One of the most attractive aspects of cryptocurrency is that its underlying blockchain ledger system makes it impenetrable to hacking. But that doesn’t mean that investments in cryptocurrency are immune to fraud – a reality that was recently driven home by the New York State Supreme Court’s shuttering of cryptocurrency trading platform Coinseed.
In mid-February 2021, following a multi-year investigation into Coinseed that found the cryptocurrency trading platform was engaging in fraudulent and illegal operations, both the U.S. Securities and Exchange Commission and New York Attorney General Letitia James filed charges against the company and its founder.
Allegations against the platform included operating as a commodity broker-dealer without being registered to do so in New York; selling worthless crypto tokens; misrepresentations by the platform’s founder, Delgerdalai Davaasambuu, regarding his level of industry expertise; unauthorized trading within customer accounts; hidden trading fees; steps taken to limit access to investors’ holdings; the disabling of investors’ ability to trade; and the funnelling of all of investors’ holdings into Dogecoin without their knowledge.
In mid-September, seven months after charges were initially filed against the platform, New York State Supreme Court Judge Andrew Borrok ordered Coinseed to permanently shutter its operations, assigning a court-appointed receiver to monitor and safeguard investments already made on the platform.
Was Coinseed unfairly targeted by US authorities?
Davaasambuu insists that Coinseed was unfairly targeted by regulators and points to the fact that several other cryptocurrency platforms that remain in operation are also not registered commodities broker-dealers.
While the laundry list of allegations against Coinseed, and the more than 170 customer complaints that have been filed with regulators in the period since the lawsuits were initially filed against the platform, clearly separate the company from other cryptocurrency platforms, investors should not necessarily discount Davaasambuu’s “what about the others” assertions. Instead, investors would be well served by looking at Coinseed as a warning sign regarding some of the risks involved with investing in cryptocurrencies.
Peter Jensen, CEO of blockchain payments company Rocketfuel Blockchain and a 30-year tech veteran, notes that the biggest thing investors need to remember when it comes to cryptocurrencies is that they are unregulated, making them inherently more susceptible to fraud than investments in more traditional vehicles such as stocks and bonds.
“Numerous projects today routinely sell their tokens through various offerings like ICO (initial coin offerings), IEO (initial exchange offerings) and the more recent IDO (initial DEX offerings), which has made token distribution a very easy task today. This has lulled investors into purchasing tokens from projects that are not credible and can lead to fraud,” said Jensen. “It is important for investors to research the communities and companies that back these token offerings and study the ROI they can generate,” he said, adding that investors should look for registered complaints against a crypto project before investing with it.
Adds Nigel Frith, lead analyst at Bitcoinmoney.net: “Cryptocurrency is still in the early stages of its evolution, and regulators have yet to figure out how best to protect consumers… That means investors are dealing with a high risk reward situation and need to be more vigilant than with other assets.”
“The crypto industry needs greater oversight”
Though cryptocurrency has become wildly popular in recent years, fuelled by the soaring price of tokens such as Bitcoin (BTC) and the interest of high-profile investors such as entrepreneur Jeff Bezos, it is still essentially a nascent commodity. And that reality is one that investors should not forget. “The crypto industry needs greater oversight and regulation, and the path to get there will include growing pains as the industry begins to comply with the new guidance,” said Richard Gardner, CEO of international financial tech services firm Modulus. “The technologies behind cryptocurrencies are so new that regulators have trouble understanding that aspect of the industry,” he said.
Until regulations catch up with the technology, increased oversight could actually prove to be somewhat of a double-edged sword for investors, offering both enhanced oversight as well as the risk that investors who rely on cryptocurrency trading platforms could suddenly find the run pulled out from under them. The safest route for investors interested in cryptocurrency is to trade through established, well known brokers.
“Companies like Coinseed and Binance are centralized exchanges, meaning they can be shut down at the drop of a hat by the government. At least in the U.S. that requires a judicial order, whereas in China the government simply pulled the plug on Bitcoin by illegalizing it,” said Stefan Ateljevic, a crypto entrepreneur and the founder of cryptocurrency and online gambling website CryptoBlokes. “Never assume that your investment is safe because it’s sitting with a ‘registered company’ such as Coinseed or Binance… it’s always advisable to NOT store all your crypto on a centralized exchange,” he said, adding that investors should be sure to regularly remove some of their profits from commodity trading platforms and store them in an independent crypto wallet, preferably offline, to ensure that they are safe.
Though the long-term legal ramifications of Coinseed’s shutdown remain to be seen, investors should view it as a cautionary tale. “Coinseed had quite a unique and impactful business model, but we saw first-hand what can potentially happen when a centralize organization controls an asset that is supposed to be decentralized,” said Alex Killingsworth, a consultant for cryptocurrency ATM network Pelicoin. “If you’re investing in crypto and don’t understand how to secure your investment with different wallets, you should immediately be learning how to do so… Diversification in crypto means nothing if the entire portfolio could disappear in a day.”
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