Partner Nicola McKinney argues that regulation alone will not curb the tide of crypto investment scams, and greater education is needed to safeguard consumers.
Nicola’s article was published in FTAdviser, 21 March 2023, and can be read here.
The sharp increase in reports to the FCA of crypto-related investment scams will come as no surprise to fraud lawyers, who have seen a rise in crypto fraud claims being pursued through the English courts. The police unit Action Fraud recorded a 33% rise in sums lost to fraudulent crypto schemes in the year to September 2022, reflecting crypto’s increasing appeal to criminal operators.
Investments into digital assets are often carried out by individuals without the assistance of professional advisors, and this lack of expert scrutiny creates abundant opportunities for certain types of fraud to flourish. Potential investors are directed to fake websites, many of which appear similar to genuine investment sites, where they are encouraged to invest funds which are then transferred out of reach by the scammers.
Alternatively, investors are targeted – romantically or otherwise – and a relationship of trust is built up, which is then exploited to convince them to transfer funds for the purchase of digital assets. In cases where the funds are not stolen outright, other deceit is deployed to fleece investors. Another commonplace fraud is the ‘pump and dump’ or ‘rug pull’, in which a crypto asset’s value is artificially inflated until the criminals have sold all of their holdings to investors, at which point the price plummets and investments are wiped out.
Despite widespread press coverage of the crypto fraud phenomenon, the crypto-investing public continues to prove a rich seam for fraudsters to mine. Scammers grow ever-more sophisticated, while those susceptible to the lure of quick profit become easier to deceive as a result. Criminals are emboldened by the lack of meaningful regulation, or of enforcement action by police when frauds are reported. They also operate safe in the knowledge that the hurdles for victims are manifold when it comes to pursuing fraudsters through civil claims, and that victims are increasingly looking instead to third parties such as developers and exchanges to attempt to recover stolen funds, meaning they are as unlikely to face retribution in the civil courts as they are in the criminal justice system.
Crypto fraud gives rise to a multitude of legal problems for the victim; how the English courts will address some of these issues has yet to be determined. A fraud victim may have to establish whether the funds sent were ever used to purchase digital assets on their behalf. If there was an initial purchase of crypto currency, the public nature of the blockchain means that it may be possible to track these through sequential wallets.
However, in some ways crypto fraud does not differ from age-old examples of fraud, and victims may still struggle to trace the journey of their assets. In some cases, their digital holdings are mixed with other assets; in other scenarios their assets may leave the visibility of the blockchain, to be converted into fiat or standard currency, or into other non-crypto securities. The more time that elapses between the fraud being carried out and its subsequent discovery, the harder it is likely to be to take meaningful steps to successful recover stolen funds or assets.
The business of establishing the necessary components of these frauds, in order to try to recover against the fraudsters or any culpable third parties, is expensive. The initial tracing or following exercise is likely to require input from a blockchain analysis expert, and at present these experts are of varying quality, meaning that outlay may not assist recovery and may itself prove irrecoverable.
Initiating court proceedings, even if just to obtain information from third parties, comes at further cost, including footing the bill of those third parties for providing the information. If the alleged fraudster or another realistic defendant is identified, contested proceedings are likely to take well over a year before they reach trial; even if the claim is ultimately successful, the fraud victim will need to have liquid funds to pay their legal costs during that period.
While wealthier victims might make legal claims to attempt to recover, for some victims who have lost smaller sums, recovery through the courts may therefore be impossible. Prevention is better than cure; UK lawmakers are likely to find that the pressing need for public education, so that this type of fraud is avoided, is as important as any other step taken to regulate the digital assets sector.
Quillon Law ranked in The Legal 500 UK Guide 2024
Quillon Law has been ranked in The Legal 500 UK 2024 guide for ‘Fraud: Civil’, ‘Banking Litigation: Investment and Retail’ and ‘Commercial Litigation: Mid-Market’.
Partner Mark Hastings explores crypto investment fraud in The Times
In light of Lloyds Bank issuing an urgent warning about crypto investment fraud, Partner Mark Hastings discusses how robust regulation and education are key to combating investment scams on social media.
Partner Nicola McKinney comments on the cum-ex trading scandal in City A.M.
In light of a Supreme Court ruling which saw the founder of hedge fund Solo Capital Partners lose a bid to prevent a £1.4bn trial over cum-ex tax trades, Partner Nicola McKinney comments on the wider implications of this case.