California fraud cases highlight the need for a regulatory crackdown on crypto

The California Department of Financial Protection and Innovation (DFPI) announced last month that it had issued cease and desist orders to 11 entities for violating California’s securities laws. Some of the highlights included allegations that they offered unqualified securities, as well as material misrepresentations and omissions to investors.

These breaches should remind us that while crypto is a unique and exciting industry for the general public, it is still an area full of potential for bad actors and fraud. To date, government crypto regulation has been minimal at best, with a distinct lack of action. Whether you’re a full-time professional investor or just a casual fan who wants to get involved, you need to be absolutely sure what you’re getting yourself into before you get involved in any crypto opportunity.

California has toyed with creating a cryptocurrency-specific business registration process for those looking to do business in the state. Governor Gavin Newsom vetoed the proposed framework, as the resources required to establish and enforce such a framework would be prohibitive for the state. Although this type of compliance infrastructure has yet to be used, it points to the concern that regulatory authorities have engaged with the crypto industry.

There seems to be a pattern that new industries, especially those receiving as much international attention as crypto, are particularly susceptible to fraud. You only have to go back to the legalization of cannabis to find the last time California had to deal with fraudulent schemes on this scale.

Related: The Feds are coming for the metaverse: from Axie Infinity to Bored Apes

It seems inevitable that California, known for being a first mover in regulation and compliance, will create some sort of cryptocurrency-specific compliance infrastructure in the name of consumer protection. If history is any indication, once California releases its framework, other states will follow.

Federal and state representatives have tried to craft legislation to set financial standards for crypto with little luck so far. At the federal level, Senators Cory Booker, John Thune, Debbie Stabenow and John Boozman co-sponsored a bill to empower the Commodity Futures Trading Commission (CFTC) to act as a crypto regulatory body, while Senators Kirsten Gillibrand and Cynthia Lummis co-sponsored a bill to establish clearer guidance on digital assets and virtual currencies. Lawmakers have even reached out to tech luminaries like Mark Zuckerberg to weigh in on crypto fraud.

Cryptocurrencies, California, CFTC, Legislation, Law, Scams, Fraud, Bitcoin Scams
Source: Chainalysis

None of these or other crypto-focused bills are expected to pass in 2022, but this level of bipartisan cooperation is unprecedented in recent times. Collaboration should only reflect the magnitude of the need for a regulatory framework. In other words, Democrats and Republicans talking to each other about anything should stop the press, but the fact that they are co-sponsoring multiple bills should tell us that there is a monumental requirement for guidance.

How should investment in the crypto space be approached if the government will not establish controls for cryptocurrency? There are some general points to keep in mind if presented with a crypto investment opportunity.

Related: GameFi developers could face heavy fines and hard time

When reviewing any opportunity, do your due diligence! Don’t take anyone’s word for it without some level of substantive backing. If cryptography is not an area of ​​expertise, contact professionals who have qualified experience. Be sure to use cryptographic monitoring and blockchain analysis tools, if possible, as part of the verification process.

A common strategy by scammers is to put undue pressure or artificial deadlines on a potential closing. Slow down the process and use all the time you need to make an investment decision.

If it sounds too good to be true, it probably is. As exaggerated as the cliché is, it does raise a valid point. There have been cases of schemes offering to pay initial and ongoing dividends for any new investors who join and for additional dividends to be paid from any investors those new investors bring in. If this sounds like a pyramid or multi-level marketing scheme, that’s because it is. Terms like “Risk Free Investment” are also thrown around. Bottom line, if no one knows where the opportunity is coming from, watch out.

While crypto can be a fun and electrifying subject with many legitimate opportunities, there are bad players who will take advantage of the lack of government oversight and the excitement of overzealous or uneducated investors.

Zach Gordon is a Certified Public Accountant (CPA) and Vice President of Crypto Accounting for Propeller Industries, serving as fractional CFO and advisor to a portfolio of crypto and Web3 clients. He has been named a Forty Under 40 CPA, serves on the NYSSCPA’s Digital Assets Committee, and has been working with crypto clients in various capacities since 2016.

This article is for general information purposes and is not intended and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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