Texas Regulators Find Rampant Cryptocurrency Fraud

AUSTIN, Texas (CN) – Texas securities regulators said they found widespread fraud in dozens of cryptocurrency offerings that were investigated, warning the public to learn how to identify safer investment options.

In this April 3, 2013 photo, Mike Caldwell, a 35-year-old software engineer, holds a 25 Bitcoin token at his shop in Sandy, Utah. Bitcoin is an online currency that allows people to make one-to-one transactions, buy goods and services and exchange money across borders without involving banks, credit card issuers or other third parties. Texas securities regulators said they found widespread fraud in dozens of other cryptocurrency offerings. (AP Photo/Rick Bowmer, File)

The Texas State Securities Board, or SSB, issued a 14-page investor report Tuesday stating its attorneys and investigators opened 32 investigations into cryptocurrency offerings starting Dec. 18, finding that none of the promoters were registered to sell securities in the Lone Star State in violation of the Texas Securities Act.

“At least five promoters all but ignored investing risks by guaranteeing returns, some as high as 40 percent per month,” the board said in a written statement. “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 board said 19 of the companies claimed to accept Bitcoin, the best known cryptocurrency, as an investment, to trade or to invest in businesses and technologies involving Bitcoin.

Cryptocurrency refers to a form of digital currency that uses encryption techniques to regulate the generation of new units and verify the transfer of existing units.

Mainstream interest in cryptocurrencies grew substantially last year as the value of Bitcoin has spiked by several thousand percent in recent years. It remains a speculative and highly volatile investment due to sudden, sharp price swings.

The SSB warns that there are “abundant signs of a cryptocurrency mania” and mentions other popular cryptocurrencies including Ethereum, Dogecoin, Potcoin and Ponzicoin – a “parody art performance” where the issuer refunded investor money.

Texas Securities Commissioner Travis J. Iles warned the public the investigations show “significant risks” lie in investments that supposedly use cryptocurrencies to enrich investors.

“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 in a statement. “Investors risk giving their hard-earned money to anonymous promoters hiding behind websites who have no intention of making good on their promises.”

The report stated that at least six of the investigated promoters were actively recruiting sales agents without verifying they were registered with the SSB. It notes that the board is not regulating cryptocurrencies themselves, only investments that claim to use them in an investment program.

The report comes three months after the board halted a sale by Ashford, England-based cryptocurrency firm BitConnect, issuing an emergency cease-and-desist order.

The SSB claims its promoters misled investors and promised annualized returns of over 100 percent. It claims $4.1 billion of BitConnect Coins, or BCC, was placed into the company’s online marketplace, that the company is not registered to sell securities in Texas, and that BCC is not a registered security either.

“BitConnect has disclosed virtually nothing about its principals, financial condition, or strategies for earning profits for investors,” the board said at the time. “It has not provided a physical address in England.”

The SSB said Tuesday the value of BCC cratered to “nearly zero” after it took action.

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

The board says it has opened approximately 60 investigations so far involving cryptocurrency investments.

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