Partner Mark Hastings examines the risk of fraud in the digital asset market and the difficulty for investors to recover losses from cryptocurrency scams.
Mark’s comments were published in Forbes Advisor, 10 January 2022, and can be read here.
While the prospect of staggering potential returns has made cryptocurrency an appealing investment for many, there are significant risks associated with investing in digital assets due to their volatility and the significant risk of fraud.
Cryptocurrency fraud soared in 2022, and the lack of regulatory oversight of the industry left many thousands of investors out of pocket. The recent collapse of FTX demonstrates just how risky investing in cryptocurrency can be, for individual and institutional investors alike.
Recovering losses arising from cryptocurrency frauds can be a lengthy, expensive and difficult process. In the case of FTX, which the SEC has alleged represented a “massive years-long fraud” in which billions of dollars of investor funds were diverted for the personal benefit of Sam Bankman-Fried, many defrauded investors are contemplating civil proceedings to recover their losses. For many investors left out of pocket, however, protracted legal action may be prohibitively expensive, thus representing a barrier for investors seeking to recoup their money.
Regulators have begun to voice their concerns around the risks associated with cryptocurrency investments due to the volatility of the asset class, as exemplified by yesterday’s warning from the Federal Reserve, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency that warned of the risk of fraud and scams associated with digital assets.
Cryptocurrency’s volatility makes it highly vulnerable to investment frauds and Ponzi schemes, and investors must tread carefully in this unique financial environment or risk significant losses.
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