Katherine Ross

The US Department of Justice charged two men with operating a crypto Ponzi scheme.



David Saffron, an Australian national, and Vincent Mazzotta of California stole $25 million from victims under multiple false entities, including one dubbed the “Federal Crypto Reserve.”



The men are charged with conspiracy to commit money laundering, money laundering, conspiracy to commit wire fraud, wire fraud and conspiracy to obstruct justice.&nbsp;



According to a DOJ <a href="https://www.justice.gov/opa/pr/two-men-charged-operating-25m-cryptocurrency-ponzi-scheme">press release</a>, the two are looking at hefty maximum sentences of roughly 75 years, with each count of conspiracy to commit wire fraud and money laundering racking up 20 years. Additionally, they face 20 years for wire fraud, five years for obstruction of justice and 10 years for money laundering.&nbsp;



Saffron faces a potential extra 10 years due to allegedly committing “felonies while on pre-trial release.”



Back in 2019, Saffron was charged by the Commodity Futures Trading Commission for engaging in a scheme to defraud victims of bitcoin and USD.



Read more: <a href="https://blockworks.co/news/cftc-whistleblowers-fraud-crypto-scams">CFTC highlights record number of tip-offs stemming from the crypto industry</a>



The scheme prompted victims to invest “in various trading programs that falsely promised to employ an artificial intelligence automated trading bot to trade victims’ investments in cryptocurrency markets and earn high-yield profits.”



The money that the two received from victims was put towards private jet flights, luxury hotels, a personal chef and security guards as well as renting out private mansions.



Aside from the Federal Crypto Reserve, the two also used names such as “Circle Society, Bitcoin Wealth Management, Omicron Trust, Mind Capital, and Cloud9Capital.”



When victims would try to recover the stolen funds, the Federal Crypto Reserve (operated by Mazzotta and Saffron) would step in to help, with Saffron operating under aliases such as Bitcoin Yoda, David Gilbert, Blue Wizard and David Gabe.



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‘Bitcoin Yoda’ faces 75 years for operating a crypto Ponzi scheme

Shalini Nagarajan

Macauley Peterson

Investors fear they may have lost tens of thousands of pounds after a cryptocurrency investment group which benefited from connections to UK parliamentary groups apparently disappeared.



Phoenix Community Capital, which once carried an $800 million valuation, appeared to have vanished in September 2022 as no traces of the community could be tracked, The Guardian <a href="https://www.theguardian.com/politics/2023/feb/23/crypto-firm-with-links-to-parliamentary-groups-appears-to-have-vanished" target="_blank" rel="noreferrer noopener">reported</a> last week. That means its website went down and investors couldn’t access their investment portfolios.



Alan Rogers, a former Premier League footballer, is said to have been among the firm’s 8,000 investors, some of whom claim to have lost as much as $100,000. The firm reportedly used links to parliamentarians in the House of Lords to promote itself.&nbsp;



Rogers, who told the outlet he lost around $50,000 himself, thinks the founders are no longer part of the project.



The firm’s co-founder, Luke Sullivan, has been cagey about its current status. When The Guardian asked him what was happening, he said he would respond if the outlet’s reporters traveled to the Philippines for a further discussion. He also criticized the British daily for factual inaccuracies and said he wasn’t being given a chance to clarify “real facts.”&nbsp;



The founders, including Sullivan, may have left the firm in September; The Guardian saw a now-deleted tweet on its feed that said new management had taken over.&nbsp;



According to his <a href="https://www.linkedin.com/in/luke-s-0750b7aa/" target="_blank" rel="noreferrer noopener">LinkedIn page,</a> Sullivan still holds the chief executive title at Phoenix and also is the CEO at NFT marketplace, SpectrumNFT. He didn’t return Blockworks’ request for comment by press time.



Phoenix Community reportedly gave £5,000 ($5,970) last year to the all-party parliamentary group (APPG) focused on blockchain — an informal group that functions as the authoritative voice within the parliament on blockchain-related topics. The firm, which used to be listed on the APPG’s website as one of its corporate partners, was originally US-based.&nbsp;



On its <a href="https://www.linkedin.com/company/phoenix-community-capital-inc/" target="_blank" rel="noreferrer noopener">LinkedIn</a> page, Phoenix describes itself as working for investors “by leveraging combined investment capital which elevates into investment options that are unavailable to the average investor.” Meanwhile, on its <a href="https://medium.com/@phoenix-community-capital" target="_blank" rel="noreferrer noopener">Medium</a> page, Phoenix says it’s “creating Avalanche network&#8217;s first community-backed crypto asset management fund.”



