US securities regulator opens fraud case on UK bitcoin firm

Out-Law News | 21 Jun 2019 | 4:41 pm | 2 min. read

A UK-based cryptocurrency trading platform defrauded more than 1,000 investors, including some in the US, of at least $147 million worth of bitcoin, the US securities regulator has claimed.

The Commodity Futures Trading Commission (CFTC) has filed a civil enforcement case in the New York courts against Control-Finance Ltd and its sole director, Benjamin Reynolds. The company fraudulently solicited customers to purchase and transfer bitcoin to them, claiming that they employed expert virtual currency traders who would earn daily profits on the bitcoin, according to the complaint.

Control-Finance also operated a fraudulent 'affiliate' scheme, through which they fraudulently promised to pay bonuses in bitcoin to people who referred new customers to the company, according to the complaint. In reality, Control-Finance made no trades on behalf of customers, earned no trading profits and misappropriated their bitcoin deposits, and made 'Ponzi scheme-like' payments from other customers' funds to customers who requested withdrawals, the CFTC said.

CFTC director of enforcement James McDonald said that Control-Finance and Reynolds had "exploited public enthusiasm" for bitcoin through their scheme.

"The CFTC will continue to vigorously police the bitcoin markets, including fraudulent trading activity as alleged in the complaint here," he said. "Fraud in these markets not only harms customers but, if left unchecked, it could also hinder innovation."

Civil fraud and asset recovery expert Jennifer Craven of Pinsent Masons, the law firm behind Out-Law, said that the CFTC's action "shows US law enforcement taking a strong stance against the alleged perpetrators of cryptocurrency fraud".

Craven Jennifer

Jennifer Craven

Legal Director

Cryptocurrencies are one of the most volatile investment opportunities out there, and investments can be a target for fraudsters.

"Although still relatively unchartered territory, cryptocurrency frauds are becoming increasingly common," she said.

"Cryptocurrencies are one of the most volatile investment opportunities out there, and investments can be a target for fraudsters. In the UK, victims are also less well protected, since cryptocurrencies are unregulated. There are also additional challenges in fraud cases involving cryptoassets which need to be skilfully navigated. Tracing cryptocurrencies which have been dissipated in the ways alleged in the CFTC complaint is made more difficult because of their pseudonymous nature. There are also currently some uncertainties about whether cryptoassets are 'property', which may impact on the remedies available to a victim," she said.

In the US, some cryptocurrencies are regulated by way of the federal commodity laws. The CFTC is therefore seeking civil monetary penalties, customer restitution and trading and registration bans as part of its action. This is not the case in the UK, although UK and EU regulators are currently examining how best to react to the growth in these forms of exchange.

A UK Cryptoassets Taskforce, established last year, includes representatives from the UK Treasury, Bank of England and Financial Conduct Authority. The Law Society of England and Wales is also working to clarify the law in relation to cryptoassets, distributed ledger technology and 'smart' contracts through its LawTech Delivery Panel UK Jurisdiction Taskforce.

Craven said that the taskforce, which is made up of judicial, legal and industry experts, planned to publish an 'authoritative legal statement' on these issues later this year, to include clarification over whether cryptoassets should be classed as 'property'.

"The taskforce has recently consulted on the issues it should consider, and Pinsent Masons has contributed to that discussion," she said. "This will hopefully provide greater clarity."

In the meantime, UK fraud victims should consider the civil law remedies available to them, although this is "arguably more challenging where there is a cryptocurrency angle", she said.

"Victims should react quickly and explore their ability to use the powerful civil fraud tools English law has to offer – including worldwide freezing and disclosure orders," she said. "Indeed, given that cryptocurrency transactions often do not utilise intermediaries, moving swiftly is even more essential in order to maximise the chances of recovery."