Enforcement Report: Widespread Fraud Found in Cryptocurrency Offerings

Apr 10

The Enforcement Division of the Texas State Securities Board found widespread fraud in cryptocurrency offerings during a four-week investigation of investment offerings that were tied to virtual currencies.

The full results are in the 14-page report Enforcement Report: Widespread Fraud Found in Cryptocurrency Offerings.

Starting Dec. 18, 2017, Enforcement staff began reviewing investment offerings by promoters who appeared to be illegally and fraudulently using online advertisements, social media, and other public solicitations to attract Texas investors.

Attorneys and investigators opened 32 investigations over a four-week period starting Dec. 18, 2017. Among the findings:

• No promoters were registered to sell securities in Texas, a violation of the Texas Securities Act;

• 30 promoters were broadly using websites, social media, and online advertising to market to Texans;

• Seven promoters were offering securities tied to a new cryptocurrency;

• At least five promoters all but ignored investing risks by guaranteeing returns, some as high as 40% per month;

• Only 11 promoters provided potential investors with a physical address, leaving investors with little recourse if they lost their money; and

• Six of the offerings involved payment of a commission to investors who recruited new investors into the scheme.

The investigations resulted in the Securities Commissioner taking seven actions against illegal or fraudulent cryptocurrency promoters.

Texas was the first state securities regulator to enter an order against a cryptocurrency firm and has entered the most orders of any state regulator.

Enforcement staff is continuing to investigate offerings uncovered during the sweep and has to date opened approximately 60 investigative files related to investment programs involving cryptocurrencies.

It is important to note that the State Securities Board is not regulating the cryptocurrencies themselves, only the offerings that claim to use virtual currencies in an investment program.

Certain actions effectively stopped the offering of fraudulent investments to Texans. Shortly after the Securities Commissioner entered an Emergency Cease and Desist Order against BitConnect, the value of the company’s own cryptocurrency, called BitConnect Coin, fell from $2.6 billion to nearly zero.

“The investigations show significant risks in investing in securities that supposedly use cryptocurrencies to enrich investors,” Securities Commissioner Travis J. Iles said.

“There is a lot of hype surrounding cryptocurrencies, but the companies offering investments are often not disclosing all the information investors need to make an informed decision,"he said. "Investors risk giving their hard-earned money to anonymous promoters hiding behind websites who have no intention of making good on their promises.”

On Dec. 16, shortly before the Enforcement Division started its regulatory sweep, the price of Bitcoin reached $19,343, the high for 2017 and a 231% increase from Nov. 12.

As the price of Bitcoin and major cryptocurrencies spiked, promoters of cryptocurrency investments ramped up their marketing to Texans.

In fact, 19 of the 32 investigations involved companies that claimed they would use Bitcoin to make money by trading it or using it to invest in other businesses.

Bitcoin is widely considered the first modern cryptocurrency and the most valuable cryptocurrency by market capitalization. It’s also the one that garners the most headlines and is the most familiar to investors.

New cryptocurrencies were also offered for sale to investors.

R2B Coin, for example, claimed its newly created currency, r2b coin, would be traded on international exchanges and, despite the volatility inherent in trading, would never decrease in value.

R2B Coin, which is purportedly based in Hong Kong, was offering the investment through a corporation it claimed was a “licensed global firm” for securities. The firm is not, however, licensed in Texas to sell securities, and there is no evidence it is licensed with other governmental securities regulators.

The Texas State Securities Board is issuing this report as a resource to assist Texans in understanding cryptocurrency-related investments and to learn how to identify suitable securities offerings that are in compliance with state law and regulations.