Introduction
There is no single commonly accepted definition of virtual or digital currency. For purposes of this volume, virtual currency is a digital representation of value that can be traded on the Internet and functions as (1) a medium of exchange; (2) a unit of account; and/or (3) a store of value, but does not have legal tender status in any jurisdiction. Virtual currency is distinguished from fiat currency (a.k.a. “real currency,” “real money,” or “national currency”), which is the coin and paper money of a country that is designated as its legal tender; circulates; and is customarily used and accepted as a medium of exchange in the issuing country. Virtual currency is also distinct from e-money, which is a digital representation of fiat currency used to electronically transfer value denominated in fiat currency. E-money is a digital transfer mechanism for fiat currency—i.e., it electronically transfers value that has legal tender status. Digital currency is a digital representation of either virtual currency or e-money.
Although virtual currencies may support important innovation and serve legitimate purposes, like traditional currencies or other methods of transferring value, virtual currencies may also be exploited for the purposes of money laundering, the facilitation and financing of terrorism, and to enable other crimes such as child pornography, drug trafficking, and cybercrimes.
Virtual currencies are designed to be an alternative to current payment systems. Better-known virtual currencies include Bitcoin, XRP, and Dogecoin. Often referred to in the industry as “digital currencies,” they are a way for people to track, store, and send payments over the Internet, and they may have the potential to make payment processing cheaper or faster. But they are not backed by any government or central bank. In addition, because virtual currency accounts are not insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, if a virtual currency company fails – and many have – the government will not cover the loss.
Virtual currency companies are springing up around the world to offer products and services to consumers. There are virtual currency exchanges, which are companies that help consumers buy or sell virtual currencies. There are also online “digital wallet providers,” which are companies that allow consumers to create accounts with them to store and manage their virtual currencies. Many virtual currency exchanges are also wallet providers, and vice versa.
Pitfalls include:
Exchange rates are volatile and costs unclear: The exchange rate of Bitcoins to U.S. dollars in 2013 fell as much as 61 percent in a single day. In 2014, the value of Bitcoins has dropped by as much as 80 percent in a single day. The advisory explains that consumers who buy virtual currencies should be prepared to weather this kind of volatility. Consumers should also consider whether there are mark-ups or other fees when using an exchange or digital wallet provider. Companies may be charging consumers to buy, spend, or accept virtual currencies.
Hackers and scammers pose serious security threats: Virtual currencies are targets for highly sophisticated hackers and scammers. Individuals, digital wallet providers, and exchanges are all at risk. For example, if a hacker gains access to a consumer’s Bitcoin “private keys,” which are 64-character codes that unlock the consumer’s funds, the consumer can lose all their virtual currency. Fraudsters are also taking advantage of the hype surrounding virtual currencies to pose as Bitcoin exchanges, Bitcoin intermediaries, and Bitcoin traders in an effort to lure consumers to send money, which is then stolen.
Companies may not offer help or refunds for lost or stolen funds: Some virtual currency companies do not identify their owners, provide phone numbers and addresses, or even specify the country in which they are located. Before using a company’s products or services, consumers should carefully consider if they know how to contact the company in question, and if they know their contractual rights. If a consumer trusts a company to hold their virtual currencies and something goes wrong, the company may not offer the kind of help the consumer would expect from a bank, debit card, or credit card provider. In fact, some virtual currency companies disclaim responsibility for consumer losses if funds are lost or stolen.
In February 2014, the Mt. Gox virtual currency exchange filed for bankruptcy, stating that a security breach resulted in the loss of bitcoins worth more than $460 million at the time. This incident is one of many real-world illustrations of the risks involved in using virtual currencies.
On January 24, 2018 the CFTC Charged Randall Crater, Mark Gillespie, and My Big Coin Pay, Inc. with Fraud and Misappropriation in Ongoing Virtual Currency Scam. Defendants allegedly solicited more than $6 million for investments in a virtual currency known as “My Big Coin”
The Commodity Futures Trading Commission (CFTC) announced the filing of a federal court enforcement action under seal on January 16, 2018, charging commodity fraud and misappropriation related to the ongoing solicitation of customers for a virtual currency known as My Big Coin (MBC). The CFTC Complaint charges Defendants Randall Crater of East Hampton, New York, Mark Gillespie of Hartland, Michigan, and My Big Coin Pay, Inc., a corporation based in Las Vegas, Nevada, with misappropriating over $6 million from customers by, among other things, transferring customer funds into personal bank accounts, and using those funds for personal expenses and the purchase of luxury goods.
