Scams, greed and the big banks and small countries involved
Each week it seems we learn about some sort of criminality associated with cryptocurrency sales. A week ago, it was the globe shattering FTX bankruptcy. Law enforcement agencies are beginning to infiltrate shady cryptocurrency companies in the effort to recover funds owed to thousands of customers. Last week, the Department of Justice announced it seized $3.36 billion in stolen bitcoin. It happened in a 2021 raid on the residence of James Zhong, but only now revealed. Zhong pleaded guilty last week to one count of wire fraud, which carries a maximum sentence of 20 years in prison.
U.S. lawmen seized 50,676 Bitcoins from Zhong during a search of his house in Gainesville, Georgia, on Nov. 9, 2021. It is the DOJ’s second-largest such seizure to date. According to authorities, Zhong stole Bitcoin from the illegal Silk Road marketplace, a dark web forum on which drugs and other illicit products were bought and sold with cryptocurrency. Silk Road was launched in 2011, but the Federal Bureau of Investigation shut it down in 2013. Its founder, Ross William Ulbricht, is now serving a life sentence in prison.
Some investors would say the benefits are transactional freedom, security, and ease of transaction. Investors who make money might say cryptos are designed to have unique advantages over ‘fiat’ currencies (or a country’s traditional banking system).
Let’s take a look at some of the largest losses by scam, not to scare readers away from buying, but to caution on how extensive the hoodwinking is. Perhaps the most interesting large scam of our lifetime was started by a man named Gerald Cotton from Nova Scotia. He and his girlfriend or wife, plus one other partner, formed Quadriga and quickly learned that they could have a wonderful lifestyle with other people’s money – buying luxury cars, multiple homes, a yacht and an island. But when hundreds of millions of dollars owed to 75,000 investors went missing the FBI and the Royal Canadian Mounted Police investigated.
As the story goes, Gerald and his wife thought they should create a persona of generosity and philanthropy, and show their investors they were nice and trusted people, so they went to India and got press attention for donating lots of money to an Indian orphanage. While in India Gerald got sick and allegations are that he faked his death. His coffin was returned to Nova Scotia along with a possibly fake death certificate. Apparently, you can buy anything with $200 million.
The cops wanted to open Cotton’s coffin and exhume the body for autopsy but the wife blocked that with a court order. The Mounties recovered a portion of the missing $200 million but most of the investors are left out in the cold. Vanity Fair, a few U.K. newspapers and a Netflix documentary describe the Gerald Cotton scheme.
We may never know if Gerald is alive or dead or enjoying others people’s money on a remote island somewhere.
But if $200 million in scammed money seems like a lot, we have learned that even larger scams seem to crop up every couple of months.
There’s A Sucker Born Every Minute
We aren’t sure who coined the phrase ‘there’s a sucker born every minute,” and we aren’t sure who coined the first Bitcoin in 2009, but in early October 2022, Binance, the world’s largest crypto exchange, had $570 million worth of tokens stolen by hackers. Binance is also left holding part of the loss incurred by FTX, because they were “partners.” Binance temporarily halted all trading on its exchange, in October, but has since resumed trading, says CNBC.
Later in October 2022, dozens of people who lost money to a scam blamed Coinbase, a publicly traded, U.S. cryptocurrency exchange, saying the company should have done more to protect them, according to Bloomberg and the Washington Post’s coverage.
Over the past year, thousands of people have lost tens, if not hundreds of millions in cryptocurrency when gangs of sophisticated scammers took their money out of their Coinbase company accounts.
“They’re trying to be a financial institution without the infrastructure to back it up,” said Eric Rosen, a lawyer at Roche Freedman representing some 96 victims in the arbitration demand, which is akin to a lawsuit, filed against Coinbase.
“There were no procedures in place to stop these frauds,” Rosen said. “Of course, scammers quickly picked up on this, and directed victims to download the Coinbase Wallet.”
Many of the victims lost their life savings. The lawyers’ demand says the rules requiring banks to reimburse debit-card users for unauthorized transfers also should apply to Coinbase’s customers.
The arbitration could be the start of a reckoning over whether crypto’s ideology of self-reliance and software-driven governance can survive collision with highly regulated mainstream financial systems.
Some who study crypto describe the industry as full of cutthroats who badmouth their competitors on nearly a daily basis, and caution newbies because of what has been learned, such as Crypto companies cozying up to the old dark web marketplace Silk Road and its then-elusive leader, the Dread Pirate Roberts.
If these investment capers seem like bad sequels of a Johnny Depp movie, they are.
Anthony Cythbertson of Yahoo News reported earlier this year that a crypto investor lost more than $40 million following the collapse of the cryptocurrency lender Celsius Network. Info from a Chapter 11 bankruptcy filing revealed the balances, transactions and names of customers who lost out when the popular crypto lender ceased operating earlier this year.
The company, which was valued at $3.25 billion less than a year ago when the crypto market was at its peak, was forced to halt customer withdrawals in June. The company said it was working on a comeback, but more than $4.5 billion is owed to 1.7 million Celsius customers according to the bankruptcy filing, as well as more than 100,000 creditors.
