The SEC Has Hit Crypto Companies With Almost $2 Billion in Penalties

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With almost 100 enforcement actions, the SEC is hitting back at crypto crime.

It's hardly surprising that the recent boom in cryptocurrencies has spurred an increase in crypto crime. The Securities and Exchange Commission (SEC), one of the bodies that regulates cryptocurrencies, pursued more crypto cases than ever last year.

As of March, the SEC's actions had brought in over $1.7 billion in penalties, according to a report from Cornerstone Research. That's from a total of 94 enforcement actions and trading suspensions it pursued between 2013 and 2020. More than half of those cases were in 2019 and 2020.

SEC enforcement actions by year

Year Number of actions
2013 1
2014 2
2015 3
2016 1
2017 10
2018 27
2019 22
2020 28
Data source: Cornerstone Research

What kind of cases has the SEC pursued?

According to Cornerstone Research, 52% of the cases involved fraud and 69% involved unregistered securities offerings. Almost 1 in 4 of the actions involved both fraud and unregistered securities.

Here are some of the activities the SEC investigated:

  • Unregistered securities: Cryptocurrencies present a regulatory challenge; since they don't work the same way as traditional currencies, should they be considered currencies or securities for regulatory purposes? The SEC's answer right now is that some ICOs (initial coin offerings) are securities, and some may need to be registered. It warns: "While some ICOs may be attempts at honest investment opportunities, many may be frauds, separating you from your hard-earned money with promises of guaranteed returns and future fortunes."
  • Unregistered exchanges: The SEC has shut down 19 unregistered trading operations in recent years. The majority of these actions took place in 2017 (six cases) and 2018 (nine cases), possibly lessening because platforms are now more aware of the registration requirements.
  • Celebrity endorsements: The SEC has directly warned investors not to make investment decisions on the back of celebrity endorsements. At the end of 2018, it settled charges with boxer Floyd Mayweather Jr. and music producer DJ Khaled for failing to be open about the compensation they received from ICOs.
  • Ponzi schemes: The commission has also warned about cryptocurrency Ponzi schemes. In fact, one of its first crypto cases was a Bitcoin Ponzi scheme. In a Ponzi scheme, an individual uses money from new investors to pay returns to existing ones. Rather than investing money to generate high returns, the schemer robs Peter to pay Paul -- until the whole scheme collapses.

How to protect yourself against crypto crime

Fraudsters are clever, and technology developments mean they have more tools at their disposal than ever. Here are some ways to avoid falling victim to cryptocurrency fraud.

Use a reputable exchange

As we saw above, 19 of the SEC actions were against illegitimate exchanges or brokerages. Only buy your crypto through an exchange you trust, and make sure you're comfortable with their security measures. Our list of top cryptocurrency exchanges is a good place to start.

Ask questions and do your own research

Whether it's a Ponzi scheme or a fraudulent coin you want to avoid, a little homework on your part goes a long way. If an investment promises extremely high returns, make sure you understand how those returns are generated. And don't take someone else's word for it. Friends' social media posts and celebrity endorsements are all very well, but it's your money on the line, not theirs.

Watch out for impostors

In a rapidly changing space, it's easy for imitation sites and apps to capture your personal information and even your coins. Scammers can trick you into opening accounts with fake websites and apps. Avoid clicking on links in emails or from unfamiliar websites. Instead, bookmark pages you use regularly.

If you're using an exchange, opening a wallet, or downloading an app, pay attention to red flags like these:

  • URLs that don't contain "https"
  • Misspelled company names or a URL where a "0" has been switched with the letter "O"
  • Miscolored logos
  • Anything that doesn't feel 100% right

It's likely we'll see increased cryptocurrency regulation this year, but we don't yet know what shape it will take. The decentralized nature of these digital currencies makes them difficult to regulate. But it's clear authorities want to protect consumers against fraud, market manipulation, and illegitimate practices.

In the meantime, invest your money carefully -- and don't be afraid to question anything that doesn't stack up.

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