SEC charges 11 people in $300M crypto pyramid Ponzi scheme

The Securities and Exchange Commission (SEC) has charged 11 people in an alleged $300 million cryptocurrency pyramid scheme for violating the registration and anti-fraud provisions of the US federal securities laws.^[1]

“Forsage is a textbook pyramid and Ponzi scheme. It raised funds by using promoters to convince millions of investors worldwide to recruit others into the programme. Forsage used smart contracts - computer programs that allow crypto trading to take place without a central intermediary- to operate the scheme,’ the SEC said. The contracts traded on the Ethereum, Tron and Binance blockchains.

Investors in the project would earn from others whom they recruited and the individuals that those people pulled into the project. Investors also earned profit-sharing fees from the broader community. “All pay-outs to earlier investors were made using funds received from later investors,” the SEC said.

Those charged include the four founders of the scheme - who were last known to be living in Russia and the Republic of Georgia - three US-based promoters of the scheme and “several members of the so-called Crypto Crusaders — the largest promotional group for the scheme that operated in the United States,” according to the SEC.

The SEC’s latest enforcement drive

The SEC’s latest enforcement action underlines the regulator’s approach to the cryptocurrency market.

The above-mentioned civil charges came just weeks after the SEC charged a former employee of crypto exchange Coinbase with insider trading related to coin listings. In its suit, the SEC named nine digital assets that it alleges are securities. Furthermore, SEC Chair Gary Gensler declared that crypto exchanges should be regulated just like securities exchanges, stating that he found “no difference” between the two and calling the situation “wild west.”

A designation of cryptocurrencies as securities would have wide implications. It would mean that the coins would be regulated as if they were stocks or a bond and the issuers of such tokens would have to comply with US securities laws.

Binance reacted to this on 2 August 2022 with an announcement^[2] to delist Flexa’s AMP token from its U.S. platform from August 15. AMP is one of those nine tokens mentioned in the insider trading lawsuit against the former Coinbase employee. Binance stated that, while AMP had previously passed the risk assessment process the exchange uses to decide whether or not to list a token, the SEC’s recent filing was pushing the company to delist the token “out of an abundance of caution.” Binance indicated that it would wait for further regulatory clarity before relisting the token.

Criticism

The recent enforcement activities have been met with criticism by numerous industry leaders and lawmakers. Although protecting the end consumer is a shared goal of all market participants, the latest actions of the SEC seem to be enforcement-driven only. However, the SEC doesn’t ensure that everything is clear from a regulatory perspective before enforcement actions are taken, which can create confusion for market participants.

Furthermore, the uneven treatment of market participants has been criticized. While some market participants have been subject to extensive investigations, others with the nearly same products and offerings were not subject to any queries from the enforcement authorities. 

[1] https://www.sec.gov/litigation/complaints/2022/comp-pr2022-134.pdf

 
[2] https://blog.binance.us/binance-us-update-on-amp/