A portion of the project&#8217;s remaining assets and its name may have been sold to someone called “Dan,” The Guardian reported. The new buyer has reportedly shown no obligations to old investors, but some who took a terrible hit have been paid as much as $1,000.



In October, the new company reportedly said around 1,000 investors made returns of around $57 million, while 7,400 investors were still missing some $87 million.&nbsp;



The event raises concerns about the use of parliamentary endorsement by companies. It also throws a light on how companies attempt to use politicians to gain public acceptance, thereby leading investors to trust the company without much due diligence.



<h2 class="wp-block-heading">News analysis by Macauley Peterson</h2>



This project appears to have been riddled with flags as red as a burning Phoenix from inception. It abused industry buzzwords like DAO, DeFi, and NFTs while having very little in common with legitimate cryptoasset applications.



The Phoenix token, FIRE, supposedly granted holders voting rights in a DAO, according to an archived version of <a href="https://web.archive.org/web/20220108115237/https://thephoenix.finance/docs/Phoenix%20Community%20Capital%20White%20Paper.pdf" target="_blank" rel="noreferrer noopener">the project’s whitepaper</a>.



The tokenomic breakdown called for 70% of purchased tokens to be used to pay member rewards, 10% to provide liquidity in an Avalanche decentralized exchange (dex), while the remaining 20% were transferred to a centrally controlled “community investment treasury wallet,” ostensibly maintained by a 3-person multisig wallet including two members of the team and one “DAO representative.”



No indication was given whatsoever as to how the project intended to generate any investment revenue other than through its &#8220;research.&#8221;



The <a href="https://blockworks.co/news/predatory-tokenomics-explained">predatory structure</a> resembles a classic Ponzi scheme, dressed up with just enough jargon — including NFTs that “reward investors with an increased growth rate of $FIRE Token rewards” — to convince overly credulous participants to hand over actual money in exchange for speculative tokens held in a custodial wallet.



About 86% of the project’s <a href="https://snowtrace.io/token/0xfcc6CE74f4cd7eDEF0C5429bB99d38A3608043a5" target="_blank" rel="noreferrer noopener">FIRE token</a> is held by just three wallets, Avalanche’s block explorer Snowtrace <a href="https://snowtrace.io/token/0xfcc6CE74f4cd7eDEF0C5429bB99d38A3608043a5#balances" target="_blank" rel="noreferrer noopener">shows</a>, and the token has lost 99.97% of its value in the past year, <a href="https://www.coingecko.com/en/coins/the-phoenix" target="_blank" rel="noreferrer noopener">per CoinGecko</a>.&nbsp;



The “Founders’ Restrictions” in the whitepaper describe an unspecified token allocation “as compensation for the creation of this DAO [due to founders] having used their own personal funds to start this community effort,” with only a three-month lockup period.



Reputable projects clearly delineate token allocations with on-chain auditable vesting schedules that usually run a year or more.



Using invested funds to pay rewards to other investors and provide exit liquidity for the founders after just three months, could hardly be expected “to tie their success to the success of the community members.”



The now-deleted whitepaper stated that “The Phoenix Community Capital management team may make operational decisions without conducting a community vote and we reserve the right to do so,” indicating it was neither decentralized, autonomous, nor particularly organized.



It also touts <a href="https://www.certik.com/projects/thephoenix" target="_blank" rel="noreferrer noopener">an audit</a> by CertiK, which gave the project a “trust score” of 85 out of 100, despite flagging two “centralization related risks” classified as “major,” among 12 total issues.



CertiK’s CEO and co-founder, Ronghui Gu, told Blockworks his company performs, &#8220;multiple levels of due diligence&#8221; on client projects.



&#8220;Our auditors&#8230;proposed short and long term mitigations to the centralization problem, along with the measures that would be needed to consider the issue permanently resolved,&#8221; Gu said, adding, &#8220;The team acknowledged the suggestions and chose to implement none of them.&#8221;



&#8220;These reports are public, and we always encourage users to read them before getting involved with a project,&#8221; he said.



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Updated, Feb. 27, 2023: Added a comment from CertiK.



