Texas Regulators Find Rampant Cryptocurrency Fraud

April 11, 2018
By David Lee
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.

FILE – 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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Texas Regulators Halt Sale of New Cryptocurrency

January 5, 2018
By David Lee

AUSTIN (CN) – Texas state securities regulators halted the sale of a new cryptocurrency by United Kingdom-based BitConnect Thursday, claiming the firm is misleading investors and promising annualized returns of at least 100 percent.

The Texas State Securities Board issued an emergency cease-and-desist order to Ashford, England-based BitConnect regarding the sale of its new BitConnect Coins, or BCC.

The board says BitConnect has put 9.4 million BCCs into its online marketplace, representing a value of $4.1 billion.

“The company requires individuals to use Bitcoin, a more established cryptocurrency, to invest in various BitConnect programs,” the board said in a written statement. “In one investment called the BitConnect Lending Program, investors purchase BitConnect Coins, which are provided to a ‘BitConnect Trading Bot’ to generate returns as high as 40 percent a month.”

Mainstream interest in cryptocurrencies grew substantially in 2017 as the value of Bitcoin, the best known cryptocurrency, spiked in value by several thousand percent in recent years. It remains a speculative and highly volatile investment due to sudden, sharp price swings.

The board says BitConnect is not registered to sell securities in Texas and that the BitConnect investments are securities that are not registered, either.

“BitConnect has disclosed virtually nothing about its principals, financial condition, or strategies for earning profits for investors. It has not provided a physical address in England,” the board said. “Despite providing no information on how it will make money for investors – including the algorithms behind the Trading Bot  – BitConnect is touting its investments as a ‘safe way to earn a high rate of return.’”

BitConnect did not immediately respond to an email message requesting comment Friday afternoon.

The board’s action comes four days before BitConnect is scheduled to hold an initial coin offering, or ICO, in the United States to raise money. It claims the company uses unregistered sales agents to target residents through website, social media and Craigslist.

From Courthouse News.

