crypto Archives - Stoll Berne | Attorneys | Class-Action, Securities, IP, Real Estate, Business Litigation

The Oregon Department of Consumer and Business Services published its Summer 2022 issue of Common Ground this week. The newsletter is available here, Common Ground Summer 2022 (oregon.gov). It includes an article about cryptocurrencies and NFTs and another about a lawsuit against Safeguard Metals, LLC and others that Oregon joined.

Regarding crypto and nonfungible tokens, DCBS writes that its Division of Financial Regulation (DFR) is “warning Oregonians to use caution when investing in cryptocurrencies, nonfungible tokens, or other new or volatile products.” And “[t]here are nearly 10,000 active cryptocurrencies and they and NFTs are increasing in popularity. Regulation of these new asset types is still evolving. While there are often promises of big returns consumers often lose money when investing in them.” According to DCBS, cryptocurrencies and digital assets topped the North American Securities Administrators Association’s (NASAA) annual list of top investor threats.

According to the article about the Safeguard Metals lawsuit, the Department joined the Commodity Futures Trading Commission (CFTC) and 26 state securities regulators in bringing claims against the precious metals dealer and its owner. The alleged scam involved $68 million taken from 450 investors, including eleven Oregon investors who were defrauded out of almost $3 million.

The Safeguard Metals article also includes a warning about self-directed IRAs. In our experience, metals dealers sometimes require investors to open a self-directed IRA to hold precious metals investments. DCBS explains, “[s]elf-directed IRAs should not be confused with traditional IRAs or other retirement vehicles. Self-directed accounts are placed with a custodian, but do not afford the investor any protections nor provide a review of the holdings or any valuations of the holdings in the account.”

President Biden signed an Executive Order on March 9, 2022, directing federal agencies to develop a strategy for regulations and policies on digital assets, which include cryptocurrencies. In a fact sheet released the same day, the White House cited survey data that the market cap of cryptocurrencies in November 2021 surpassed $3 trillion, a massive increase from $14 billion five years before. The fact sheet reports that around 40 million Americans have put money in cryptocurrencies. In explaining the basis for the executive order, the White House cited the “substantial implications” of digital assets for “consumer protection, financial stability, national security, and climate risk.”

The Order is aimed at setting the stage for regulation. The first of the objectives identified in the Order includes, in part, “We must protect consumers, investors, and businesses in the United States. The unique and varied features of digital assets can pose significant financial risks to consumers, investors, and businesses if appropriate protections are not in place.”

These risks are often not understood by investors. In our practice, we hear from investors who lost money in outright scams or who are running into issues with crypto exchanges. Some of the fraud impacting digital assets could be mitigated through regulation.

The crypto industry apparently thinks that regulation is coming and has been hiring former government officials, in the words of the Tech Transparency Project, “to help mold the policy landscape in the industry’s favor.” In a report published last month, the Tech Transparency Project said it identified “nearly 240 examples of officials with key positions in the White House, Congress, federal regulatory agencies, and national political campaigns moving to and from the industry.” This includes two former chairs of the SEC, two former chairs of the Commodity Futures Trading Commission, and a former chair of the U.S. Senate Finance Committee.

New York Times columnist Paul Krugman wrote about crypto currency markets and investing in his column, How Crypto Became the New Subprime. Whether you are a crypto skeptic or advocate, the column draws an interesting comparison between the crypto craze today and the subprime mortgage crisis from a few years ago. Mr. Krugman points out, as data on Tradingview.com (Crypto Market Cap and DeFi Market Cap Charts — TradingView) shows, the market cap of cryptocurrencies reached $3 trillion in November 2021. He cites a survey that 55% of crypto investors do not have a college degree. This data point alone does not mean that the majority of crypto investors are unsophisticated, but an investor’s background can be an important factor when evaluating suitability.

According to Mr. Krugman, the promotion of crypto today looks at least somewhat like subprime lending a few years ago. Much like crypto is marketed as a way to expand the pool of people who invest, subprime lending was promoted as expanding the pool of potential homebuyers. The subprime mortgage bubble burst, leading to foreclosures, credit problems, and worse. In the bubble’s aftermath, it was clear that predatory lending was behind some of the subprime loans. Similarly, Mr. Krugman is skeptical that most crypto investors understand what they are buying and have the means to suffer losses.

Crypto markets are lightly regulated, if at all. And investors can be defrauded or taken advantage of in even regulated markets. We have seen investors, both large and small, who have suffered material losses after they were convinced to buy cryptocurrencies or trade even more complex financial products that relate to cryptocurrencies. Whether you agree with Mr. Krugman or not, his point that investors should understand what they are investing in is an important one.