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Former Premier League Player Caught in Defunct Crypto Promoted in UK Parliament

A string of findings by an independent examiner show Celsius operated its business in a manner completely unlike what it advertised, a <a href="https://cases.stretto.com/public/x191/11749/PLEADINGS/1174901312380000000039.pdf" target="_blank" rel="noreferrer noopener">report</a>, published Tuesday, revealed.



Shoba Pillay, the <a href="https://blockworks.co/news/celsius-to-shell-out-some-5m-on-independent-examiner">court-appointed examiner</a> in Celsius’ bankruptcy case, was given a mandate to review its native currency CEL, its representations to customers and to examine claims that its operations qualified as a “Ponzi scheme.”



She wrote that customers were sold on the concept that the lender offered better returns than a traditional bank, but it “was not the business that Celsius actually operated.”



Celsius emphasized that it puts its “community first,” with former CEO Alex Mashinsky convincing investors that customer-deposits coins “are your coins, not our coins,” she said. He also promised that coins would be returned to owners even in the event of a bankruptcy, her report alleged.



Another foundational marketing ploy the firm is said to have used is trading in its CEL token. Customers were allegedly told they would score CEL rewards that Celsius would procure from the company’s internal treasury or by buying CEL in the secondary market — what it described as a self-sustaining “flywheel.”



“From its inception, however, Celsius and the driving force behind its operations, Mr. Mashinsky, did not deliver on these promises. Behind the scenes, Celsius conducted its business in a starkly different manner than how it marketed itself to its customers in every key respect,” Pillay said.



Blockworks has reached out for comment on the examiner’s report.



<h3 class="wp-block-heading">Celsius abandoned transparency promises from the get-go</h3>



Celsius allegedly failed to tell customers about its flop initial coin offering (ICO). Mashinsky had initially promised to snap up any unsold tokens from the ICO, but failed to deliver on that pledge.&nbsp;



However, the company chose to “substantially expand” its CEL purchases in 2020, with the intention to boost its price, and timed purchases in a way that would create a market buzz around the token. So although Celsius customers were aware the company would purchase CEL tokens, the lengths to which it would go was kept hidden.



The report stated that Celsius’ head of trading desk wrote to colleagues including the CFO: “Just to clarify between us three: The last 3-4 months we bought always more CEL than what we pay as interest per week but we did not buy it for the interest payments, that is just what we told the community.”



They later praised their secretive purchases and discussed how it led to “people thinking [the price of CEL] is going to the moon haha.”



<h3 class="wp-block-heading">Edits to Ask Me Anything interactions</h3>



Internal managers noted that several statements Mashinsky made in his tweets and during AMAs weren’t accurate. The chief risk office proposed editing the AMAs beginning May 2021 even though investors may have heard them, and before they were posted to YouTube, “to eliminate any misleading statements.” However, Mashinsky thwarted this effort as he felt delays would lead to doubts.



“Throughout 2021 and up through the bankruptcy filing, Celsius continued to identify incorrect statements Mr. Mashinsky made during the AMAs,” the report said. “In some instances, Celsius was able to edit the AMAs after posting; in other instances, it was not.”



<h3 class="wp-block-heading">Employee concerns about CEL</h3>



The examiner noted that CEL had limited utility as it could only be used on Celsius, that employees often discussed it was “worthless” and that its price should have been zero.



Celsius also engaged in protecting the price of its token if insiders like Mashinsky wanted to cash out and make millions on his CEL holdings.



The report noted an employee saying internally on Slack: “if anyone ever found out our position and how much our founders took in USD could be a very very bad look…We are using users USDC to pay for employees’ worthless CEL…All because the company is the one inflating the price to get the valuations to be able to sell back to the company.”



Dean Happen, coin deployment specialist at Celsius, noticed that customer funds were being used to fund CEL purchases. In January 2021, he said internally that his title at Celsius should be “Ponzi Consultant.” And last year, Tappen called Celsius’ practice of using customer assets to fund CEL purchases as “very Ponzi like.”&nbsp;



<h3 class="wp-block-heading">Use of new customer funds to support withdrawals</h3>



The examiner found that Celsius didn’t have enough liquidity to cover future withdrawals in the period leading up to its withdrawal pause, and that it had to rely on new customers to fund further claims. This would be typical of a Ponzi case, but the examiner didn’t explicitly state that it amounted to one.



“If Celsius had not instituted the Pause and the run on the bank continued, new customer deposits inevitably would have become the only liquid source of coins for Celsius to fund withdrawals,” Pillay found.



