US regulators charge three Bitcoin operators with fraud | Hacker News Reader

US regulators charge three Bitcoin operators with fraud

engadget.com

CFTC complain links:

http://www.cftc.gov/PressRoom/PressReleases/pr7675-18#PrRoWM...

http://www.cftc.gov/PressRoom/PressReleases/pr7674-18#PrRoWM...

Second fraud is very common on bitcointalk. Many people who have gotten rich off bitcoin or other cryptocurrencies don't know how to spread their risk. They are not exactly investment savvy. So they routinely fall for fraudsters claiming to be expert investors. These fraudsters solicit coins to be converted to fiat and then invested in real estate or some other commodity.

This obviously is a bad idea because if you give say 1 BTC @ 10k USD, two things can happen:

a. BTC price increases to 15k USD. Now the fraudster needs to pay back 50% more in USD. So, the fraudsters routinely come back claiming the investment was a bust or they got hacked.

b. BTC price decreases to 8k USD. Now fraudsters need to pay 20% less. So they will come back claiming some family emergency and paying back all outstanding BTC obligations.

And I have tried explaining it to people on the forum only to be drowned with "This is FUD" posts.

I know saying this makes me unpopular, but I think maybe the best solution is to just leave things unregulated and let dumb money get burnt. The "this is FUD" crowd will never learn their lesson if the people teaching them get prosecuted. If someone wants to loose money on blatant scams with many warning signs, I say let them. If I want to take my life savings and put it all on red, that's my prerogative.

> I think maybe the best solution is to just leave things unregulated and let dumb money get burnt

There are a lot of unsophisticated "investors" who cannot differentiate investing from gambling.

We have experience with extra-systemic irrational exuberance. Too light-tough and the risks contaminate broader markets, thus fomenting a crisis. Too heavy and the risks go underground. There they (a) fuel broader criminality and/or (b) metastasize into the broader markets, thus fomenting a crisis.

A strategy focussing on three things emerges from the literature:

1. Stomp out obvious, easy-to-enforce-against fraud. This keeps regulators engaged, helps keep everyone wary and removes fuel from the fire.

2. Monitor lending channels. In the late stages of a bubble, the devoted few will borrow to buy. Run properly, this transfers wealth from them to those exiting. What you don't want is for said zealots to re-transfer their risk to lenders e.g. by buying on a credit card.

3. Support prudent, de-leveraging instruments used by sophisticated investors. You want a controlled place where the smart money can slowly exert countervailing pressure without causing a panic. Bitcoin futures, which encourage sober shorting while causing the effects of a bad bet to come home to roost every day, are a good example.

The best general-use analog I've found for bubble control is riot control, some principles of which are described in this video [1].

[1] https://www.youtube.com/watch?v=yT9bit2-1pg

It is theft. It's not a scheme, or a game, or a trick. They are stealing money. It needs to be made punishable.

As these frauds get more sophisticated, it won't just be "dumb" money getting burnt. The answer to "someone stole this from me" isn't "well you shouldn't have been so dumb" - whether it is your wallet, a package from your doorstep, or a bit. Theft is theft.

If someone takes a pallet of hundreds sitting in the open on the back of a truck. It's reasonable to say: "Take reasonable precautions, temping targets promote crime."

Bitcoin forums are filled with people that are both incompetent and well off, that's going to attract sharks. For similar reasons Google brought in investment advisers pre IPO to educate staff that where about to become targets.

PS: That's not to say any form of theft is ok. Just locked doors keep people honest and let police focus on more important things.

That's not how the law works. If you lie to get someone's money, that's fraud. If you take their money, that's theft. People being taken by obvious cons don't make these things not theft or not fraud.

That's not what I am saying. Bank vaults among other things prevent many bank robberies. If someone does not rob a bank then they are not a bank robber.

The above says nothing about people who do rob banks.

If someone takes a pallet of hundreds sitting in the open on the back of the truck, and it doesn't belong to them, it still meets the legal definition of theft. It might not be the best idea to leave it there, but that doesn't magically absolve the thief of legal responsibility.

