loss is compounded when there is fraud involved. In order to protect yourself and many others, it is always important to report any fraudulent activity when it is discovered.