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Celsius Execs Joked that Investors Thought the CEL Token Was ‘Going to the Moon’

<div id="highlights-block_631af7251aa93" class="highlights">
 <ul>
 <li>Chief Trader pleaded guilty to one count of conspiracy to commit securities fraud</li>
 <li>Founders Emerson Pires and Glavio Goncalves have allegedly fled to their home country, Brazil</li>
 </ul>
 
</div>



A Florida-based head trader of cryptocurrency platform EmpiresX pleaded guilty to an alleged Ponzi scheme that collected $100 million from investors.



28-year-old Joshua David Nicholas admitted to promoting a company-operated trading bot along with co-conspirators, claiming that it used artificial and human intelligence to maximize gains for investors, the Department of Justice (DOJ) said in a <a href="https://www.justice.gov/opa/pr/empiresx-head-trader-pleads-guilty-global-cryptocurrency-investment-fraud-scheme-amassed" target="_blank" rel="noreferrer noopener">statement</a> Thursday.


<div class="wp-block-image">
<figure class="alignright size-full"><img loading="lazy" decoding="async" width="278" height="283" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Joshua-David-Nicholas.png" alt="" class="wp-image-30610" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Joshua-David-Nicholas.png?w=278 278w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Joshua-David-Nicholas.png?w=252 252w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Joshua-David-Nicholas.png?w=256 256w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Joshua-David-Nicholas.png?w=215 215w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Joshua-David-Nicholas.png?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Joshua-David-Nicholas.png?w=50 50w" sizes="(max-width: 278px) 100vw, 278px" /><figcaption>Joshua David Nicholas</figcaption></figure></div>


Prosecutors allege that, instead of providing a profitable service, they rewarded earlier investors with money collected from later investors. EmpiresX also never registered its investment program as an offering with the Securities and Exchange Commission (SEC), nor did it have an exemption to do so, the DOJ said.



Nicholas pleaded guilty to one count of conspiracy to commit securities fraud. He faces a maximum penalty of five years in prison.&nbsp;



The plea follows a <a href="https://www.justice.gov/usao-sdfl/pr/three-men-charged-100-million-cryptocurrency-fraud" target="_blank" rel="noreferrer noopener">June indictment</a>, when DOJ officials charged Nicholas along with the founders of the firm, Emerson Pires and Flavio Goncalves, with conspiracy to commit wire fraud and securities fraud. The latter two were also charged with conspiracy to commit international money laundering.



On the same day as the DOJ’s indictment, the SEC also <a href="https://www.sec.gov/news/press-release/2022-119" target="_blank" rel="noreferrer noopener">charged</a> all three individuals over allegations of luring investors with false claims of 1% daily profits and misappropriating investor money for personal use.



Pires and Goncalves, both Brazilian nationals, have allegedly fled to their home country.


<div class="wp-block-image">
<figure class="aligncenter size-full"><img loading="lazy" decoding="async" width="830" height="450" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Emerson-Pires-and-Flavio-Goncalves.png" alt="" class="wp-image-30609" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Emerson-Pires-and-Flavio-Goncalves.png?w=830 830w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Emerson-Pires-and-Flavio-Goncalves.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Emerson-Pires-and-Flavio-Goncalves.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Emerson-Pires-and-Flavio-Goncalves.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Emerson-Pires-and-Flavio-Goncalves.png?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Emerson-Pires-and-Flavio-Goncalves.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Emerson-Pires-and-Flavio-Goncalves.png?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Emerson-Pires-and-Flavio-Goncalves.png?w=50 50w" sizes="(max-width: 830px) 100vw, 830px" /><figcaption>Emerson Pires and Flavio Goncalves</figcaption></figure></div>


A sentencing date for Nicholas hasn’t yet been scheduled. Julie Holt, the public defender representing Nicholas, didn’t return Blockworks’ request for comment by press time.



The debate over which cryptocurrencies, and therefore which adjacent businesses, are considered securities currently shrouds the entire industry.



SEC Chair Gary Gensler <a href="https://cms.blockworks.co/gensler-on-board-with-cftc-taking-over-bitcoin-oversight/" target="_blank" rel="noreferrer noopener">said</a> on Thursday that he would support a growing consensus that cryptocurrencies such as bitcoin — which he terms non-security tokens — to be handled by the Commodity Futures Trading Commission, rather than the SEC. Still, he said a majority of crypto tokens are securities that should come under his jurisdiction.



