A House Oversight subcommittee chair has requested information from four federal financial regulators and five digital assets organizations about their efforts to combat fraud. Rep. Raja Krishnamoorthi, chair of the Subcommittee on Economic and Consumer Policy, is concerned that the federal government and cryptocurrency trading platforms might not be doing enough to protect consumers from cryptocurrency-related scams.
“The lack of a central authority to flag suspicious transactions in many situations, the irreversibility of transactions, and the limited understanding many consumers and investors have of the underlying technology make cryptocurrency a preferred transaction method for scammers,” wrote Chairman Krishnamoorthi. “For all these reasons, I am concerned about the growth of fraud and consumer abuse linked to cryptocurrencies.”
The letters to regulators, all virtually identical, included SEC Chair Gary Gensler, CFTC Chair Rostin Behnam, FTC Chair Lina Khan, and Treasury Secretary Janet Yellen. The letters to digital assets organizations include Binance.US, Coinbase, FTX, Kraken, and KuCoin.
Cryptocurrency fraud. According to Krishnamoorthi, the annual amount of cryptocurrency lost to fraud is on track to surpass $1 billion in 2022. Scammers have cashed in as stories of skyrocketing prices and overnight riches have attracted both professional and amateur investors to cryptocurrencies.
Krishnamoorthi explained that one form of fraud is a “rug pull,” in which developers create tokens, list them on exchanges, and generate investments before absconding with investors’ dollars. According to Chainalysis, a blockchain data platform, rug pulls accounted for roughly 37 percent of cryptocurrency scam revenue 2021, compared to 1 percent in 2020.
Questions for regulators. Krishnamoorthi said he is concerned that despite these vulnerabilities, the federal government has been “slow to curb cryptocurrency scams and fraud.” Gaps in regulation include a lack of oversight over both entities and transactions, with a lack of clarity and agency “infighting” compounding the problem.
In addition to general information about regulators’ authority and efforts to combat crypto-related fraud, Krishnamoorthi seeks answers to the following questions:
- What tools could provide consumers with information to better assess risks?
- What regulatory processes could ensure that digital assets contain sufficient consumer and investor protections?
- Should cryptocurrency holdings be treated as commodities, securities, or both?
- What executive branch agencies or institutions play a role in regulating cryptocurrencies and addressing cryptocurrency-related scams and frauds?
- What is the existing framework for interagency cooperation on the regulation of cryptocurrencies, cryptocurrency exchanges, and other digital assets?
Questions for crypto organizations. In the letters to digital asset trading platforms, also virtually identical, Krishnamoorthi noted that the private sector has taken some steps to protect consumers and investors and curb cryptocurrency fraud. For example, open-source investigators and organizations such as RugDocs conduct audits and warn potential investors of the risks of certain digital assets. In addition, some exchanges maintain insurance policies to cover consumer losses from criminal activity.
But significant risk remains, said Krishnamoorthi. Consumers are often unaware of resources to inform their investing decisions, and insurance companies are wary to provide insurance to individual consumers given the lack of regulation of digital assets. Other issues include listing of digital assets with little or no vetting, undiscovered potential vulnerabilities, insufficient security leading to outright theft of assets on exchanges, and insufficient monitoring of accounts.
In addition to general information about digital assets organizations’ policies, processes, and efforts to combat fraud, Krishnamoorthi asked the following questions:
- What tools does the organization currently have in place to mitigate the risk of fraud or other criminal activity?
- What mechanisms does the organization have in place to ensure that individuals selling, purchasing, or investing in digital assets are made aware of the relevant risks?
- What mechanisms, such as insurance, does the organization have in place to ensure that harmed individuals are recompensed?
- For the above questions, does the organization currently have concrete plans to implement the mechanisms? By when?
- What actions can the federal government take to assist cryptocurrency exchanges in combatting fraud and scams?