Texas Spearheads US-Canada Probe of Cryptocurrency Investments

May 21

The Texas State Securities Board, a leader in policing cryptocurrency-related investments, has joined more than 40 U.S. state and Canadian regulators in a coordinated investigation of fraudulent cryptocurrency-related investment products.

The North American Securities Administrators Association (NASAA) launched “Operation Cryptosweep” on May 1. Its members, which include all U.S. states and provincial securities agencies in Canada, have opened approximately 70 investigations and taken or have pending 35 enforcement actions.

Texas, which started its own targeted investigation of cryptocurrency offerings last year, took the lead in organizing, managing, and coordinating the NASAA sweep.

Texas Securities Commissioner Travis J. Iles has entered three enforcement orders since the start of the sweep, bringing to 10 the number of actions the State Securities Board has taken against illegal or fraudulent cryptocurrency promoters since Dec. 20,  2017. Texas was the first state regulator to issue an order against a promoter offering cryptocurrency-related investments.

The State Securities Board and NASAA member agencies in the coming weeks will continue to investigate cryptocurrency investment schemes — including the sometimes murky business of Initial Coin Offerings, in which companies sell their own "tokens"to investors to raise capital — and pursue new enforcement actions.

Besides identifying hundreds of potentially fraudulent cryptocurrency schemes in the U.S. and Canada, the task force found other evidence of the frenzied interest in virtual currencies: There are approximately 30,000 crypto-related domain name registrations, most of which were created in 2017 and 2018.

“Although the task force’s work is far from complete, my suspicions have already been confirmed,” said Joseph Rotunda, Director of the Enforcement Division of the Texas Securities Board and the Vice-Chair of the Enforcement Section for NASAA. “The market for cryptocurrency investments is saturated with widespread fraud, and our work is only revealing the tip of the iceberg.”

In December 2017 the State Securities Board started a four-week investigation into cryptocurrency offerings that provided the framework for the NASAA sweep. In addition to the 10 orders, the State Securities Board is currently investigating more than 60 suspect offerings targeting Texas residents.

The State Securities Board enforcement division has uncovered voluminous evidence that clearly shows many promoters are attempting to capitalize on the hype and excitement associated with Bitcoin and other cryptocurrencies to defraud senior citizens, retirees and other Texas investors.

“Many promoters of cryptocurrency investment scams are using strikingly similar tactics,” Rotunda said. “Although they often promise improbably high returns, promoters rarely provide any material information on their investment strategies.”

Many of these issuers are also concealing the true identities of their principals, using phony addresses to depict their office locations, and covering up significant risks in investments tied to cryptocurrencies. Some promoters are even using the likenesses of celebrities and public figures to add a false sense legitimacy to their claims.

These tactics were employed by the companies the State Securities Board took action against in May during Operation Cryptosweep:

  • Wind Wide Coin AKA WWC Inc. offered triple-digit returns in a cryptocurrency trading program operated by a “trading bot” and used the likenesses of actress Jennifer Aniston and Prince Charles in testimonials touting the profitability of the scheme.
  • Bitcoin Trading & Cloud Mining Limited AKA BTCRUSH offered investments in a cloud-based cryptocurrency mining program using phony videos to falsely depict the interior, exterior and workings of its computer server farms. 
  • Forex EA & Bitcoin Investment LLC attempted to capitalize on the intersection of two highly technical markets — cryptocurrency and foreign exchange trading — by promising guaranteed returns without disclosing its strategies and financial backing. The company has represented to investors that a $5,000 investment will return $50,000 in 21 days.ad Fraud Found in Cryptocurrency Offerings.

Cryptocurrency Glossary

Bitcoin. A specific currency in an electronic payment system that acts as an alternative to fiat currency. It exists only on computers and the internet. It is not backed by a government, and its price is not set by a centralized authority.

Cryptocurrency. A digital currency secured through cryptography, or codes that can't be read without a key.

Blockchain. A permanent online ledger that functions as a public accounting of cybercurrency transactions that have been executed. New “blocks” are added to the blockchain after the confirmation of each set of transactions.

Blockchain technology. Enables the electronic payment system for virtual currencies, but not tied to any specific currency. Companies are using blockchains to create a permanent record of transactions of such things as sales of investments, corporate records, and legal documents.

Initial Coin Offering. In an ICO, an entity issues virtual coins, often called tokens, to raise capital. A “token sale” is simply distributing a new cryptocurrency to investors,  who typically pay for the tokens in bitcoin or another established cryptocurrency.

Mining. The process of applying high amounts of computing power to solve complex equations that verify transactions in a virtual currency. Miners who solve the equations are awarded new units of the virtual currency.

Emerging Investor Threat: Cryptocurrencies

The TSSB has found widespread fraud in investments that are supposedly tied to cryptocurrencies.

Read the results of a four-week investigation into crypto offerings and ongoing enforcement efforts.