Texas Man Must Pony Up $40.7M for Bitcoin Scam

September 19, 2014
By David Lee
SHERMAN, Texas (CN) – A Texas man must pay over $40.4 million for running a massive Ponzi scheme based on a Bitcoin operation he ran out of his home, a federal judge ruled.
The U.S. Securities and Exchange Commission sued Trendon T. Shavers, 31, of McKinney, and Bitcoin Savings & Trust in July 2013 for securities fraud and disgorgement.
It alleged he raised over 700,000 bitcoins from investors, promising up to seven percent interest every week based on BTCST’s claimed market arbitrage activity.
The SEC claimed Shavers’ fraudulent activities began in November 2011, when he posted a “Looking for Lenders” ad on the online Bitcoin Forum, offering one percent daily interest for “loans” of 50 bitcoins or more. The agency cited a dozen more of Shavers’ posts in which he claimed that business was great and that the “risk is almost 0.”
When the scheme collapsed in August 2012, Shavers made preferential redemptions to friends and longtime investors, the SEC claimed.
U.S. Magistrate Judge Amos L. Mazzant granted the SEC’s motion for summary judgment on Thursday, concluding investors lost over 265,000 bitcoins valued at $149 million at current exchange rates.
He did not believe Shaver’s claims that he loaned 202,000 bitcoins to an borrower who ran off with the funds.
“Shavers’ claims concerning the lending activity he supposedly undertook for BTCST are not possible based on the record evidence in this action,” the 25-page opinion states. “First, the identified sources of bitcoins obtained by Shavers do not include such borrowers; second, the amounts of bitcoins received by Shavers from unidentified sources fall far short of the amounts necessary to support the principal or interest payments Shavers claimed to be receiving from BTCST’s borrowers, or the rates of return Shavers otherwise claimed to be earning for BTCST investors; and, third, Shavers did not have nearly enough bitcoins in July 2012 to make a 202,000 bitcoin loan.”
The evidence shows Shavers “knowingly and intentionally operated BTCST as a sham and Ponzi scheme,” Mazzant wrote.
“In reality, Shavers, on the whole, either used new bitcoins received from BTCST investors to pay purported returns and withdrawals on outstanding BTCST investments, or diverted BTCST investors’ bitcoins for his personal use,” the opinion states. “Shavers admits he commingled BTCST investors’ bitcoins with his personal bitcoins and bitcoins from his GPUMAX activity as a “reserve fund” in his “main operating wallet” for BTCST.
Shavers admitted that he used the “reserve fund” – in classic Ponzi scheme fashion – to honor withdrawal requests from BTCST investors whenever he failed to generate sufficient returns from BTCST’s purported investment activities to do so. He also admitted that following his July 2, 2012, announcement that the rates of return for BTCST investments would be reduced, he received a ‘wave’ of withdrawal requests that wiped out the ‘reserve fund,’ even as he still owed bitcoins to BTCST investors.”
Shavers admitted he had no proof that the lending activities he engaged in generated returns, nor any proof he made the 202,000 bitcoin loan, Mazzant noted.
Two weeks after the SEC sued Shavers, Mazzant ruled against Shavers’ argument that the court had no subject matter jurisdiction because bitcoins are virtual currency, not actual money.
“It is clear that Bitcoin can be used as money,” Mazzant wrote at the time. “It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses. The only limitation of Bitcoin is that it is limited to those places that accept it as currency. However, it can also be exchanged for conventional currencies, such as the U.S. dollar, Euro, Yen, and Yuan. Therefore, Bitcoin is a currency or form of money, and investors wishing to invest in BTCST provided an investment of money.”
In April, Texas banking regulators issued regulations for virtual currencies, including Bitcoin, and their virtual exchanges. Texas Banking Commissioner Charles G. Cooper issued a supervisory memorandum that concluded the virtual currents are not money. He said they lack intrinsic value because they are not centralized, backed by a commodity or convertible by law.
Cooper concluded that since they are not money, cryptocurrencies themselves do not trigger licensing requirements under the Texas Money Services Act. He said the exchange of cryptocurrency between two parties for sovereign currency is therefore not a money transaction.
Neither is the exchange of one cryptocurrency for another or the transfer of cryptocurrency by itself.
“However, some common business activities relating to cryptocurrency that involve the receipt of government-issued currency can trigger the licensing requirements of the act,” the commissions said in a statement at the time.
Cooper said the exchange of cryptocurrency for sovereign currency through a third-party exchange like bankruptcy Bitcoin exchange Mt. Gox is “generally” a money transmission because Gox is an escrow like intermediary.

From Courthouse News.

