Third-Party Enforcement of Cryptocurrency Markets

Shortly after viewers watched the Netflix series Squid Game, where contestants participated in a deadly, rigged contest for millions of dollars, real-life investors lost millions by investing in a fraudulent crypto token of the same name—SQUID.

Anonymous creators promised to create a crypto “play-to-earn” platform whereby people could virtually participate in the squid games. However, instead of building the game, the anonymous creators allowed the SQUID token’s value to soar and then cashed out with approximately $3.4 million. The investors were left with nothing.

Do Whistleblower Laws Apply to Cryptocurrencies?

Much like the game show in the television series, this scam could have been avoided had a whistleblower come forward. There were numerous red flags that a third-party whistleblower may have been able to recognize: The creators of the token were anonymous; the website allowed you to purchase the SQUID token but not sell it; its social media websites did not allow people to comment; and the website (since taken down, but archived versions are here and here) had a large number of grammatical mistakes.

There are doubtlessly many other cryptocurrency scams whereby a third party must come forward to protect innocent investors. Fortunately, whistleblowers can be rewarded for doing just that. Under the Securities and Exchange Commission (SEC) whistleblower program, if a whistleblower provides information to the SEC that leads to an enforcement action resulting in over $1 million in monetary sanctions, the SEC rewards whistleblowers between 10% and 30% of the sanctions.

While whistleblowers are frequently thought of as corporate insiders who secretly copy incriminating documents, in fact it is almost equally likely that the whistleblower does not even work for the company and is an outsider with reasonable suspicions regarding potentially fraudulent activity. In its 2021 year-end review, the SEC reported that 40% of recipients of an SEC whistleblower award were outsiders who reviewed the public record and determined there was a violation.

Examples of The SEC Taking Enforcement Actions Against Misleading Digital Assets

The cryptocurrency markets are an ideal avenue for third parties to come forward and blow the whistle on fraud. First, the SEC has made it a priority to enforce on cryptocurrency scams. On its website, the SEC lists over 80 instances in which it has enforced on false and misleading digital assets and/or initial coin offerings.

The actions include:

  • Enforcements against companies for failing to disclose how they used the funds raised from an initial coin offering (ICO), as in SEC v. Crowd Machine Inc.
  • Enforcements against companies for conducting an unregistered offering of digital asset securities, as in SEC v. LBRY, Inc.
  • Enforcements against individuals for making false statements in promotional materials disseminated to the public for an unregistered ICO, as in an SEC case against the founder of Bitcoiin2Gen.

Uncovering Cryptocurrency Scams via Publicly Available Documents

As indicated in the “Squid Game” scam above, the warning signs were publicly available, making third-party enforcement of cryptocurrencies possible.

Out of curiosity, we did a quick search of our own to find out whether other scams may be uncovered through reviewing publicly available documents. We reviewed white papers, grant requests, and LinkedIn profiles.

In one instance, we discovered that a creator of a cryptocurrency who raised over $25 million in an initial coin offering had a misleading, if not false, LinkedIn profile with no experience in the crypto space. We also found a $240,000 grant request that was approved by a major metaverse token – only to discover that the grantee company’s “lead developer” states on LinkedIn that he does not work for the grantee company, but another company in another field.

These examples above would be classified as “suspicious activity” and may provide an initial starting place for an investigation. Yet in our view, they are not sufficient for filing an SEC claim. Perhaps the LinkedIn profiles are not up-to-date, and the creators and developers are diligently working for their respective projects. We still do not know, based on the information above, whether the founders made false statements to investors regarding the cryptocurrency.

While by no means comprehensive, we have outlined below some more reliable guiding questions to consider when searching for signs of suspicious activity:

  • The White Paper: Did the founders publish false or misleading information in the document that provides investors with technical information regarding the company and its plans to grow?
  • Founder Information: Are the founders of the cryptocurrency credible?
  • Token Transactions: Are the founders selling the token once the ICO has completed?
  • Third-Party Backing: Does the party have venture capital backing? Has there been a third party that finds the token credible?
  • Cryptocurrency-Exchanges: Has the token been blacklisted by any exchanges?

Should I Come Forward As a Whistleblower?

Overall, while many third parties have the capacity to disclose cryptocurrency fraud, the decision to come forward as a whistleblower rests with each individual.

However, there are perks of hiring an attorney and submitting a claim to the SEC. Namely, whistleblowers who submit a tip to the SEC through an attorney stay anonymous. Moreover, anonymous, third-party whistleblowers are even less likely to experience retaliation from a company or in the market in general.

For cryptocurrencies to stay reputable and credible (as we hope it does), the amount of fraud and black-market activity must decline. As a result, by identifying instances of fraud, the whistleblower makes cryptocurrencies safer and more profitable for everyone. And if a whistleblower earns a reward for keeping the industry honest, then, all the better.

Our Whistleblower Attorneys Can Provide You with Reliable Counsel

Our award-winning legal team at Sanford Heisler Sharp has extensive experience representing whistleblowers trying to expose fraud and mismanagement. Our firm has helped the U.S. Government and a number of state governments in the recovery of billions of dollars through whistleblower actions. We are committed to providing whistleblowers across the country with the dedicated support and experienced counsel they need to navigate this complicated area of law.

Sanford Heisler Sharp is here to help you blow the whistle and work hard to protect you from retaliation, so please don’t hesitate to contact us today.

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