According to TechCrunch+, crypto losses in the second quarter of 2022 were $670,698,280, up 52% from $440,021,559 in the same period for 2021.
The Biggest Losses Over This Past Summer
Most losses were contained to just four hacks: Decentralized ‘stablecoin’ company Beanstalk lost $182 million; blockchain bridging Harmony Horizon lost $100 million; and Mirror and TribeDAO lost $90 million and $80 million, respectively.
In March of this year, more than $275 billion had been wiped off the value of the global crypto market in the space of 24 hours, after the collapse of a cryptocurrency that was supposed to be pegged to the U.S. dollar sparked mayhem. UST was one of the most popular “stablecoins,” which are meant to have the same value as a real-world currency. UST’s supposed peg to the dollar was based on a complicated algorithmic interaction with other cryptocurrencies, which turned out not to work, according to Nikkei Asia.
Mt. Gox, the Japan-based cryptocurrency exchange, which at one time handled 70 percent of all Bitcoin transactions, declared bankruptcy in 2014 after revealing that hackers had made off with 850,000 Bitcoins. That stolen loot was worth about $500 million then. It would be worth about $5 billion now. A Tokyo district court has approved the start of civil proceedings.
There have been crypto companies that have lost $300 million and $500 million and often the companies issue a statement saying, “we were hacked and there’s nothing we can do about it.’
Individual loss stories are sometime heart wrenching, unless you feel ‘they should have known better.” The publication “Inc.” is keeping track of these mega losses and tells some pretty sad tales.
Chris Larsen lost $44 billion in Ripple, a coin that was created to better manage bank transactions. At one point, the coin was trading at $3.65 which meant that Larsen entered 2018 worth just shy of $60 billion. His coin was recently worth 45 cents.
One of the more cautionary tales of Bitcoin losses comes from Australian journalist Derek Rose. In 2017, Rose cashed in his $70,000 retirement account and poured it all into cryptocurrencies. At first, things went great. Cryptocurrencies were racing upwards and Rose borrowed money to enhance his investments. He was paying $1,000 a day in interest but he was making half a million dollars a day in profit. At one point, his holdings had reached $7 million. When a friend suggested he cash in, he replied that he wanted to own a sports team and a yacht. He continued using leverage… and quickly lost everything.
A British I.T. worker, James Howells, lost $146 million.
Cameron and Tyler Winklevoss who once sued over a claim they invented Facebook, bought 120,000 Bitcoins, or 1 percent of all the coins in circulation. That was in 2012, when Bitcoin cost a pittance. At Bitcoin’s peak, their holdings were worth $2.34 billion. They’re now worth just $720 million, a loss of $1.62 billion.
Banks to the Rescue ?
Despite their paper values, a collapse of Bitcoin and cryptocurrencies is unlikely to rattle the financial system because banks have largely stayed away, until now.
Warren Buffet announced plans this month to release a cryptocurrency as part of a new customer rewards program he established for Nubank of Brazil, which could be launched in the first half of 2023. Its goal is to offer customers benefits such as discounts and perks as they accumulate Nucoins.
Dragon Boscovic, Director of the Blockchain Lab, at Arizona State University didn’t seem terribly enamored with Buffet’s coin launch comparing it to “Loyalty points easily translated into digital assets/tokens residing on a blockchain that can be freely traded on specialized exchanges.” It’s kind of like trading one’s American Airlines points for Marriott points and vice versa, but having the exchange ratio determined by supply and demand on a specialized exchange, he said.
Crypto has its own language and many terms need explanation. Blockchain is a platform to store and transfer information in a way that is virtually impossible to change without other users knowing. Users record information to a public ledger that is managed and verified by a network of computers without a third party such as a government, bank, or other institutional intermediary getting involved. Numerous industries can benefit from blockchain including healthcare, government, insurance, transportation, and banking to name some.
Mastercard has formed a partnership with crypto trading platform Paxos to offer a program that will help financial institutions offer crypto. They call it the Crypto Source program, where it will help banks follow crypto compliance rules, verify transactions, provide anti-money-laundering and identity monitoring services, says CNBC.
But last April a top U.S. banking regulator warned of growing risks as banks start to capitalize on the popularity of cryptocurrencies to offer related services to clients.
Reuters reported numerous banks dipping their toes into Crypto such as Deutsche Bank, Morgan Stanley, JPMorgan Chase, Wells Fargo, CitiGroup, Goldman Sachs, Bank of New York Mellon, U.S. Bancorp, State Street Corp, and BNP Paribas.
What’s the rush? Many believe crypto could replace national currencies known as fiat currency. And governments, such as the U.S. are trying to figure out how to tax and regulate it. The roles cryptocurrency will play are still being explored and researched by academics and policy-makers, such as those connected with A.S.U.
“The ASU Blockchain Research Lab’s mission is to develop a strong teaching syllabus and advance the research and development of blockchain-based technologies for use in business, finance, economics, mathematics, computer science, and all other areas of potential impact,” says Boscovic. “Since the Lab’s creation in early 2017, we have partnered with dozens of industry leaders to provide blockchain-backed solutions for real-world problems.”