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Bogus Trading Bot Operator Guilty of $100M Fraud

Sebastian Sinclair

<div id="highlights-block_63198d7e34faa" class="highlights">
 <ul>
 <li>Vermont joins 40 other state regulators in their pursuit of Celsius&#8217; true financials</li>
 <li>Celsius’ liabilities may have exceeded its assets as far back as February 2019, Vermont’s regulator alleges</li>
 </ul>
 
</div>



Vermont is requesting the appointment of an examiner with “broad powers” to further investigate embattled crypto lender Celsius and its financials.



The Vermont Department of Financial Regulation alleged Wednesday the lender manipulated the price of its CEL token and used investor deposits to boost its net position in them, according to a <a href="https://cases.stretto.com/public/x191/11749/PLEADINGS/1174909072280000000015.pdf">court filing</a>, first <a href="https://twitter.com/davidzmorris/status/1567515126302998528">reported</a> by Coindesk.



Celsius filed for chapter 11 bankruptcy in July after a month-long battle to stay solvent following Terra’s collapse. The <a href="https://cms.blockworks.co/7-critical-events-in-the-celsius-bankruptcy-case/" target="_blank" rel="noreferrer noopener">court proceedings that followed</a> have exposed a $3 billion hole in its balance sheet.



The regulator alleges Celsius misled investors on the state of its financial health which “likely” baited retail investors into keeping their funds on its platform, irrespective of the crypto market’s wild price swings.



Roughly 100,000 creditors are also reportedly owed money by the lender after they lent the firm unsecured cash loans. Sam Bankman-Fried’s trading firm, Alameda Research, is one of the high-profile lenders caught in the cross hairs.



<blockquote class="wp-block-quote">&#8220;At a minimum, Celsius has been operating its business in violation of state securities laws, the regulator said in its filing. “That improper practice alone warrants investigation by a neutral party.”</blockquote>



The regulator also alleges Celsius’ liabilities may have exceeded its assets since at least February 2019, before taking into account its net position in CEL tokens. The practice of artificially inflating its token led to the potential enrichment of insiders at the expense of retail investors, Vermont’s regulator said.



That revelation has some commentators calling the operation a Ponzi scheme.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">This should be jail for Celsius CEO Mashinsky. Total ponzi scheme. <a href="https://t.co/7jNA3NXRXa">pic.twitter.com/7jNA3NXRXa</a>&mdash; Nate Anderson (@ClarityToast) <a href="https://twitter.com/ClarityToast/status/1567531634592727049?ref_src=twsrc%5Etfw">September 7, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Vermont joins at least 40 other state securities regulators in a multistate investigation of potential securities fraud, mismanagement and market manipulation, the filing reads.



Losses suffered by retail investors and savers, which include middle class unaccredited investors, some of whom parked their life savings on the platform, are the focus of Vermont’s fight, the financial watchdog said.



“The appointment of an examiner is critical to ensure the interests of these investors are protected.”



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40 State Regulators are Opening Celsius’ Books in Search of Fraud

Ben Strack

<div id="highlights-block_62fa11710b204" class="highlights">
 <ul>
 <li>Recent regulator actions are the culmination of efforts to bolster authority in the space made in the past year</li>
 <li>Defendants in current case against alleged crypto scheme Forsage could challenge SEC’s jurisdiction, lawyers say</li>
 </ul>
 
</div>



Regulation by enforcement will continue in the absence of concrete crypto legal frameworks, according to industry executives and lawyers, as regulators are seeking to spotlight recent investor protection issues in the space.&nbsp;



Crypto-related cases and enforcement actions have picked up in recent weeks. The SEC most recently charged 11 people for allegedly creating and promoting <a href="https://cms.blockworks.co/sec-charges-11-in-alleged-300m-crypto-pyramid-scheme-forsage/" target="_blank" rel="noreferrer noopener">a fraudulent crypto pyramid and Ponzi scheme, called Forsage</a>, that raised more than $300 million from retail investors.



The regulator, along with the US Department of Justice (DOJ) also <a href="https://cms.blockworks.co/sec-charges-former-coinbase-product-manager-with-insider-trading/" target="_blank" rel="noreferrer noopener">charged a former Coinbase employee</a>, along with his brother and his friend, with insider trading last month. The SEC alleges in the complaint that <a href="https://cms.blockworks.co/qa-the-sec-classified-9-tokens-as-securities-now-what/">nine different crypto tokens are securities</a>.



