 (1).jpg)
There”s a formula out there that enthusiasts for cryptocurrencies should consider, the author of this article argues: rising prices + public interest = FOMO = fraud.
The price of bitcoin – fetching around $48,500 at the time of
this article going to press – is still up significantly from the
start of January ($34,705), if off its highs of 2024 so far. The
wealth sector remains fascinated with cryptocurrencies and
digital assets, although the editors sense that some of the
stardust has faded with the passing of time and maturation of
this market. To set market developments in context, and consider
what the future holds, we carry this article by James Evison
(pictured below), partner, Stevens &
Bolton. In particular, he considers the risk of investment
fraud.
James Evison
The editors are pleased to share these views; the usual
editorial disclaimers apply to views of outside contributors. If
readers wish to jump into the conversation, please do so!
Email [email protected]
The first half of 2024 saw the crypto winter give way to a bull
market. Investor appetite appeared undimmed by the long run of
negative news stories, market volatility, widespread reports of
fraud, and high-profile insolvencies. The price of bitcoin has
hit all-time highs and some commentators predict it has further
to go.
This may be good news for many, but there are also risks for the
unwary investor in a rising market: that a price may crash is the
obvious one, but there is also the risk, perhaps overlooked
sometimes, of investment fraud.
An all-too-common cautionary tale fraud lawyers hear is of
private investors, intrigued by the concept of cryptocurrency,
being duped into sending funds to fraudsters. It often starts
with some online research. Then maybe an approach by individuals
with an attractive investment proposal. They are super helpful
and attentive. They demonstrate the returns their platform can
achieve. “Just invest a small amount with us and see what
happens,” they say. That initial investment soars and more
is put in. After a while the investor wants to withdraw some
money. Excuses are made. Further payments are needed to release
the funds. Still nothing is released. Then comes the dawning
realisation of what has happened.
One way of demonstrating this risk is to look at what has
happened before. Back in May 2020, an event known as the bitcoin
halving took place. This happens every four years and,
effectively, means that the supply of bitcoin is halved. If an
asset becomes scarcer but demand remains the same, we generally
expect value to increase. After the halving in 2020, a boom duly
followed. The price surged from somewhere around $7,000 before
the halving to a peak of more than $60,000 in 2021.
Stories about digital assets – positive and negative
– were all over the news. At the same time, the value of
cryptocurrency received by illicit wallet addresses rose from
around $9.4 billion in 2020 to $23.2 billion in 2021 and then
$39.6 billion in 2022 (according to the Chainalysis 2024 crypto
crime report). This period also saw a run of crypto cases coming
before the English courts as defrauded investors sought
disclosure orders, freezing injunctions, and the return of their
stolen funds.
Jump ahead to 2024, and the cycle of bitcoin halving has just
been repeated at a point when bitcoin prices had already risen
sharply. Again, the media is awash with stories about opportunity
and loss – the impact of rising prices, the regulatory
approval of exchange-traded funds in the US, Dr Craig Wright’s
adventures in the English courts, and the ongoing fallout from
the FTX collapse.
It is not hard to guess what fraud lawyers are expecting to
happen next. It can be summed up with the following simple
equation: rising prices + public interest = FOMO = fraud.
So what can be done to mitigate the risks and prevent investors
falling victim to these scams? Better regulation is part of the
answer. A number of jurisdictions around the world are competing
to put regulatory systems in place, balancing the protection of
consumers with the goal of building an innovative but stable new
financial sector.
In the UK, a limited set of rules covering firms marketing crypto
assets to consumers has been introduced and the intention is to
bring crypto asset-related activities within the existing UK
regulatory framework under the Financial Services and Markets Act
2000. This is broadly welcome news for investors, albeit we will
need to see whether it survives the upcoming general election
intact. Either way, it won’t replace the need for caution and
proper due diligence before parting with funds. Prevention is
better than cure.
However, if things do go wrong – and they will for some – then
all hope is not lost. The English courts are famously friendly to
victims of fraud and helpful case law has been laid down applying
traditional legal principles to cases of fraud involving digital
assets. If the assets can be traced (which they often can be
thanks to the blockchain), and you act quickly enough, there is a
range of measures that can be taken to protect those assets and
to try to secure their return.
