Bitcoin is a relative newcomer in the world of finance, but as with any monetary instrument, there are cases of fraud and abuse with the cryptocurrency.
For example, in early 2019, Randall Crater was indicted for allegedly leading the ‘My Big Coin’ cryptocurrency fraud that robbed at least $6 million from largely New York-based investors. (Crowdfundinsider.com)
Federal laws on fraud involving Bitcoin specifically are still being developed, but Bitcoin fraud is certainly a form of general fraud as defined by 42 CFR 455.2, which calls fraud ‘an intentional deception or representation by a person which is intended to cause unauthorized benefit or material gain.
Bitcoin Fraud Laws
The US Commodity Futures Trading Commission (CFTC) determined in 2018 that virtual currencies such as Bitcoin are commodities, so the CFTC has the power to prosecute fraud involving any type of virtual currency. (CFTC.gov)
Given that ruling, Bitcoin fraud can be treated at the federal level similarly to any type of securities and commodities fraud. Securities fraud happens when a person makes a false statement about a company, value of the stock or another commodity, and others make financial decisions based on this false information. (Law.Cornell.edu).
Bitcoin fraud, like securities and commodities fraud, is often perpetuated through one or more schemes to encourage others to put forth money willingly. Some types of securities and commodities fraud may involve embezzlement as well, which is a form of theft. Statutes at the state and federal level outlaw securities and commodities fraud, and by extension Bitcoin fraud, although the Securities and Exchange Commission (SEC) plays a major role in the investigation and prosecution of these crimes.
Bitcoin fraud charges also can involve federal charges of conspiracy, wire fraud and money laundering.
Bitcoin Fraud Crimes & Charges
Some of the common types of securities and commodities fraud crimes that encompass Bitcoin fraud crimes as well include:
- By a company: A common form of securities and commodities fraud is where the leader or director of a company does not accurately report financial information from the company to shareholders or owners of cryptocurrency such as Bitcoin. This can raise the value of the commodity artificially and encourage more investors to invest money in a company that is unhealthy, or in a commodity that is fraudulent. If the company goes bankrupt, the people who purchased the shares or commodities based on the false information will completely lose their investment.
- Insider trading: This form of securities fraud occurs when a person with confidential information about the financial state of uses the information to make decisions on whether they should buy or sell stock before the information is disclosed publicly. For instance, an accountant for a corporation could notice the company is losing a lot of money and is going to go bankrupt. If the accountant were to order the sale of his stock before the board is notified, this is insider trading. Insider trading also could occur with cryptocurrencies if owners learn the value of the commodities are about to rise or fall, and then make personal decisions based on that insider information.
- Third-party misrepresentation: If a third party distributes false information about the stock market or a particular commodity, company or industry. This is also known as a ‘pump and dump’ scheme. This is where a person finds a small, lesser-known company with inexpensive stock and buy large amounts of it. The person then sends out false information about the company to get others to buy, which drives up the price. Once the stock price is high, the perpetrators sells his stock and makes a large profit.
Bitcoin Fraud Punishment
Penalties for any securities or commodities fraud are severe as they are largely federal crimes. Potential penalties include:
- Fines: Securities and commodities fraud can involve major fines, but the fine depends on how serious the case is. In some insider trading cases, the fine could be up to $5 million. Fines for other securities fraud can be $10,000 or more.
- Incarceration: A conviction for securities or commodities fraud usually results in a federal prison sentence. You can receive a five-year prison sentence for each offense.
- Probation: A conviction for securities fraud can result in probation, if there was only one incident of fraud, or if there were offenses that did not cause financial losses. Probation usually is several years, but terms of five or more years are common.
- Restitution: Securities and commodities fraud usually involves many investors and clients who suffered monetary losses. Courts usually require restitution to the victims of the fraud. Restitution must be paid on top of fines for the fraud.
Bitcoin Fraud Statute of Limitations
According to federal statute 18 USC 3282, no one can be prosecuted for a noncapital offense unless the indictment is instituted within five years of the commission of the alleged offense.
Bitcoin Fraud Cases
- US Prosecutors Charge 2 Foreign Nationals for Bitcoin Scam: In April 2019, two Nigerian nationals were indicted by prosecutors in the US for running a fraudulent Bitcoin investment scheme. The two men were charged with 11 counts of wire fraud, as well as conspiracy to commit wire fraud and money laundering. They are alleged to have promoted a fake Bitcoin investment scheme with three websites, and promising investors 20-50% risk-free returns. (com)
- Scammer Taunts Investors Who Lost Thousands in Bitcoin Fraud: A couple from Australia lost $14,000 US in a Bitcoin scam, and were taunted by the criminal over their losses. The man and woman invested thousands of dollars of their savings into what they thought was Bitcoin on the website Coinexx.org (a knockoff of the legitimate Coinexx.com). The couple lost their money and eventually got a message on WhatApp that told them they had been scammed. (com)
- Dutch Police Arrest Cryptocurrency CEO in $25 Million Fraud Case: A former entrepreneur in the Netherlands was arrested in May after he allegedly conned investors in a fake Bitcoin mining operation out of at least $25 million US. Barry van Mourik allegedly deceived clients into thinking they would make money by mining Bitcoin. He allegedly used client funds for his personal use while failing to buy any equipment for the Bitcoin mining operation. (com)