Published: September 20th, 2021
Britain’s national financial regulator, the Financial Conduct Authority (FCA), released data last week that showed a 200 per cent increase in reported cryptocurrency scams between March 2020 and April 2021.
Last March, the FCA received 175 tip-offs relating to possible cryptocurrency fraud attempts. A year later, the number had jumped to 568.
While the FCA’s recently expressed concerns about Binance and its operating model suggest it has potential crypto-fraud firmly in its sites, the spike in reports could be down to a changing investor profile.
‘Young people are twice as likely to choose high-risk investments as the overall adult population,’ the FCA said in a statement. ‘Some 46 per cent of cryptocurrency investments and 34 per cent of crowdfunding rounds are owned by people under the age of 35.’
However, with fraud on the rise, it’s no surprise that the finance watchdog is working to bring the crypto industry into line.
Over the past 12 months, there’s been a clear pattern of FCA enforcement actions that treat crypto as a consumer protection issue.
In January, the regulator issued a warning to the public about the risky nature of cryptocurrency investments.
“Buying into cryptocurrencies or crypto-backed investment vehicles typically comes with a high degree of investor risk. Any consumer investing in crypto products and services could potentially lose their entire investment.”
The FCA went on to list five key risks it had identified in crypto investments, including weak consumer protections and extreme price volatility that would put inexperienced investors at a high risk of losses.
In addition, the FCA said the technical complexity of crypto assets, unique charges and fee structures, plus marketing materials with unsubstantiated claims as inherent risks for the crypto investment space.
‘Consumers need to know the risks and take on board that high-return investments based on crypto assets could wipe out their purchases or trading positions’.
The watchdog has also taken umbrage at the behaviour of global crypto exchange Binance and its UK subsidiary, Binance Markets Limited (BML). The FCA published a warning to investors about BML in July, then doubled down in August, saying the firm was skirting UK regulatory law and may be incapable of staying inside Britain’s regulatory framework due to its decentralised nature.
In August, The FCA said Binance had refused to comply with demands for information about its operating model, including basics like a UK postal address. Because of its intransigence, the FCA said BML is ‘not capable of being supervised.’
Issuing a supervisory notice required in advance of enforcement action, the FCA said it’s ‘treating the organisation’s non-responses as direct refusals to deliver the required information. These include hiding simple details about how the business is organised’.
Binance has also resisted explaining in clearer detail how UK customers can purchase products or identify the legal entity responsible for Binance’s web domain, binance.com.
The regulator’s supervisory notice emphasises the FCA’s frustration with Binance’s attempts at obstruction.
‘Based on communications with the business to date, the FCA considers Binance in breach of UK finance law. This is especially worrying given the firm’s membership in a global Group which sells high-risk and technically complex financial products.’
The entity known as BML was previously called EddieUK, an investment firm licensed to operate in the UK since August 2018.
Binance bought EddieUK in April 2020, inheriting the license and necessary operating permissions from the FCA.
The FCA says Binance declared an intention to offer only regulated services and assets to investors; however, it was still out of compliance when the FCA issued its original consumer warning in June.
While the UK’s crypto fraud spike was being publicised, on the other side of the world, a notorious crypto fraudster received a harsh prison sentence and fine for defrauding unsuspecting investors.
Australian Stefan He Qin was sentenced to seven and a half years in prison and will have to pay a penalty of USD 54 million for his role in a scam that saw more than a hundred people defrauded of USD 113 million.
In his freshman year at university in 2017, Qin launched a hedge fund called Virgil Sigma Fund. It promised investors returns of up to 500 per cent based on an algorithm Qin named Tenjin, which could, he claimed, find opportunities for arbitrage by buying and selling cryptocurrencies across different exchanges.
In less than a year, the fund had garnered USD 23 million in funds under management, earning the fast-rising fund press coverage in the Financial Times. Two years later, the fund’s portfolio had grown to USD 92 million.
In February of 2020, Qin launched a second hedge fund and named it VQR. The fund was also a success, attracting more than USD 23 million in assets-under-management.
However, Qin’s apparent successes began to spin out of control. He had used investor capital to rent a palatial penthouse in Manhattan and fund an extravagant lifestyle. Substantial amounts of investor cash were secretly placed in highly speculative investments. He repeatedly lied about the fund's performance.
He also used investor funds to buy into a series of initial coin offerings, which were outside the scope of the fund’s promised arbitrage strategy.
The house of cards came crashing down in December of last year when redemption requests began pouring in from Virgil investors. Qin responded by cashing out trading positions at his second hedge fund to pay for the losses accumulated on behalf of Virgil clients.
Qin surrendered himself to American authorities in March 2021. While he initially faced as much as 20 years of prison time, his voluntary return to face trial and otherwise clean criminal clean gained him a more lenient sentence.
Crypto scams often lure unsuspecting victims using the promise of sophisticated trading algorithms that deliver big returns quickly.