Exclusive interview with the FBI on ICOs and cryptocurrencies

Tuesday 19 February 2019 08:47 CET | Interview

ICOs and cryptocurrencies have experienced a dramatic increase between 2017 and 2018, and fraudsters know it

They have started exploiting these trends, and their crimes are characterised by deceit, concealment, or violation of trust. Here at The Paypers we aim to educate readers, investors, and financial parties to spot and fight scam ICOs and to inform them about some risks they are exposing themselves to when taking part in the token economy. This project wouldn’t have been possible without the help of a skilled FBI investigator, Steven M. D’Antuono, Section Chief of the FBI’s Financial Crimes Section within the Criminal Investigative Division, who shared with us his expertise.

What are the main characteristics of a scam ICO? How can we make a distinction between legal and fake ones?

Similar to most fraudulent investment vehicles, individual(s) conducting fraudulent initial coin offerings misrepresent either their ability or intention to fulfil the promised security, and/or the probability of projected returns that the investment will generate. The fraud scheme may vary, but some of the consistent threads running throughout most ICO scams are misrepresentations regarding the principals’ experience, misrepresentations regarding industry’s interest in the ICO, and misrepresentations regarding the coin’s probable rate of return. Like any investment product, rates of return can never be guaranteed and if it sounds too good to be true, it probably is.

Potential investors in an ICO should perform due diligence on the principals of the entity as well as the individual offering the security, and the investor should confirm where the entity is physically located and which laws and regulations will therefore apply to that entity. Investors should be particularly leery of entities offering coins that appear to be wholly internet based; where the investor cannot confirm a physical location of the entity other than perhaps a P.O. Box or the address of a registered agent. Ultimately, the market has shown that even investments in widely recognized virtual currencies have been volatile. An investor should be cognizant that an investment in virtual currency brings substantial risk, and they should only invest what they can afford to lose. Additionally, potential investors should practice good due diligence by checking the credentials of anyone promoting an ICO. This can easily be accomplished by checking the background and registration of any individual recommending an investment, including ICOs, by using the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck system.

With today’s fraud schemes being more sophisticated than ever – especially with regards to scam ICOs - what skills does FBI use to track down the culprits and stop scams before they start?

The Federal Bureau of Investigation (FBI) tries to abate potential scams prior to investors being victimised. Whether that comes through industry outreach, the FBI’s source base, or just plain research, the FBI is always trying to learn of scams and determine how we can mitigate the threat that the scams pose to investors. Specifically, the FBI has many employees versed in virtual currency and securities as well as multiple initiatives aimed at tracking and extinguishing virtual currency based schemes and the individuals that perpetrate them. We also work extremely close with our regulatory agency partners at the US Securities and Exchange Commission (SEC) and the US Commodity Futures Trading Commission (CFTC).

What is the impact of these activities on the US economy and consumers?

Unfortunately, many citizens, both US and foreign, have fallen prey to fraudulent coin offerings, investment frauds generally, and other scams involving virtual currency. While the FBI and other law enforcement and regulatory agencies are actively trying to eliminate the scams and bring the scammers to justice, there seems to be a lucrative market for the scammers, meaning they continue to appear. Perhaps our best tool in mitigating fraudulent offerings is getting information out to the public that they need to be careful prior to investing in these projects.

Bloomberg released a comprehensive report about how Bitcoin ATMs are being used for the purpose of money laundering activities. How do you comment on this?

Agreed. Innocent owners and legitimate businesses need to be certain that they are registered as a Money Service Business with the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of the Treasury, if they are owners of virtual currency ATMs or generally in the business of virtual currency exchange. FinCEN proclaimed, and multiple Federal District Courts have agreed, that if an individual or an entity is engaged in the business of virtual currency exchange, they are subject to registration requirements. Failure to register is a violation of 18 US Code Section 1960 - Prohibition of unlicensed money transmitting businesses.

For 2019, some people predict that ICOs will be replaced by securities token offerings (STOs). How does the US respond to this new trend in terms of regulation?

The regulatory landscape for cryptocurrencies is extremely muddy, but as a law enforcement agency, such a distinction has no bearing on our investigations of fraudulent offerings. The SEC determines if an offering is defined as a security by applying the US Supreme Court’s Howey test and in recent reporting I’ve seen the SEC opine that many of the tokens sold in 2017 and 2018 should have been classified as a security. Investopedia stated that there were 20,000 distinct tokens operating according to the ERC20 standard as of the first weeks of 2018. CCN suggested that ERC20 tokens “almost single-handedly dominated the ICO bull market of 2017 and that many successful cryptocurrencies are founded according to ERC20 protocol.” There is no reason to believe this trend will abate and we anticipate more tokens being offered in the future. The more tokens there are, the more risk there is for fraud in the market. As previously discussed, investors need to perform diligence prior to investing in any investment product. The FBI will continue our efforts to mitigate these threats and bring to justice the perpetrators, but the first line of defence against fraud is investors’ knowledge of the risk. We like to say the best victim is no victim at all.

About Steven M. D’Antuono

Mr. D’Antuono began his career with the FBI in 1996 as a Forensic Accountant assigned to the Boston Division, Providence Resident Agency. While in the Boston office, he supported investigations involving financial crimes, public corruption, organized crime, drugs, and counterintelligence. Mr. D’Antuono received an appointment as a Special Agent in July 1998 and was subsequently assigned to the Washington Field Office after graduating the FBI Academy. While in Washington, he investigated public corruption and white collar crime.

Mr. D’Antuono currently serves as the Section Chief of the FBI’s Financial Crimes Section within the Criminal Investigative Division. He currently oversees all aspects of WCC for the FBI including Corporate Securities and Commodities, Economic Crimes, Financial Institution Fraud, Money Laundering, Health Care Fraud, Intellectual Property and Forensic Accountant Programs.

Prior to his appointment to the FBI, Mr. D’Antuono, worked as a Certified Public Accountant developing an expertise in auditing, forensic accounting, and taxation.

About the Federal Bureau of Investigation (FBI)

The Federal Bureau of Investigation (FBI) is the domestic intelligence and security service of the US, and its principal federal law enforcement agency. Operating under the jurisdiction of the United States Department of Justice, the FBI is also a member of the US Intelligence Community and reports to both the Attorney General and the Director of National Intelligence. A leading US counter-terrorism, counterintelligence, and criminal investigative organization, the FBI has jurisdiction over violations of more than 200 categories of federal crimes.

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Keywords: FBI, ICO, crypto, cryptocurrencies, STOs, money laundering, Bitcoin ATM, fraud prevention, fraud scheme, due diligence
Countries: World