On January 16, 2018, Judge Rya Zobel of the U.S. District Court for the District of Massachusetts, issued a restraining Order, also under seal, freezing the Defendants’ assets. The Order also freezes the assets of Relief Defendants Kimberly Renee Benge, Kimberly Renee Benge d/b/a Greyshore Advertisement a/k/a Greyshore Advertiset, Barbara Crater Meeks, Erica Crater, Greyshore, LLC, and Greyshore Technology, LLC for allegedly receiving customer funds without providing any legitimate services to clients and without any interest or entitlement to such customer funds. The court’s restraining Order also prohibits the Defendants and Relief Defendants from destroying or altering books and records.
CFTC’s Director of Enforcement Comments
Director of Enforcement James McDonald, stated: “As this case shows, the CFTC is actively policing the virtual currency markets and will vigorously enforce the anti-fraud provisions of the Commodity Exchange Act. In addition to harming customers, fraud in connection with virtual currencies inhibits potentially market-enhancing developments in this area. We caution potential virtual currency customers, once again, that they should engage in appropriate diligence before purchasing virtual currencies.”
Specifically, the CFTC Complaint alleges that from at least January 2014 through January 2018, the Defendants fraudulently solicited potential and existing MBC customers throughout the United States by making false and misleading claims and omissions about MBC’s value, usage, and trade status, and that MBC was backed by gold. Defendants also allegedly fraudulently solicited numerous customers in the District of Massachusetts, receiving in excess of $5 million from those customers.
As alleged in the Complaint, the MBC website, maintained and operated by the Defendants, conveyed to customers numerous solicitation materials, MBC trade data, and other materials (1) misrepresenting that MBC was actively being traded on several currency exchanges, including the MBC Exchange website, when in fact it was not; (2) misrepresenting in reports the daily trading price, when in fact no price existed because MBC was not trading; (3) misrepresenting that MBC was backed by gold, when in fact it was not; and (4) misrepresenting that MBC had partnered with MasterCard, with the promise that MBC could be used anywhere MasterCard was accepted, when in fact no such partnership existed and MBC could not be used anywhere MasterCard was accepted. In reality, as alleged, the supposed trading results were illusory, and any payouts to customers were derived from funds fraudulently obtained from other customers in the manner of a Ponzi scheme.
As customers began to raise questions about their MBC accounts, Defendants attempted to conceal their fraud by issuing additional coins to customers and falsely representing that they had secured a deal with another exchange to trade MBC, according to the Complaint. Defendants allegedly encouraged customers to refrain from redeeming their MBC holdings until MBC was active on this “new” exchange.
Misappropriated Funds Used for Personal Purchases, Including a Home, Jewelry & Travel
As further alleged in the Complaint, Defendants misappropriated virtually all of the approximately $6 million they solicited from customers. Defendants allegedly used these misappropriated funds to purchase a home, antiques, fine art, jewelry, luxury goods, furniture, interior decorating and other home improvement services, travel, and entertainment.
In its continuing litigation, the CFTC seeks civil monetary penalties, restitution, rescission, disgorgement of ill-gotten gains, trading and registration bans, and permanent injunctions against further violations of the federal commodities laws, as charged.
This case is brought in connection with the CFTC Division of Enforcement’s Virtual Currency Task Force, and CFTC staff members responsible for this case are Traci Rodriguez, Patricia Gomersall, Jonah McCarthy, Jason Mahoney, Hillary Van Tassel, John Einstman and Paul Hayeck.
Source: https://www.consumerfinance.gov/about-us/newsroom/cfpb-warns-consumers-about-bitcoin/
http://www.cftc.gov/PressRoom/PressReleases/pr7678-18