This example isn't even one of those murky ethical grey areas around property (see: copyright law extensions, squatters' rights, medieval concepts of hunting rights, privatization of public resources, farmers' rights to re-grow seeds, etc.) - it's out-and-out theft.

I completely agree. However, a large chunk of society would take it even if they had never stolen anything before and did not intend to commit a crime that day.

PS: Look up Duty of Care, people can share responsibility even if a third party is commuting a crime. Placing a 10 lb solid gold statue on your roof and advertising this is is not just negligent, but flat out dangerous.

What you say shows the exact same mistake (but in opposite direction) as the "victim-blaming" crowd - conflating moral responsibility with practical wisdom. Yes, putting that gold statue on your roof is just stupid, because of the world we live in. No, that doesn't make the burglars less responsible, morally and legally, for robbing you. Those two statements are true at the same time.

What makes you think I disagree with that idea?

If everyone walked around holding a loaded gun, you would see far more gun violence. That has nothing to do with morality, just impulse control.

I am not saying people are not responsible for their own actions. Just that forms of crime prevention do actually work.

> What makes you think I disagree with that idea?

The whole subthread kind of looks like you're disagreeing with the idea that theft is theft.

> I am not saying people are not responsible for their own actions. Just that forms of crime prevention do actually work.

So we agree on that. My point is that it's not either-or - effective crime prevention doesn't make a crime not a crime.

> looks like you're disagreeing with the idea that theft is theft

I don't. If you're reading that into what I said that's on you.

A mass murder will commit fewer crimes in solitary confinement. That does not mean solitary confinement makes them a better person, or not a murder. It simply prevents future murders. So, the concepts are independent.

There is a dead comment here that I think raises an interesting question (even if perhaps not in the most appropriate way).

When dealing with electronic goods, where do we draw the line with theft. Even in video games, electronic goods do have an effective market value (even if real money trading is banned), and there have been a few court cases surrounding items of great value. Often times the items stolen has a market value too small to be worth investigating, but what of the cases where there is a significant investment. Eve Online has some interesting cases where the market value being above a few thousand US dollars. Diablo 3 use to have a real money auction house with items worth up to $300, and with a gold market that allowed for items to be sold for even more than that.

Now, Diablo 3 bans scams and would take action against players engaging in them. But in Eve Online, it looks like some of the tactics used are allowed. In another game, Path of Exile, scamming people is allowed (and there even seems to be some protections for scammers). While Path of Exile bans real money trading, there is still a black market and certain items do have a market value, some worth noticeable amounts.

And while I can't think of any case yet, it would be possible for a video game to be created where the in game currency is a crypto currency that is usable outside the game as a crypto currency as well.

I'm not saying we should legalize all scamming, but I do think it is worth discussing further where we draw a life, if we draw a line, and what that line looks like.

The same line is also drawn with physical goods too. If you report something worth a few hundred dollars stolen, the full extent of the investigation will probably be to file a report and then include the item in a list of things to look for in periodic checks of nearby pawn shops.

>As these frauds get more sophisticated, it won't just be "dumb" money getting burnt.

legit question, has there ever been an online scam that isn't obvious after an hour of research?

rhetorical question, is it reasonable to expect people to do an hour of research before "investing"

>The answer to "someone stole this from me" isn't "well you shouldn't have been so dumb"

Sometimes the answer really is "you shouldn't have been so dumb". "People shouldn't steal" is not a blank cheque to be negligent.

> If someone wants to loose money on blatant scams with many warning signs, I say let them.

I find this an abhorrent behavior that predates the uneducated. We have failed as a society to provide some people, actually a lot of people, with a good education. That people has a hard time defending themselves. Your solution to our failure is to let them being victims of scammers as punishment for being born with a lack of resources.

This is not only morally wrong but even from a purely utilitarian perspective only creates an incentive for companies to move from normal business to legalized scam practices.

