Think back to a year ago. Bitcoin, and other kinds of cryptocurrency, were just starting to regularly appear in major news sources across the globe. China was in the midst of instituting a sweeping set of bans against crypto; a growing number of companies were looking for reasons to tack the word ‘blockchain’ onto their names.
Perhaps most significantly, however, was the sheer magnitude of the big “crypto boom” that was continuing to gain momentum. Cryptocurrency exchanges and exchange apps like Coinbase suddenly found themselves with way more new users than their systems were capable of handling; everyone wanted in on the crypto scene.
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And then, they came–the scammers. Hundreds–thousands–of every shape and size, color and stripe. The cryptic nature of cryptocurrency (pun intended) left the door wide open for swindlers to make outlandish claims about the kinds of returns that their products offered unsuspecting investors.
A lot of these schemes are sophisticated–many of them happen without our knowledge. Some hackers have created bits of software that unsuspectingly mine cryptocurrency using your CPU while you’re browsing the web, minding your own business; others have even created schemes that rob other people attempting to steal crypto. Fake or otherwise illegitimate ICOs run wild throughout the space.
However, some of the most effective scams are far more traditional than that. Indeed, authorities around the globe have increasingly cracked down on one of the oldest tricks in the book: crypto boiler room scams. While this kind of scam has been largely eliminated from other parts of the investing world, the largely unregulated nature of cryptocurrency has left this particular door wide open.
What is a ‘Boiler Room Scam’?
The term ‘boiler room scam’ describes a scam that uses cold calling and high-pressure sales techniques to sell investments.
More often than not, these fly-by-night operations are based in low-cost office spaces (ie ‘boiler rooms’), tightly packed with rows of telemarketers, who are incentivized by commissions and instructed to sell by any means necessary. Before the days of cryptocurrency, these telemarketers would sell unknown micro-cap stocks and other low-value assets; sometimes, the assets they sell don’t exist at all.
The key here is that the sales tactics that these telemarketers use involve misleading (or outright false) information to hype up their products, and that their sales tactics are often coercive. Their target ‘customers’ are vulnerable people who may not be aware of what’s happening–elderly or very young people, or people with disabilities.
Too Good to Be True
The Times of Israel published a piece detailing exactly the kinds of things that cryptocurrency boiler-room scammers will say in order to hook investors, promises of high returns and buzzword-packed sales pitches a-plenty:
“What we offer you is to start with a discovery account that ensures an exceptional rate of 6% over 30 days whatever your investment. Our customers usually invest 5,000 euros initially.”
”…The market of virtual currencies has a capitalization of nearly 2 trillion dollars (2,000 billion) in just 12 years. We can no longer speak of a bubble or a passing fad. Do you agree?”
Of course, crypto ‘boiler room’ scams may not involve as much direct contact as traditional boiler room scams do. As effective as talking on the phone can be for these scammers, it’s often enough to send emails or even just continually post promises of high returns somewhere online.
BitConnect, now widely known as a fraudulent company, promised outlandish returns to users of its lending program.
Scammers Add Industry “Accoutrements” to Appear Legitimate
It almost goes without saying that the perpetrators of these scams are not qualified to work into the financial industry. They are not professional brokers or analysts; they are either criminally-minded individuals with ill intentions or desperate people who see no other option for their own survival.
Scams attempting to appear more “legitimate” will often have elaborate websites and claim to have offices set up in different countries. The reality is, however, that these scams will merely have mailing addresses set up in different places across the globe.
‘ #WolfofWallStreet ‘ says #Bitcoin is a ‘ #hugescam ‘and a ‘ #bubble ‘ https://t.co/cbFT3M0wBk via @MailOnline#cryptocurrency #CryptoCurrencies #crypto #cryptomania #virtualcurrency #boilerroom #Bitstamp #exchange #highlyvolatile #speculative #instrument #marketbubble #burst
— John Cesarek (@JCesarek) December 16, 2017
(Finance Magnates’ David Kimberley discovered once instance of this when he attempted to visit the offices of a company called ‘BlackRock Crypto Asset Management’–no relation to the ‘real’ BlackRock. The supposed office of this ‘company’ did not exist at the address it was listed under.)
