The California Department of Financial Protection and Innovation (DFPI) announced last month that it had issued cease and desist orders to 11 entities for violating California securities laws. Some of the highlights included allegations that they were offering unqualified securities as well as material misrepresentations and omissions to investors.
These breaches should remind us that while crypto is a unique and exciting industry for the general public, it is still a field that is rife with the risk of bad players and fraud. To date, government regulation of crypto has been minimal at best, with a noticeable lack of action. Whether you are a full-time professional investor or just a casual fan who wants to get involved, you need to be absolutely sure what you are getting yourself into before getting involved in any crypto opportunity.
California has toyed with implementing a crypto-specific business registration process for those looking to do business in the state. The proposed framework was vetoed by Governor Gavin Newsom because the resources required to establish and enforce such a framework would be prohibitively expensive for the state. While this type of compliance infrastructure has yet to be used, it underscores regulators’ concerns about the crypto industry.
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There seems to be a trend that new industries, especially those that attract as much international attention as crypto, are particularly susceptible to fraud. You only have to go back to the legalization of cannabis to find the last time California had to deal with fraudulent schemes on this scale.
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It seems inevitable that California, known for being a frontrunner in regulation and compliance, will create some form of crypto-specific compliance infrastructure in the name of consumer protection. If history is any indication, once California releases its framework, other states will follow.
Federal and state officials have attempted to draft legislation to establish financial standards for crypto with little luck so far. At the federal level, Senators Cory Booker, John Thune, Debbie Stabenow and John Boozman co-sponsored a bill to empower the Commodities Futures Trading Commission (CFTC) to serve as a crypto regulator, while Senators Kirsten Gillibrand and Cynthia Lummis co-sponsored a bill to establish clearer guidelines for digital assets and virtual currencies. Lawmakers have even reached out to tech luminaries such as Mark Zuckerberg to weigh in on crypto fraud.
None of these or other similar crypto-focused bills are expected to pass in 2022, but this level of bipartisan cooperation has been unprecedented in recent times. The collaboration should reflect the magnitude of the need for a regulatory framework. Simply put, Democrats and Republicans talking nonsense to each other should stop the press, but the fact that they are co-sponsoring multiple bills should tell us there is a monumental need for guidance.
How should one approach investing in the crypto space if the government is not going to establish controls for crypto? There are a few general things to consider if presented with a crypto investment opportunity.
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When considering an opportunity, do your due diligence! Don’t take their word for it without some level of substantial support. If cryptography is not an area of expertise, contact professionals who have qualified experience. Be sure to use crypto monitoring and blockchain analysis tools, if possible, as part of the verification process.
A common strategy of scammers is to put undue pressure or artificial delays on a potential closure. Slow down the process and use all the time necessary to make an investment decision.
If it sounds too good to be true, it probably is. As exaggerated as the cliche is, it raises a valid point. There have been instances of schemes offering to pay initial and ongoing dividends to any new investors that are brought in and to pay additional dividends to any investors that those new investors bring in. If this sounds like a pyramid or multi-level marketing scheme, that’s because it is. Terms like “Risk Free Investment” are also used. Ultimately, if no one knows where the opportunity is coming from, beware.
While crypto can be a fun and electrifying topic with plenty of legitimate opportunities, there are bad players who will take advantage of the lack of government oversight and the excitement of overenthusiastic or undereducated investors.
Zach Gordon is a Certified Public Accountant (CPA) and Vice President of Crypto Accounting for Propeller Industries, serving as a fractional CFO and advisor to a portfolio of crypto and Web3 clients. He was named a Forty Under 40 CPA, serves on the NYSSCPA’s Digital Assets Committee, and has worked with crypto clients in various capacities since 2016.
This article is for general informational purposes and is not intended to be and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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California Fraud Cases Highlight Need For Regulatory Crackdown On Crypto
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