Bankruptcy Cases Highlight Risks of Cryptocurrencies
LITTLE ROCK—The Arkansas Securities Department (ASD) cautions Arkansans to exercise extreme caution when deciding to invest, purchase, or hold assets in cryptocurrency. Cryptocurrencies are not functional equivalents of traditional banking, securities, or insurance investment products, and there is no insurance protection for losses arising from market fluctuations, theft, or scams. Like any investment product, investors in cryptocurrencies should be prepared to lose the entire amount of their investment.
Recent events highlight these risks. On Nov. 11, 2022, the Bahamas-based cryptocurrency exchange FTX Trading, Ltd. (FTX), along with its U.S.-based cryptocurrency exchange FTX.US and 100 other businesses affiliated with FTX and its founder Sam Bankman-Fried, filed for Chapter 11 bankruptcy protection. FTX operated as a cryptocurrency derivates exchange on which many other companies depended for asset deployment activities and other financial assistance.
On Nov. 22, 2022, BlockFi Inc., a U.S.-based cryptocurrency lender, along with BlockFi Trading, LLC, and seven of its affiliates filed for Chapter 11 bankruptcy protection. BlockFi Trading operated as a cryptocurrency trading exchange and interest-bearing custodial service for cryptocurrencies.
The FTX and Blockfi bankruptcies follow the of bankruptcy filings by the crypto-lending firms Celsius Network, LLC, and Voyager Digital Holdings, Inc., earlier this year. In addition, Gemini Trust Company, LLC, has paused withdrawals from its crypto-lending program.
The ASD continues to monitor FTX, BlockFi, and other cryptocurrency investment companies and cryptocurrency exchangers.
“The recent bankruptcy filings and liquidity issues in the crypto-lending market demonstrate that those who hold their cryptocurrency on either a platform or exchange can lose access to their funds,” ASD Interim Commissioner Campbell McLaurin said. “In addition, a myriad of other risk factors can impact the value of cryptocurrencies and the financial stability of crypto fintech firms. If you choose to invest in a cryptocurrency or related product, know that it is highly speculative, and you may lose the entire amount of your investment.”
Arkansans should be cautious of cryptocurrency websites as they may be corrupted by malware and/or experiencing cyberattacks following the bankruptcies of the U.S.-based cryptocurrency exchanges FTX.US and BlockFi Trading. Additionally, promoters of fraudulent cryptocurrency investments are using the instability in the market to lure unsuspecting investors into their schemes. The ASD asks Arkansans to be cautious regarding cryptocurrency investment opportunities and to be mindful of the following:
Scams: Investors should also beware of “reload” scams where fraudsters purport to help recoup funds that are locked in accounts or otherwise unavailable. In a new variation of the reload scam, fraudsters might tempt investors to try and recover their losses by investing in a new type of cryptocurrency or by offering to host digital wallets in which the investors provide the fraudsters with access to their private keys. There are many versions of this scam, and they are likely to continue to evolve.
Pump-and-Dumps: Groups of individuals coordinate to buy a thinly traded cryptocurrency, promote the cryptocurrency on social media to push up demand and the price, and then sell it in a coordinated sale. The price plummets and those unaware of the scheme are left with the devalued cryptocurrency.
Multi-level Marketing Platforms: Companies lure investors through the promise of high returns with low risk. Investors are then incentivized to recruit more members. The business of these companies is tied to the intake of new investors and not to the value of the cryptocurrency. Eventually, the company stops paying to recruit new members, leaving investors with worthless tokens or coins.
“Guaranteed” High Investment Returns: Promoters emphasize guaranteed, secure profits while concealing basic facts, such as the names of the principals and even the physical address of their offices. There is no such thing as guaranteed high investment returns. Be wary of anyone who promises that you will receive a high rate of return on your investment, with little or no risk.
Volatility: Cryptocurrency markets are highly volatile, making them unsuitable for most investors looking to meet long-term savings or retirement goals. Cryptocurrencies are commonly touted as safe alternatives in times of financial or global chaos.
No recourse: Cryptocurrency and many crypto-related investments are subject to minimal regulatory oversight, and there may be no recourse should the cryptocurrency disappear due to a cybersecurity breach or hack.
Untraceable: Cryptocurrency or crypto-related investments only exist on the internet. Issuers can be located anywhere in the world, so it may be impossible to trace and recover lost funds through the courts.
Uninsured: Cryptocurrency accounts are not insured by U.S. depository insurance.
Unregulated: Cryptocurrency investors may rely upon unregulated exchanges or offerings that potentially lack appropriate internal controls, making them susceptible to fraud, theft, and hacking.
Hackable: Creating a digital wallet to store cryptocurrency involves installing software on an investor’s computer. As with any software download, hackers may include malicious code to compromise the computer.
Vulnerable: Purchasers of cryptocurrencies rely on the strength of their own computer systems as well as systems provided by third parties to protect purchased cryptocurrencies from theft.
The ASD cautions citizen investors of all ages and experiences to thoroughly scrutinize and research any investment opportunity or offer. Contact the ASD at 1-800-981-4429 to check out any person or financial professional offering an investment opportunity or investment advice for a fee and the products they offer for proper registration. Contact the ASD to report suspected fraud, inappropriate securities business practices, or to obtain consumer information. The ASD provides free investor education and fraud prevention materials in print and through educational presentations upon request.