> I know saying this makes me unpopular Take this as constructive feedback. This way of starting your comment creates the same kind of feeling than starting your sentence with "I'm not racist but...". It doesn't add anything to the conversation and it looks like you are trying to excuse something that yourself find wrong to start with.

Quite a lot of these people are the very old, many of whom had a good education with which they earned their money; but time and dementia leads people into accepting terrible investment scams.

I think the best solution to property crime is to leave things unregulated, and leave people too dumb, slow, and weak to defend themselves and their property get robbed.

Why should the rest of society pay for their inability to protect themselves? I've got mine.

(As soon as this becomes policy, I'll be looking for, ah, business partners.)

There’s a huge difference between blatant fraud, and not registering as a “Commodity Pool Operator” with the CFTC.

I can see the argument for allowing people to use unregulated services, but legalizing fraud and misrepresentation seems like insanity to me.

Imagine buying anything in a market where fraud is legal... you’d never know what you’re actually buying.

There’s enough dumb money to threaten the economy with scams like these.

> If I want to take my life savings and put it all on red, that's my prerogative.

A guy famously did that: https://www.youtube.com/watch?v=zGCdBsOIKYA

I find it curious that when someone suggests leaving an area of human action unregulated (i.e., not _a priori_ restricting otherwise non-criminal acts), others rush to read that as allowing crimes such as fraud to go unprosecuted.

The scams described are common financial scam types. These are standard CFTC actions that happen to apply to cryptocurrencies.

Look for actions involving more ICOs. The SEC and CFTC are mostly reactive; people send in "they stole my money" complaints, and those get processed. The regulatory actions happen after people lose money.

Those who’ve been drawn into this craze don’t seem to realize the risks involved. I’ve had several people with barely any technical literacy who’ve “invested” or asked about what it is. None of them understood the purpose, mechanisms of transfer, or risks.

When your your dry cleaner is telling you about a sure thing, you know the bubble is already over.

Once cryptos are roped off from money laundering, we’ll see the prices fall back down to Silk Road levels because black markets were and seem likely to remain their sole utility for some time.

Blockchain tech is really interesting. I think there’s some amazing stuff that could come out of the space. But anyone watching this closely should realize that there is a lot of magical thinking going on, largely because of the deflationary nature of many of the coins.

As someone who has been in the cryptocurrency space for many years and loves the tech, the space is still very much the wild west in terms of risks, scoundrels, pick-axe salesmen, and idealists looking for salvation.

So many avenues to take advantage of others.

>Once cryptos are roped off from money laundering, we’ll see the prices fall back down to Silk Road levels because black markets were and seem likely to remain their sole utility for some time.

Hmm, I think you might doubt the amount of true believers out there. Many bitcoin investors seem to be in a mindset where anything that happens is 'good for bitcoin.' Dips are good, high prices are good, volatility is good, lack of regulation is good, no wait regulation is happening? Actually regulation is good. Since bitcoin requires you to up the stakes and put money in the pot but also has no fundamentals there is a kind of concentrated effect we see on facebook and other social networks where you're massively incentivized to enter a thought bubble and only read good news about bitcoin.

You could be right. But from what I’ve read there’s a very small number of large owners who are almost certainly manipulating the market to enrich themselves while the vast majority have such tiny stakes as to be utterly insignificant in the scheme of things. Once the botting and laundering is unachievable, there may not be much of a game left for these players and I think all it will take is one or two deciding the jig is up to tank the market permanently. I think the libertarian ideologues will probably keep holding even if the music stops, but that won’t be enough to sustain any of this growth.

Read up on Spoofy and Picasso if you want to get a sense of some of the shenanigans going on here. This crescendo of growth is largely artificial, not even speculative in nature.

> I think you might doubt the amount of true believers out there

If you've experienced a proper run on an illiquid asset, you'll remember that the true believers never stop believing. People just stop lending to them.

> a kind of concentrated effect we see on facebook and other social networks where you're massively incentivized to enter a thought bubble and only read good news about bitcoin

Very astute observation. Imagine Ponzi days (or Mavrodi days) fueled by Facebook?