Once You’re In, It’s Hard to Get Out
Once you’ve been hooked into a boiler room scam, it’s difficult to get out. The same “brokers” who were so eager to speak with you before you handed over your cash may not even answer your calls anymore, or may otherwise be perpetually tied up in meetings or be “out of the office.”
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Unfortunately, there aren’t often repercussions for the individuals behind these schemes. The cheaply-rented spaces where they’re based are easily vacated; the temporary phone lines that were used to make calls are easily cut; the swindlers vanish without a trace, and investors are left “holding the bag.”
Because the cryptocurrency industry is still so new and enigmatic, there are plenty of fraudsters who see the crypto boom with dollar-signs in their eyes. While the general public has developed quite a bit of healthy skepticism surrounding cryptocurrencies (and the number of successful scams may have wanted), there are still plenty of scammers who seek to take advantage of people who may not know any better.
Policing is Increasing–But is it Enough?
Still, the SEC, CFTC, and other organizations have intensified their efforts to crack down on boiler room schemes within the space.
Most recently, US District Judge Jack B. Weinstein ruled in favor of the CFTC in a case brought against Patrick K. McDonnell, a man who operated a company called “CabbageTech,” on September 11th, 2018.
The CFTC charged McDonnell with operating “a deceptive and fraudulent virtual currency scheme . . . for purported virtual currency trading advice” and “for virtual currency purchases and trading.” McDonnell collected funds from unsuspecting customers and used them for his own purposes.
Court documents said that McDonnell was found guilty of running a “‘boiler room’ scheme”, although his “company” was pawning off “expert advice” rather than assets themselves.
— Know_Tomorrow (#FreeRoss #NoMoreBanksterWars) (@JoelAigner) March 3, 2018
“[McDonnell] defraud[ed] members of the public by conning them into believing they were paying for, and receiving, bona fide advice on investing in virtual currencies – that is to say: expert virtual currency trading advice from him and an imaginary team of advisors – and that he was making purchases and sales of virtual currencies using their assets on their behalf and for their benefit.”
McDonnell represented himself throughout the course of the trial, despite the court’s urgence that he needed a lawyer. Eventually, the court banned McDonnell from ever dealing in virtual currencies again, and ordered him to pay $290,429.90 in restitution and $871,287.87 in civil penalties.
The CFTC Maintains its Right to Protect Investors from Fraud, Even if Crypto’s Legal Status ISn’t Always Clear
Following the ruling, McDonnell attempted to appeal his case–he filed a motion for reconsideration based on Commodity Futures Trading Commission v. Monex Credit Co., a case that took place earlier this year. The National Law review wrote that this case “more narrowly defined the CFTC’s regulatory authority,” and resulted in a dismissal of the original complaint brought against Monex.
However, the motion was denied by the court, “reaffirm[ing] its view that Title 7 U.S.C. § 9(1) gives the CFTC standing to exercise its enforcement power over the fraudulent schemes alleged in the complaint.”
Court documents also said that although the CFTC does indeed have the right to regulate virtual currency as a commodity (although cryptocurrency’s legal status is still somewhat ambiguous), it is the Commission’s legal responsibility and right to protect citizens from fraud and manipulation that takes precedence in cases similar to this once.
“[The] CFTC’s broad statutory authority, Title 7 U.S.C. § 9(1), and regulatory authority, Title 17 C.F.R. § 180.1, extends to fraud or manipulation in the virtual currency derivatives market and its underlying spot market,” court documents said.
Chances are that someone at some point in your life has tried to convince you to buy something that you didn’t really want or need, and that they used aggressive tactics to try and do so.
Whether it was someone spraying perfume on you at the mall as you attempted to flee, an adorable girlscout touting sugary snacks, or a telemarketer offering investments that will bring you fantastic returns, each of them was trying to convince you of the same thing: buy this, and your life will be better.
Boiler room scams can be so effective because people want to believe that what they’re hearing is true. They want to believe that their financial problems will be solved by making a few payments to the person on the other end of the phone line–but you know, if something sounds too good to be true…