The California Department of Financial Protection and Innovation (DFPI) announced last month that it had issued cease and desist orders against 11 companies for violating California securities laws. Highlights included allegations that they offered unqualified securities and material misrepresentations and omissions to investors.
These breaches should remind us that while crypto is a unique and exciting industry for the general public, it is still an area that is brimming with potential for bad players and scams. So far, government crypto regulation has been minimal at best, with a distinct lack of action. Whether you are a full-time professional investor or just a casual fan looking to get involved, you need to be absolutely sure of what you are getting into before committing to any crypto opportunity.
California has toyed with setting up a crypto-specific business registration process for those looking to do business in the state. Governor Gavin Newsom vetoed the proposed framework because the resources required to establish and enforce such a framework would be prohibitive for the state. While this type of compliance infrastructure has not yet been deployed, it does indicate concerns regulators have regarding the crypto industry.
There seems to be a pattern that new industries, particularly those that are attracting as much international attention as crypto, are particularly vulnerable to fraud. One only has to go back to the legalization of cannabis to find out the last time California dealt with fraudulent schemes on this scale.
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It seems inevitable that California, known for being at the forefront of regulation and compliance, will create some sort of crypto-specific compliance infrastructure in the name of consumer protection. If history is any indication, other states will follow once California releases its framework.
Federal and state officials have tried, with little luck, to draft legislation to set financial standards for crypto. At the federal level, Senators Cory Booker, John Thune, Debbie Stabenow, and John Boozman have co-sponsored a bill to authorize the Commodities Futures Trading Commission (CFTC) to act as a regulator of crypto, while Senators Kirsten Gillibrand and Cynthia Lummis are sponsoring a bill , to set clearer guidelines for digital assets and virtual currencies. Lawmakers have even turned to tech luminaries like Mark Zuckerberg to weigh in on crypto scams.
None of these or other similarly crypto-focused bills are expected to pass in 2022, but this level of bipartisan collaboration has been unprecedented in recent times. Cooperation should only reflect the sheer scale of the need for a regulatory framework. In other words, Democrats and Republicans talking to each other about anything should stop the press, but the fact that they’re co-sponsoring multiple bills should tell us there’s a tremendous need for guidance.
How to invest in the crypto space if the government won’t implement controls on crypto? There are a few general points to keep in mind when offering them a crypto investment opportunity.
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When reviewing an opportunity, do your due diligence! Don’t take anyone’s word without some level of substantive support. If crypto is not an area of expertise, turn to professionals who have qualified experience. Make sure to use crypto monitoring and blockchain analysis tools as part of the verification process whenever possible.
A common strategy used by scammers is to apply undue pressure or artificial deadlines for a potential close. Slow down the process and utilize all the time it takes to make an investment decision.
If it sounds too good to be true, it probably is. As exaggerated as the cliché is, it makes a valid point. There have been instances where plans have been offered to pay initial and ongoing dividends for any new investors who come on board and to pay additional dividends from any investors who bring those new investors on board. If that sounds like a pyramid or multi-level marketing scheme, that’s because it is. Terms like “risk-free investment” are also thrown around. Finally, if no one knows where the opportunity is coming from, be careful.
While crypto can be a fun and electrifying topic with many legitimate opportunities, there are bad players who will take advantage of the lack of government oversight and the excitement of overzealous or uneducated investors.
Zach Gordon is a Certified Public Accountant (CPA) and Vice President of Crypto Accounting at Propeller Industries, serving as fractional Chief Financial Officer and advisor to a portfolio of crypto and Web3 clients. He was named a Forty Under 40 CPA, sits on the NYSSCPA’s Digital Assets Committee and has worked with crypto clients in various capacities since 2016.
This article is for general informational purposes and should not be construed as legal or investment advice. The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.