Fraudulent cryptocurrency investment schemes

How do crypto investment frauds come about?

At its core, a fake cryptocurrency investment scheme involves an offer of an investment, usually in a new type of digital coin.

These frauds sometimes mirror the more well known ‘Ponzi scheme’, a fraud in which ‘returns’ to investors are actually just initial payments from new investors. They predominantly grow from a social media presence, on any one of a number of platforms. A profile may encourage people to visit an apparently legitimate site. Trust in the site may be reinforced by influencers advertising the scheme and its alleged success.

People are then expected to deposit either conventional money or cryptocurrency. The cryptocurrency you are then provided within these schemes may not even be a genuine form of cryptocurrency at all. However, the most common cryptocurrency you can expect to hear about will be Bitcoin. 

Investors may receive assurances of growth, week on week, sometimes leading them to invest further or wait to request withdrawals until even more is accumulated. Investors who do get to withdraw successfully are instead paid with funds from new investors. This is, however, rare. Most investors never get the chance to withdraw before their account is closed and they are locked out. Because the FCA does not regulate cryptocurrency, the ability to recover invested funds can be very difficult.

An example of how easily and how quickly fake schemes can gather momentum is the story of the crypto twitter user FatManTerra. This fraudster tweeted about access to a ‘high yield bitcoin farm’. Although many people realised this was a scam, he was still able to get ‘investments’ of $100,000 worth of bitcoin.

How the law on crypto scams works

There is no specific offence of cryptocurrency fraud, so offences relating to cryptocurrency scams would usually fall into general fraud and money laundering offences.

Dishonest statements to investors are often prosecuted under section 2 of the Fraud Act. The offence is making a false representation or statement dishonestly for gain or someone else’s loss. The false representation would be the fact that a crypto investment will provide a high yield when this is just not true.

Money laundering offences are governed by the Proceeds of Crime Act 2002. Anyone who transfers or converts assets such as cryptocurrency which are stolen or the result of fraud is committing the offence, if they know or suspect it is stolen.

What decides the outcome in a crypto-fraud investment case?

No two cases require an identical strategic approach. This is especially true of cryptocurrency investment schemes. So far, UK prosecutors mainly targeted more obvious and easy to prosecute crypto cases. The authorities here are years behind the US in taking action but cryptocurrency investment schemes are expected to become a major focus for fraud investigators.

Anyone facing a prosecution or investigation should be aware of what is required to properly defend fraud cases:

• Detailed knowledge of all of the prosecution and potential defence evidence by all of the defence team

• Expertise in fraud and money laundering law

• Understanding of finance and business practices

Because crypto frauds are technical, they are usually run by criminals between the age of 20 and 35, and who target victims who also relatively young. This means that for a jury even the basics may seem difficult to understand. The crypto fraud defence team should be able to present technical information to a jury clearly so they can follow the defence case with interest. This means having great presentation skills as well as charismatic and powerful advocacy.

What does the legal team need to know about cryptocurrency?

The legal status of cryptocurrencies

Cryptocurrencies are not considered legal tender in most countries. They’re unregulated, and this lack of regulation makes crypto an attractive area for criminals. 

Technical aspects of cryptocurrencies

Cryptocurrency lawyers must understand how coins are mined, stored and traded, and how the blockchain is written, validated and accessed by the community. This understanding is crucial in getting to grips with the facts of the case and developing a defence strategy.

Cryptocurrency exchanges

Fraud defence lawyers should understand how exchanges allow transactions to take place, and be able to find out what ID traces are left through the use of different exchange platforms.

Forensic investigation into cryptocurrency fraud

Cryptocurrency transactions can be difficult to trace, but forensic investigation can often uncover evidence of fraudulent activity. Crypto lawyers should have access to experienced forensic investigators who can gather and analyse evidence to have the best chance of establishing a strong defence.

What sentences do people get in cryptocurrency investment cases?

The government clearly wants to be seen to be tackling the cybercrime epidemic. This means that guidance will be provided in the coming years by the Court of Appeal in referred cases.

The James Parker case shows that courts are now starting to take cryptocurrency very seriously. Four defendants were given prison sentences in the years, not months, for defrauding users of a trading platform for £21m.

The Crown Prosecution Service has also come out in support of London’s planned flagship Economic Crime Unit.

High-value frauds in any form can carry long prison sentences. That does not mean that each offender’s role within the operation is the same or that everyone will be sentenced in the same way.

It is important to know that a Judge will look at the following factors when passing any sentence:

• Previous convictions

• Remorse

• The defendant's role in any operation

• Effects on the wider community

• Any attempts to repay any money

• The defendant's age and personal circumstances

Ancillary orders

While prison is usually a person’s main concern, ancillary orders are an added form of punishment which could affect others when someone is convicted. These can include a restraint order, a financial reporting order, or most commonly a confiscation order under the Proceeds of Crime Act.