According to the FBI’s Internet Crime Report for 2023 released last week, investment fraud perpetrated on Americans referencing cryptocurrency caused $3.9 billion in losses last year, up from $2.57 billion in 2022. Those losses were the lion’s share of all investment fraud perpetrated.

After investment fraud, the largest losses came from cases involving business email compromise, tech support, and personal data breaches, the report said. Phishing and spoofing was the most popular medium or tool used by scammers.

The Securities and Exchange Commission (SEC) has ramped up its enforcement actions against sketchy crypto firms over the last two years, but its efforts are not without controversy.

The SEC brought 46 enforcement actions against cryptocurrency market participants in calendar year 2023, up 53% from 2022 and the highest number since 2013, according to Cornerstone Research’s cryptocurrency enforcement database.

Monetary penalties amounted to $281.4 million, up slightly from the prior year’s $241 million. The largest settlement was a $79.5 million in disgorgement and prejudgment interest imposed in SEC v. Barksdale et al, a case involving a digital token offering to retail investors.

“We will be watching to see what 2024 brings, particularly in light of the SEC’s recent approval of the first Bitcoin [exchange traded funds],” said Simona Mola, a principal at Cornerstone.

About 37% of all the enforcement actions the SEC brought in 2023 were related to initial coin offerings (ICOs), down from 47% in 2022. While the number of ICOs have dropped the past couple of years, they have reportedly raised $50 billion for startups globally since 2017, according to ICOBench.

The SEC announced last Tuesday that Genesis Global Capital, a company specializing in lending and borrowing services for digital assets, would pay a $21 million penalty to settle charges brought last January that it illegally sold securities through its crypto lending program without registering them.

“The SEC has increasingly concentrated on trading platforms for their crypto lending and staking programs or for allegedly failing to register as an exchange, a broker-dealer, and a clearing agency,” said Abe Chernin, a vice president at Cornerstone and co-head of the firm’s fintech practice.

The Gary Gensler-led SEC insists that any cryptocurrency other than Bitcoin is a security and, therefore, should be subject to federal securities laws.

While Gensler has noted that “enforcement is a tool, not the destination,” the SEC denied a petition last December to propose and adopt rules to govern securities offered and traded via digitally native methods. Gensler said then that the crypto securities markets could be handled with existing regulations.

The SEC is currently in a court battle with Coinbase, a trading platform it charged with being an unregistered securities exchange in June 2023. Many industry players have filed amicus briefs in the case, including the Crypto Innovation Council, which calls the SEC’s interpretation of securities laws flawed.

The SEC has also been under fire for its actions in a 2023 crypto case against Digital Licensing (DEBT Box), in which it persuaded a judge to freeze the company’s assets and put it into receivership. The same federal judge in Utah that acted against DEBT Box sanctioned the SEC this week, saying the evidence it used to win the emergency order “proved to be some combination of false, mischaracterized, and misleading.”

By Vincent Ryan on March 25, 2024
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