Senate Banking Committee Will Hear Today About Getting “Pig Butchered” and an Explosion in Crypto Con Men Preying on the Unwary

By Pam Martens and Russ Martens: July 28, 2022 ~

Melanie Senter Lubin, Commissioner of the Maryland Securities Division; President of NASAA

Melanie Senter Lubin, Commissioner of the Maryland Securities Division; President of NASAA

The Senate Banking Committee will hear today from two witnesses at its hearing titled: “Protecting Investors and Savers: Understanding Scams and Risks in Crypto and Securities Markets.” On tap will be Melanie Senter Lubin, the Commissioner of the Maryland Securities Division, who also serves as President of the North American Securities Administrators Association (NASAA), a group that represents state and provincial securities regulators in the United States, Canada and Mexico.

Gerri Walsh, President of FINRA Investor Education Foundation and Senior V.P. FINRA Investor Education

Gerri Walsh, President of FINRA Investor Education Foundation and Senior V.P. FINRA Investor Education

Also giving testimony will be Gerri Walsh, the President of FINRA Investor Education Foundation and Senior Vice President of FINRA Investor Education. FINRA is the self-regulatory body that oversees Wall Street’s broker dealers and licensed traders. It also runs the discredited private justice system for Wall Street firms called mandatory arbitration.

In the written testimony that Lubin provided to the Senate Banking Committee, she reveals that surveys conducted by NASAA for the past three years (2019 through 2021) showed that respondents viewed “investments tied to digital assets” as a top threat to investors. Lubin writes:

“As background, the nature of the threat has evolved over the last five years or so. In early 2018, investors and con artists alike returned to cryptocurrency-related investment products looking for quick profits following news surrounding surging prices and a new product backed by Facebook. Then, in early 2020, criminals and other bad actors started to take advantage of the COVID-19 pandemic as they do every other natural or man-made disaster. Moreover, a persistent concern the last five years has been the promotion of the digital assets space. Marketing that promises ‘high returns’ or ‘high interest rates’ to investors is a red flag of possible false, misleading, or other illegal activity…

“For several reasons, I expect ‘investments tied to digital assets’ will be a top threat again when we publish the survey results for 2022. To begin with, in 2022, more digital asset companies enlisted celebrities and sports stars to market their platforms or products. For example, during Super Bowl LVI, an estimated 208 million-plus viewers watched comedy icon Larry David in an FTX commercial and NBA legend LeBron James in a commercial. In addition, they watched a Coinbase ad with a QR code bouncing from corner to corner of the TV screen. When scanned, the code brought viewers to Coinbase’s promotional website, offering a limited-time promotion of $15 worth of free Bitcoin to new sign-ups, along with a $3 million giveaway that customers could enter. These ads all appeared to work. In the case of Coinbase, it saw installs of its app jump 309% week-over-week after the ad aired on Sunday, February 13, 2022, and then climb by another 286% on February 14.

“In the months that followed, we have seen a dramatic decline in the value of cryptocurrencies and other digital assets. By way of illustration, between February 13 and July 24, 2022, the total market capitalization of cryptocurrency fell from approximately $1.9 trillion to approximately $1 trillion. Excluding Bitcoin, the decline during that same period was from approximately $1.1 trillion to approximately $600 billion.

“In addition, we have seen several bankruptcies and collapses relating to digital assets. Though the facts are still emerging, it appears the eventual implosion of Terra and the loss of over $50 billion in the values of Terra LUNA and TerraUSD over a three-day period had cascading, interconnected consequences for many market participants. By way of example, in June 2022, a court in the British Virgin Islands ordered Three Arrows Capital (‘3AC’), a Singapore-based hedge fund that once managed as much as $10 billion in assets, into liquidation. Days later, 3AC filed for bankruptcy under Chapter 15 of the U.S. bankruptcy code, which allows a foreign debtor to deal with their U.S. assets. On July 5, Voyager Digital Holdings, Inc. (‘Voyager’), a cryptocurrency brokerage that allowed customers to buy, sell, trade, and store cryptocurrency on a single platform, filed for Chapter 11 bankruptcy protection. At the time of bankruptcy, Voyager had over 3.5 million active users of its mobile application and over $5.9 billion of cryptocurrency assets held. A few days later, another trading platform, Celsius Network (‘Celsius’) declared bankruptcy. Celsius had approximately 1.7 million registered users and approximately 300,000 active users with account balances of more than $100, and approximately $6 billion in assets.”

The crypto news from FINRA’s Walsh was no better. Her written testimony included details about a growing scam called “Pig Butchering.” It works like this according to Walsh:

“In these scams, victims are lured into making investments, often in cryptocurrency or in microcap investments, through the guise of romance. These scams are typically initiated on social media, dating apps, or through private messaging apps where the scammer forms a friendship or romance with the intended target and convinces the target to invest — for instance, on a crypto platform affiliated in some way with the scammer or in small cap stocks being manipulated in a pump and dump scheme. Ultimately, the individual is victimized when the crypto wallet is stolen by the scammer, or the investments fall in value due to the manipulation.”

Walsh also explained the multiple, unique threats that crypto investors face, writing:

“Investors face significant risks when engaging with crypto assets, most of which exist with respect to activities conducted outside of a registered broker-dealer. For example, if the private keys to assets or wallets are lost, mishandled or stolen, an investor could experience an irreversible loss of their digital assets. Vulnerabilities in smart contract code, blockchain network or related protocol may also enable a hacker to empty out investors’ funds. In addition, the decentralized nature of some blockchain networks and applications implies uncertain investor protections to the extent that there may be no entity to hold accountable when there is a breakdown in service. Further, if a transfer is made in error, it may not be possible to unwind the transaction and there may be no other avenue for recourse…

“There has been a significant increase in bad actors exploiting the hype around cryptocurrencies and digital assets by creating schemes that capitalize on new or popular investment products. According to the Better Business Bureau’s 2021 Scam Tracker Risk Report, cryptocurrency fraud jumped from the seventh riskiest scam in 2020 to second riskiest in 2021. Similarly, reports to the FTC’s Consumer Sentinel Network show that fraud with cryptocurrency as the payment method increased fivefold between 2020 and 2021, from $130M to $680M, and most of the $680M lost was tied to crypto-related investment scams.

“Some of those crypto-related frauds include scammers designing fake digital platforms to syphon the contents of investors’ crypto wallets. FINRA and other regulators have also observed bad actors running crypto-related Ponzi or pump and dump schemes. Generally, a majority of these schemes are conducted by individuals outside of FINRA’s jurisdiction.”

For specific examples of customer complaints that have been filed by the thousands against crypto exchange, Coinbase, with the Consumer Financial Protection Bureau (CFPB), see our report: Crypto Victims’ Cries for Help Are Piling Up at a Federal Complaint Center.

For what some of the brightest scientific minds and software engineers are saying about the sham of crypto and blockchain, see our report: Over 1,600 of the Brightest Scientific Minds in Technology Have Signed a Letter Calling Both Crypto and Blockchain a Sham.

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