Texas Tries to Regulate Bitcoins

April 6, 2014
By David Lee
AUSTIN (CN) – For the first time, Texas banking regulators have established licensing and security guidelines for virtual currencies and their exchanges, such as the collapsed Bitcoin exchange Mt. Gox.
Texas Banking Commissioner Charles G. Cooper issued a supervisory memorandum on April 3, noting that cryptocurrencies such as Bitcoins, Litecoins, Peercoins and Namecoins lack intrinsic value because they are neither centralized, backed by a commodity nor convertible by law.
“At this point a cryptocurrency like Bitcoin is best viewed like a speculative investment, not as money,” Cooper wrote in the memo. “However, as this innovative technology develops, the [Texas Department of Banking] will continue to evaluate whether the nature of cryptocurrencies and the potential harm to the public warrant additional action.”
Cooper concluded that since they are not money, cryptocurrencies themselves do not trigger licensing requirements under the Texas Money Services Act. He said the exchange of cryptocurrency between two parties for sovereign currency is therefore not a money transaction.
Neither is the exchange of one cryptocurrency for another or the transfer of cryptocurrency by itself.
“However, some common business activities relating to cryptocurrency that involve the receipt of government-issued currency can trigger the licensing requirements of the act,” the commission said in a statement Friday.
Cooper said the exchange of cryptocurrency for sovereign currency through a third-party exchange like Mt. Gox is “generally” a money transmission because Gox is an escrowlike intermediary.
“In a typical transaction, the buyer of cryptocurrency sends sovereign currency to the exchanger, who holds the funds until it determines that the terms of the sale have been satisfied before remitting the funds to the seller,” Cooper said. “Irrespective of its handling of the cryptocurrency, the exchanger conducts money transmission by receiving the buyer’s sovereign currency in exchange for a promise to make it available to the seller.”
Cooper concluded the exchange of cryptocurrency for sovereign currency through an automated teller machine is “usually, but not always” a money transmission.
He cited Bitcoin ATMs as an intermediary between a buyer and seller when operating in default mode.
“However, it is worth noting that at least some Bitcoin ATMs can be configured to conduct transactions only between the customer and the machine’s operator, with no third parties involved,” Cooper said. “If the machine never involves a third party, and only facilitates a sale or purchase of Bitcoins by the machine’s operator directly with the customer, there is no money transmission because at no time is money received in exchange for a promise to make it available at a later time or different location.”
Cooper said businesses that conduct these money transmissions with cryptocurrencies must meet the act’s licensing requirements, including having a minimum net worth of $500,000. They are also required to submit to a security audit of their computer systems to be conducted by a third party.
“Because the new technological paradigm created by cryptocurrencies has brought with it new risks for the consumer, it is incumbent on a license applicant to demonstrate that all virtual currency is secure while controlled by the applicant,” Cooper wrote.
A Dallas bankruptcy judge in March granted Mt. Gox’s petition for Chapter 15 bankruptcy protection weeks after it filed for bankruptcy protection in Japan. The exchange collapsed after more than $470 million worth of Bitcoins disappeared from the site in a purported security breach.
The exchange faces a 2013 lawsuit in Seattle Federal Court by Bitcoin business incubator Coinlab, which demands more than $75 million for breach of contract.
It also faces a proposed class action filed in February in Chicago Federal Court by users who lost their Bitcoins in the security breach. The exchange’s Chapter 15 filing temporarily halts both lawsuits as its bankruptcy in Japan unfolds.

From Courthouse News.

After Bitcoin Loss, Mt. Gox Given U.S. Protection

Nobody gets me Bitcoins! by zcopley, on Flickr
Creative Commons Creative Commons Attribution-Share Alike 2.0 Generic License   Nobody gets me Bitcoins,  zcopley 

March 11, 2014
By David Lee
DALLAS (CN) – A federal judge granted collapsed bitcoin exchange Mt. Gox temporary protection Monday from U.S. lawsuits in the wake of a security breach and believed theft of approximately 744,000 bitcoins.
The Tokyo-based cryptocurrency exchange filed for bankruptcy protection in Japan last month, shutting down after more than $470 million worth of the currency disappeared from the site.
Mt. Gox had allowed users to buy and sell the digital currency, which is largely unregulated by governments or central banks. The price of bitcoins is highly violatile, topping $1,000 in November.
On Sunday, Mt. Gox filed for Chapter 15 bankruptcy protection, asking a Dallas federal judge to halt two pending lawsuits while its bankruptcy in Japan unfolds.
It lists between $10 million and $50 million in assets and between $50 million and $100 million in liabilities.
U.S. Bankruptcy Judge Harlin Hale granted the request the next day, ordering Mt. Gox to return to court on April 1 to determine if an extension is needed.
Mt. Gox was sued months earlier in Seattle by Bitcoin business incubator CoinLab, which seeks more than $75 million for breach of contract.
After the bankruptcy filing in Japan, a man hoping to represent a class of investors who lost their bitcoins in the security breach sued Mt. Gox in Chicago.
Lead plaintiff Gregory Greene said the Tokyo-based exchange touted itself as the “world’s largest bitcoin exchange,” handling “over 80% of all bitcoin trade.”
But the price on Mt. Gox plummeted after the exchange froze bitcoin withdrawals while it purportedly investigated a “bug” or “technical glitch,” the lawsuit claims.
Mt. Gox is represented by David Parham with Baker McKenzie in Dallas.

From Courthouse News.