Crypto scams are the top threat to investors ‘by far,’ say regulators

Investments related to cryptocurrencies and digital assets are the top threat to investors “by far,” according to new data from the North American Securities Administrators Association (NASAA).

“Stories of ‘crypto millionaires’ attracted some investors to try their hand at investing in cryptocurrencies or crypto-related investments this year, and with them, many stories of those who bet big and lost big began appearing, and they will continue to appear in 2022,” said Enforcement Section Committee Co-Chair Joseph P. Borg, Alabama Securities Commission Director.

The annual survey of North American securities regulators urged investors to exercise caution before purchasing popular and volatile unregulated investments, especially those involving cryptocurrency and digital assets.

“The most common telltale sign of an investment scam is an offer of guaranteed high returns with no risk. It is important for investors to understand what they are investing in and with whom they are investing,” said Melanie Senter Lubin, NASAA President and Maryland Securities Commissioner.

“Education and information are an investor’s best defense against investment fraud,” continued Lubin.

The report added that digital assets “do not fall neatly into the existing investor regulatory framework,” so it may be easier for promoters of these products “to fleece the public.”

“Before you jump into the crypto craze, be mindful that cryptocurrencies and related financial products may be nothing more than public facing fronts for Ponzi schemes and other frauds,” said Enforcement Section Committee Vice-Chair Joseph Rotunda.

Rotunda added that investments in cryptocurrency trading programs, interests in crypto mining pools, crypto depository accounts and securitized tokens should “be seen for what they are: extremely risky speculation with a high risk of loss.”

Scammers took home a record $14 billion in cryptocurrency in 2021, thanks in large part to the rise of decentralized finance (DeFi) platforms, according to blockchain analytics firm Chainalysis.

DeFi is a rapidly growing sector of the crypto market that aims to cut out middlemen, such as banks, from traditional financial transactions, like securing a loan, by using blockchain technology.

Losses from crypto-related crime rose 79% from a year earlier, driven by a spike in theft and scams.

Scamming was the greatest form of cryptocurrency-based crime in 2021, followed by theft — most of which occurred through hacking of cryptocurrency businesses. Chainalysis says that DeFi is a big part of the story for both, in yet another warning for those dabbling in this emerging segment of the crypto industry.

NASAA noted that many of the fraud threats facing investors today involve private offerings, which are exempted from federal law registration requirements. States are also preempted from enforcing investor protection laws related to these private securities.

“Unregistered private offerings generally are high-risk investments and don’t have the same investor protection requirements as those sold through public markets,” said Borg.

Ultimately, state securities regulators say that if it sounds too good to be true, it probably is.

Some DeFi platforms, for example, offer users huge returns, such as high-interest rate savings and lending products.

Bad actors often entice new investors by promising the payment of safe, lucrative, guaranteed returns over relatively short terms – “sometimes measured in hours or days instead of months or years,” according to NASAA, which says these kinds of promises are a red flag for fraud.

Fraud offerings tied to promissory notes, money scams offered online and via social media, as well as financial schemes connected to self-directed Individual Retirement Accounts rounded out the survey’s list of the top threats to retail investors.