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Beware of ICO and Cryptocurrency Investment Scams

Estimated reading time: 2 minutes, 12 seconds

digital currency cryptocurrencyAs regulators continue to learn more about the new digital asset class, they are cracking down on scam artists.

For instance, in February, the Commodity Futures Trading Commission (CFTC) released a two-page circular warning against virtual currency scams. The CFTC warned investors about sales pitches touting “IRS-approved” or “IRA-approved” cryptocurrency accounts—just in time for tax season. But scammers will try to strike no matter the time of year.

Always be aware of fraudsters looking to take advantage of the heightened interest in ICOs and cryptocurrency.

Oftentimes, scam artists will put up coins or tokens via an ICO backed by an abstract idea or even nothing whatsoever. According to its chairman, Jay Clayton, the Securities and Exchange Commission (SEC) considers all ICOs to be securities and, therefore, will be regulated. The SEC even launched a fake ICO on the website HoweyCoins.com to educate investors on potential scams. It’s essentially the SEC’s version of a too-good-to-be-true coin offering.

For further guidance, the agency listed five red flags on its companion page to HoweyCoins.com:

  • claims of high, guaranteed returns;
  • celebrity endorsements;
  • claims of “SEC-compliant”;
  • investing with a credit card; and
  • pump and dump scams.

In one example, the SEC shut down an alleged $600 million ICO in January which had some of these hallmarks. Evander Holyfield was the company’s celebrity endorser.

But it’s not just the CFTC and SEC concerned about fraud related to ICOs and crypto assets. The North American Securities Administrators Association (NASAA) launched an enforcement effort in May to crack down on fraudulent ICOs and other investment scams related to crypto assets. The operation, called Operation Cryptosweep, has resulted in 47 enforcement actions thus far. In fact, since May, the number of active investigations has nearly tripled from 70 to 200.

Of course, not every cryptocurrency-related investment or offering is fraudulent.

However, with more investors entering the crypto space, fraudsters are looking for any way to make a buck off the demand. And investors should approach ICOs and crypto assets with the same caution as they do other alternative asset investments.

Remember that self-directed custodians do not evaluate an investment’s legitimacy or quality. As with any type of investment, one should be highly suspect of claims of guaranteed returns. Also be wary of any investment promotion indicating a custodian and/or the IRS has approved an asset.

With any investment opportunity, you must know the risks. Seek the counsel of your team of professionals (your advisor, CPA, attorney, etc.) before making any investment.

To report any suspicious activity regarding an investment, visit the CFTC’s fraud tip or complaint page. You can also fill out the SEC’s Investor Complaint Form if you have a problem with an investment, investment account or financial professional.

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