>Once cryptos are roped off from money laundering, we’ll see the prices fall back down to Silk Road levels because black markets were and seem likely to remain their sole utility for some time.

I don't think that'll happen for all countries.

You might even be able to run your crypto businesses in micronations and/or international waters: https://en.wikipedia.org/wiki/Micronation

Yes we see this comment rehashed on every crypto thread on HN, why? This article is about something specific.

>McDonnell and CDM engaged in a deceptive and fraudulent virtual currency scheme to induce customers to send money and virtual currencies to CDM, purportedly in exchange for real-time virtual currency trading advice and for virtual currency purchasing and trading on behalf of the customers under McDonnell’s direction

>In short, McDonnell and CDM used their fraudulent solicitations to obtain and then simply misappropriate customer funds

This raises some interesting questions: how do these schemes (which have been around much longer than cryptocurrency) differ when virtual currencies are involved instead of fiat?

Yes we see this comment rehashed on every crypto thread on HN, why?

Because it still bears saying, especially given how many people are just looking for greater fools to hold their bag. Inevitably the replies include a barrage of whataboutism centered on “fiat currency” in an attempt to normalize or justify the cryptocurrency shitshow.

This story has nothing to do with whether cryptocurrency is a bubble. It’s a simple instance of theft. Sophomoric prognostications on the future value of cryptocurrencies have nothing to add to the conversation about the article. This kind of thing is depressingly common on HN, and I believe the majority of them are written by people who have not read the article. They usually have nothing to do with the content of whichever article triggered them.

The article itself isn't particularly useful, but I'm pleasantly surprised by how well the CFTC has done with their press releases. They clearly explain the nature of the alleged crimes without any legalese.

One of the companies is accused of being an outright Ponzi scheme. They took money and promised to invest it, but just paid off other customers with the money instead. The second company took money, then vanished into the night without providing services.

As someone who is developing a business that involves Ethereum smart contracts, I'm pleased to see that the regulators seem well versed in crypto currencies, and they have a nuanced view of the subject.

This is appropriate. You don't need cryptocurrency to engage in a ponzi scheme - they've been going on since time immemorial.

I'm a pretty hard-headed realist, but I find it irritating that every price movement, every regulatory action, every rumour of new legislation is parroted about as proof of the broader illegitimacy of cryptocurrency as a medium of exchange.

Maybe the corollary to the rule of bubbles is - if everybody and their dog agrees that something is a bubble, but the price doesn't correct itself, maybe there are other factors at play beyond the simplistic media narrative?

Indeed, additionally it's a myth that libertarians and advocates of decentralized markets in general are against all government or law enforcement intervention as well. Enforcement of fraud and theft are exactly the type of stuff they view as a critical and necessary role of a centralized government.

The Bitcoin community should openly support this type of stuff which would help legitimize their industry, assuming the charges are credible I haven't yet checked. Only the tiny group of the most extreme (crypto) anarchists believe in some sort of total private/self-regulation in some idealized future.

I've never been convinced that Bitcoin will allow thieves and pedophiles and all the worst things the media talk about being able to operate without fear. It's extremely difficult to be a criminal in 2018 even with a decentralized pseudonymous currency, even assuming the police follow constitutional, targeted, and warrant-based approach to law enforcement (which would obviously should be the implied limits of community support for law enforcement action).

Ironically the best way to be a successful criminal in 2018 is probably to be as low-tech as possible. Bitcoin transactions are trivially easy to track, and the exchanges are an obvious place to apply regulatory pressure.

Tip of the iceberg... building up public opinion going after low hanging fruit first, then raiding the big US exchangers.

https://news.ycombinator.com/item?id=16183454

I wonder who the third case is. Bitfinex, perhaps?

Bitfinex isn't in USA and doesn't service US customers AFAIK. Not that it's not possible they're being charged with something, but it seems like a stab in the dark to guess it's them.

AFAIK they used to have some form of presence in the US until last year.

It's not Coinbase, of course, but notice how they managed to sneak a mention of that company into the article for the purpose of a price quote.

Reply on news.ycombinator.com