Converting a Country’s Currency to Crypto Amid Volatility and Instability
Many Crypto writers and financial CEOs agree the U.S. needs to find a solution to its debt problems, but none of them agree on how Crypto would be used. It is unknown what would happen to global stability if crypto replaced national currencies. Countries who have or will adopt Bitcoin, could be forced to adopt the U.S. dollar as a unit of account, because you will have to peg Bitcoin to something.
Bitcoin countries may make the switch out of spite against the U.S. dollar, which could be partly why President Biden has arranged a digital currency summit in the White House.
Nineteen of the G20 countries are exploring a CBDC, (Central Bank Digital Currency), with 16 already in development or pilot stage including South Korea, Japan, India, and Russia. Central African Republic and El Salvador have gone crypto, and Switzerland’s southern city of Lugano and El Salvador have signed an economic cooperation agreement based on crypto and blockchain, says Coin Telegraph.
Ten countries have fully launched a digital currency, with China’s Crypto pilot program set to expand in 2023. Jamaica and Nigeria launched theirs according to Central Bank Digital Currency Tracker. Singapore will run four pilot programs this year using the digital Singdollar for government payouts and vouchers.
Enormous international companies are becoming “asset managers” of hundreds of millions of dollars in digital currency accounts, and other asset managers who control Crytpo accounts are buying hundreds of millions of U.S. dollars for their portfolios according to Bitcoin Magazine.
ExxonMobil, the largest oil company in the U.S., with a budget larger than many countries, has announced it will use Bitcoin mining to offset its carbon emissions.
There could be significant adverse impacts on economic and financial stability, or the change to Crypto from national currency could usher in an era of complete global stability. No one knows and it’s all guesswork at this time.
The International Monetary Fund recommends against adopting cryptocurrency as a main national currency in its current state due to price volatility. Additionally, the organization feels that the risks of macro-financial stability and lack of consumer protections should be addressed, according to one of the myriads of crypto publications – Investopedia.
Photo: A Dogecoin
This reporter is hearing the Ohio Players song “Rollercoaster” in his mind. Bitcoin surged to $60,000 in 2021, fell to half that in a few weeks and was recently set at $19,500. The volatile Dogecoin has risen and fallen sharply sometimes only because of tweets from Elon Musk. Saturday Night Live did a skit starring Musk as an investor who could not define Dogecoin https://youtu.be/x5RCfQyTDFI.
Crypto is simply a particular way of operating a digital currency, but most troubling for investors are the governance (policies, regulations and oversight) issues with cryptocurrencies whose current business models and anonymity make them attractive for illegal activity such as money laundering and legal evasion. The disadvantages of cryptocurrency are scalability (increase or decrease in performance and cost), cyber security, price volatility and lack of inherent value.
Yes, there are success stories from people who got in on the ground floor in 2009 – kind of like the old axiom that you should stay in the stock market for the long haul, but naïve investors who came later are at risk because of a) value volatility, b) the market isn’t very transparent, c) transactions are irreversible, d) consumer protections are minimal, and e), regulators still haven’t decided what they want to regulate.
When I asked Boscovic if he agreed with Coin Telegraph’s prediction that crypto is going over $100,000 next year he said, ”I am not a financial analyst, but believe that this prediction is not wrong if the global economic turmoil (and economic wars) intensifies and it becomes obvious to ordinary investors that Bitcoin is a safe haven since it is resilient to manipulation by any global political actor.”
Coin Desk opined: the battle for how to regulate cryptocurrency might handicap the entire value proposition if we simply apply the same old rules to a new way of moving money around.
When asked, Boscovic of ASU said, “How close is USA and or Canada or other countries to regulating Bitcoin or crypto? The bigger question is more about “what needs to be regulated” in the context of blockchain applications. Regulating financial applications is quite different from regulating food safety applications, and both of these applications can run on the same blockchain network.”
Some say the current mess of U.S. monetary policy caused instability, in the first place, and may have contributed to the gold rush for Bitcoins.
Boscovic agreed with Coin Desk’s opinion that “There’s nothing valuable in remaking the same financial system (the U.S. dollar, or crypto) – with a new, fancy crypto wrapper that openly welcomes censorship resistance just because it is new and fancy.”
“Censorship resistance” is one of the numerous crypto buzz phrases which means: As long as a participant in the Bitcoin or whatever network follows the predetermined technical criteria to make a valid transaction, then nobody – not the cops, not your nosy neighbor – should be able to prevent that.
Scholars of crypto say its protocols are all about creating trust in a trustless system, and ask what degree of legal and regulatory clarity is needed to support innovation and protect consumers if this “source of trust” fails or is misused, depends on this “work in progress” and requires more time to observe, learn and form clear, legal and regulatory governance.
if you are willing to take the risk, first make sure you understand what you are investing in and have a crypto investment strategy. Do your own research before investing, says Boscovic. Invest only in crypto projects that have been around for two-three years, already have some useful applications implemented, and are used by other institutions, and have reputable people at the helm.
For more on Boscovic’s ASU program, see: AZ Blockchain Applied Research Center
Report fraud and suspicious activity about crypto to ReportFraud.ftc.gov