On June 30, the DOJ charged six people with crypto fraud offenses in cases involving more than $100 million in losses. One was the largest known NFT scheme charged to date, involving an alleged so-called “rug pull” scheme involving the Baller Ape Club NFTs.&nbsp;&nbsp;



Much of the latest enforcement activity has been in the works for a while, according to Ari Redbord, head of government affairs at <a href="https://www.trmlabs.com" target="_blank" rel="noreferrer noopener">TRM Labs</a>.&nbsp;&nbsp;



“These aren’t necessarily new frauds or scams; they’re frauds or scams that are now finding their way through the enforcement system or the criminal justice system,” he said. “It feels very much like a lot is going on right now, but some of it is the culmination of what started six months or a year ago.”&nbsp;



<h3 class="wp-block-heading">Regulation by enforcement on a backdrop of regulatory uncertainty</h3>



The SEC renamed its cyber team in the agency’s Division of Enforcement to the Crypto Assets and Cyber Unit, in May. The regulator revealed at the time that it would add 20 people to the team responsible for protecting investors in crypto markets and cyber-related threats, bringing its headcount to 50.



“The SEC has already turned up the heat, and I would expect that heat to continue and possibly get even hotter as the SEC attempts to expand its authority over an industry already inundated with regulatory uncertainty,” said <a href="https://www.linkedin.com/in/adam-pollet-8168073/" target="_blank" rel="noreferrer noopener">Adam Pollet</a>, a partner in Eversheds Sutherland’s securities enforcement and litigation practices.



<a href="https://www.linkedin.com/in/patrick-daugherty-232701b/" target="_blank" rel="noreferrer noopener">Patrick Daugherty</a>, a former SEC lawyer and partner at Foley &amp; Lardner, added: “Fraud cases are easy cases. I expect the SEC to bring easy cases to chalk up easy wins.”



The Department of Justice in February <a href="https://cms.blockworks.co/fbi-doubles-down-on-crypto-crimes-with-new-unit/" target="_blank" rel="noreferrer noopener">named a director for its National Cryptocurrency Enforcement Team</a> — a new unit focused on digital asset seizure and blockchain-based lawbreaking.



<a href="https://www.linkedin.com/in/ari-redbord-4054381b4/" target="_blank" rel="noreferrer noopener">Redbord</a>, who, before TRM Labs, was a US prosecutor and an official at both the DOJ and the US Department of the Treasury, said that recent events such as the collapse of <a href="https://cms.blockworks.co/tag/terra/" target="_blank" rel="noreferrer noopener">Terra’s algorithmic stablecoin UST</a> and the LUNA token have spurred regulators to want to shine a light on consumer protection issues and stability risk in the space.



“It’s difficult to get anything through Congress, so you’re not necessarily going to get any clear legal framework any time soon,” he added.



<blockquote class="wp-block-quote">“You see regulation by enforcement action for better or worse because without clear legal frameworks, regulators are going to sort of interpret their own authorities themselves.”</blockquote>



Though guidelines are fairly clear in the anti-money laundering space, having a clear regulatory framework in place is critical in the securities space, Redbord said.&nbsp;



Unlike the DOJ, which must prove wire fraud, he added, the SEC must also show that the co-conspirators traded on insider information involving securities.



Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-N.Y., in June <a href="https://cms.blockworks.co/bipartisan-crypto-bill-hits-congress-with-focus-on-cftc-jurisdiction-taxes/" target="_blank" rel="noreferrer noopener">introduced</a> the <a href="https://www.gillibrand.senate.gov/imo/media/doc/Lummis-Gillibrand%20Responsible%20Financial%20Innovation%20Act%20%5bFinal%5d.pdf" target="_blank" rel="noreferrer noopener">Responsible Financial Innovation Act</a>, which has a section on “securities innovation.”



“That is something that is going to be negotiated and iterated on and discussed for some time,” he said.&nbsp;



<h3 class="wp-block-heading">What’s next in the Forsage case?</h3>



Though industry watchers expect the SEC to ramp up enforcement actions within the crypto space, they acknowledged not all cases will be easy.&nbsp;



Forsage, for example, continued to operate despite receiving cease-and-desist actions from the <a href="https://www.sec.gov.ph/pr-2020/sec-issues-cease-and-desist-order-against-forsage/" target="_blank" rel="noreferrer noopener">SEC of the Philippines</a> in September 2020 and the <a href="https://csimt.gov/news/commissioner-downing-orders-forsage-to-cease-and-desist/" target="_blank" rel="noreferrer noopener">Montana Commissioner of Securities and Insurance</a> in March 2021.



