Cryptocurrency clouded in mist, financial risks

Mark Sievers: Wealth Matters

The realm of cryptocurrency has become even more clouded in mist, confusion, failures and financial risks. Besides the collapse in values, bankruptcy of crypto companies and trading companies, another scam involving cryptocurrency has appeared out of the mist. And the basis is just another version of lying to pander to greed.

The ambiguity and confusion of the crypto market enabled these scammers to bilk investors out of $100 million. The scam was a global pitch and even involved money laundering. A federal indictment tells the story of an old-fashioned caper with the current shine of blockchain claims.

The scam began in 2020 and involved old-fashioned lies and manipulation of clients, wrapped in the guise of new technology, which was not even new. Unscrupulous fraudsters are nothing new to the investment world. Now they have new deals, like cryptocurrency, to push.

Crypto is very complex but that trait makes it easier to confuse and dupe clients. As with any emerging technology, those who invest in cryptocurrency must beware of profit-making opportunities that appear too good to be true.

The scammers used in-person meetings, video calls and social media to tout the purported power of their platform and a proprietary trading bot they claimed could generate guaranteed returns. The scam offered the personal attention of the company “genius” and “head trader” to manually handle the client’s (victim) account.

The pitch fabricated the professional history of the principals and included fictitious demonstrations purporting to show the computer trading bot making trades. In reality, the whole thing was fake. Indeed, the actual trading resulted in significant losses.

To assure investors of the safety of their investments, the scammers told victims that they had filed paperwork with the SEC to register as a hedge fund and that they were licensed traders. Actually, they had lost securities licenses for misappropriating customer funds.

Client money was laundered through a foreign-based cryptocurrency exchange. Early investors were paid with money from later investors in a classic Ponzi-style scheme. Most of the money went to extravagant lifestyles of the scammers.

Warning signs appeared in late 2021, when the scammers restricted investor access to funds, thus violating earlier promises that investors could easily withdraw their money. Fear set in and the scheme began to collapse. The scammers stopped all communication and left the U.S.

The central matter here is that lack of understanding turns an already complicated conversation into a potentially dangerous opportunity for fraudsters preying on unsophisticated investors. The reports of huge increases in value of crypto attracted attention, i.e., greed. The entire crypto market has been based on speculation with questionable underlying value. This is not a place for realistic investors.

Tax rules also arise for those involved with cryptocurrency. Declaration of gains and losses are mandatory, but the documentation rules are not clear. Overlay this matter with the fraud above and the situation can be very ugly.

The core IRS concern centers on abuse for tax fraud and other criminal activities like money laundering, drug trafficking and ransomware, not to mention tax revenue that escapes.

New IRS reporting requirements affect those with transactions exceeding $10,000 and includes receiving more than $10,000 in digital assets a year. The requirement applies not only to individuals but also to businesses, like those who accept crypto as payment. One problem is the law does not clearly define what it means to “receive” digital assets.

Recent polls report one in five individuals have traded in cryptocurrency and one in five businesses intend to accept crypto as payment. The new rules will involve a vast number of people.

Starting in 2024, recipients must report the sender’s name, address and Social Security number within 15 days. Civil penalties for those who accidentally overlook the requirement can hit $3 million. Those who intentionally disregard the requirement can be charged with a felony and face up to five years in prison and higher civil penalties. Corporate violators face fines of up to $100,000 per transaction.

Now add in the matter of keeping proper records and the problems increase. Can you obtain the information on who gave you the crypto assets? Even for your own account, each individual must keep the documentation. Relying on the custodian/broker may not work as those brokers may not have the information because they were not required to keep it up to now. Do not depend on the custodians to have all the details for you.

Remember there is a long-standing rule on the disclosure of cash transactions by the recipient. The new requirement for digital assets, including non-fungible tokens, effectively treats cryptocurrencies like cash, even though the IRS considers crypto to be taxable property like a stock or bond. There are ample opportunities to make a mistake. If you are involved with crypto, be cautious and thorough.

Mark Sievers, president of Epsilon Financial Group, is a certified financial planner with a master’s in business administration from the University of California, Berkeley. Contact him by email at [email protected].

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