The <a href="https://forsage.io" target="_blank" rel="noreferrer noopener">alleged scheme’s website</a>, which was operating at the time the charges were filed, now appears to be shut down.&nbsp;



Founders of Forsage were last known to be living in Russia, the Republic of Georgia and Indonesia. Pollet said the defendants may challenge the jurisdiction of the SEC, to the extent that they surface at all.



The SEC can ask the court to enter a temporary restraining order or an asset freeze against operators of an alleged fraudulent scheme to prevent further dissipation of investor funds while the litigation proceeds, he added. But it does not appear the regulator has done so, Pollet said, noting that it could be because the relevant assets reside outside the US.



An SEC spokesperson declined to comment beyond <a href="https://www.sec.gov/litigation/complaints/2022/comp-pr2022-134.pdf">the complaint</a>.



Redbord said getting Forsage co-founders Mikail Sergeev and Sergey Maslakov— last known to be living in Russia — into a US courtroom would be especially difficult.



Sergeev, along with another defendant in the SEC case, Lola Ferrari, moved on to a new and similarly suspect project, dubbed Express Smart Game, while another Forsage creator, Vladimir “Lado” Okhotnikov, funneled traffic from the Forsage YouTube channel to his new (alleged) scam, Meta Force, the complaint notes.



“It becomes something of a sort of name and shame,” Redbord said, “where you want to ensure that these individuals — and Forsage in particular — are known out there as entities not to do business with.”



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Crypto Industry Eyes SEC’s ‘Regulation by Enforcement’ Ramp Up

Casey Wagner

<div id="highlights-block_622a6b5db879a" class="highlights">
 <ul>
 <li>The CFTC has charged four individuals it claims were involved in operating a ponzi scheme that swindled $44 million of bitcoin from investors</li>
 <li>Regulators should focus on establishing rules rather than retroactive charges, one attorney said</li>
 </ul>
 
</div>



A US regulator has charged four individuals with fraud surrounding an alleged crypto ponzi scheme that raised more than $44 million of bitcoin.



The case, brought by the Commodity Futures Trading Commission (CFTC), highlights the escalating jurisdiction battle over digital asset regulation, an attorney said.



“This case is indicative of the high-profile matters regulatory agencies desire when it comes to crypto oversight,” Braden Perry, partner at Kennyhertz Perry, said. “[There is] a rift between regulators, and the jurisdictional war has been ongoing between the CFTC and [the Securities and Exchange Commission], who are fighting to expand their regulatory remit over the crypto and [decentralized finance] industry.”



The CFTC has charged Florida resident Dwayne Golden, North Carolina resident Marquis Egerton, New York resident Gregory Aggesen and Indian citizen Jatin Patel in connection to the ponzi scheme.&nbsp;



According to the <a href="https://www.cftc.gov/PressRoom/PressReleases/8498-22" target="_blank" rel="noreferrer noopener">complaint</a> filed Tuesday, the quartet operated several websites — Empowercoin, Ecoinplus and later JetCoin — from April to August 2017.



The sites promised users that invested funds would be doubled in less than two months and guaranteed between 2% and 5% of daily accruals. The twist, according to the CFTC: The payouts stemmed from funds from new investors.



The <a href="https://cms.blockworks.co/?s=CFTC" target="_blank" rel="noreferrer noopener">CFTC</a> alleged the accused pocketed $10 million from Empowercoin and Ecoinplus — they allegedly received a total of $23 million in bitcoin, valued at the time of investment, from the two sites. They took home about $7.8 million of the $21.7 million raised through JetCoin.



In July 2017, the Ecoinplus website went offline, and by August, JetCoin was shut down. Customers from either website did not receive funds, according to the CFTC.



The charges are based on violations of anti-fraud measures laid out in the Commodity Exchange Act and CFTC rules, according to Perry.



<blockquote class="wp-block-quote">“This is different from CFTC regulating the spot bitcoin [market], and there is still much industry confusion about what agency, if any, regulates bitcoin as a commodity,” Perry said.</blockquote>



The CFTC filed civil charges, but the American defendants are also facing criminal charges from the Justice Department for wire fraud and money laundering. If convicted, the defendants could face time in federal prison.



The battle between agencies over crypto regulation isn’t helping to bring clarity to the space, according to Perry.



“The last thing any industry wants is what regulators have been doing in the cryptocurrency space: regulation by enforcement, in which agencies decide that some practices should have been illegal, and instead of declaring it illegal from now on through rulemaking, go back and prosecute the people who were doing it before,” Perry said.



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CFTC Charges 4 in Crypto Ponzi Scheme as Questions Swirl Over Jurisdiction

<div id="highlights-block_620b0825b1a83" class="highlights">
 <ul>
 <li>The deputy governor of India&#8217;s central bank said cryptocurrency is akin to a Ponzi scheme</li>
 <li>He also said crypto was just one use case of blockchain technology and that a ban on digital assets would not affect innovation</li>
 </ul>
 
</div>



Cryptocurrencies are akin to Ponzi schemes and have no intrinsic value, according to India&#8217;s central bank deputy governor.



T. Rabi Sankar, who spoke during the Indian Banks&#8217; Association&#8217;s 17th annual Banking Technology Conference on Monday, said cryptocurrencies had no place in India&#8217;s economy and presented <a href="https://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/CRYPTOCURRENCIESFBEA27DE561D427DB9DD5F25BE2CB8BB.PDF" target="_blank" rel="noreferrer noopener">significant risks</a> to financial stability.



<blockquote class="wp-block-quote">&#8220;All these factors lead to the conclusion that banning cryptocurrency is perhaps the most advisable choice open to India,&#8221; said Sankar. &#8220;We have examined the arguments proffered by those advocating that cryptocurrencies should be regulated and found that none of them stand up to basic scrutiny.&#8221;</blockquote>



The deputy governor said the argument put forth by enthusiasts including crypto&#8217;s use as a store of value or a medium of exchange — and that they should be regulated as such — did not stand up to &#8220;basic scrutiny.&#8221; He also said he did not accept the argument that crypto advanced the development of blockchain technology.



&#8220;Even in case of private authentication through consensus mechanisms, accounts can be kept and rewards can be given in any legal tender currency,&#8221; said Sankar. &#8220;In other words, creating native cryptocurrencies is just one way of implementing a blockchain; it can be viewed as just one use case of the blockchain technology.&#8221;



Sankar said that those arguing that a ban on crypto would limit innovation in blockchain was similar to drawing the conclusion that a ban on nuclear weapons would harm advancements in nuclear physics.



While Sankar&#8217;s comments come as no surprise, the seesawing rhetoric on crypto regulation from India&#8217;s policymakers has amounted to a dizzying stance. A patchwork of <a href="https://cms.blockworks.co/india-crypto-ban-about-payments-not-the-asset-class/" target="_blank" rel="noreferrer noopener">ad-hoc laws</a> has, at times, allowed private cryptos to function as digital assets, while, at others, have <a href="https://economictimes.indiatimes.com/tech/technology/indias-crypto-law-will-allow-only-a-few-cryptocurrencies-government-says/articleshow/87873526.cms?from=mdr" target="_blank" rel="noreferrer noopener">outlawed</a> them.



The lack of a unified front on crypto has exposed fragmentation among the country&#8217;s policymakers on the issue of how the nascent asset class should best be policed. Earlier this month, India’s finance minister, Nirmala Sitharaman, moved to introduce a <a href="https://cms.blockworks.co/india-to-introduce-a-30-crypto-tax-push-out-cbdc-by-2022-23/" target="_blank" rel="noreferrer noopener">30% tax</a> on income received from crypto gains, raising hopes for crypto&#8217;s legitimacy as an asset class.



Last week, Sitharaman shut down expectations she was not doing &#8220;<a href="https://timesofindia.indiatimes.com/business/india-business/taxing-crypto-doesnt-mean-it-is-legalised-fm/articleshow/89514617.cms" target="_blank" rel="noreferrer noopener">anything to legalize it or ban it [crypto]</a>&#8221; at present and left the question as to how crypto would be regulated in India unanswered. Instead, the minister said she wanted to wait until after <a href="https://timesofindia.indiatimes.com/business/india-business/taxing-crypto-doesnt-mean-it-is-legalised-fm/articleshow/89514617.cms" target="_blank" rel="noreferrer noopener">inputs from consultation</a> were concluded and that taxing crypto now is the government&#8217;s &#8220;sovereign right.&#8221;



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