Despite the blockchain, cryptocurrencies still carry fraud risk
Cryptocurrencies, in theory, should be fraud-proof. But that did not stop two Canadians from creating a new cryptocurrency to defraud millions from investors, according to the SEC.
The SEC’s Cyber Unit recently filed its first charges against individuals involved in what is said to be a fraudulent offering of a new cryptocurrency called PlexCoin. The extent of the fraud is relatively small, believed to involve around $15 million of investors’ funds to date.
The SEC’s filings against the two Canadians and the company, PlexCorp, reveal what appears to be a fairly run-of-the-mill scam, drawing in investors with wild promises of incredible returns “as high as 88,000%.” Very little substance was found to back up the promises, other than a Facebook page and a website.
The existence of fraudulent schemes involving cryptocurrencies is hardly surprising, given the skyrocketing valuations for leading global cryptocurrencies such as bitcoin. The SEC’s Cyber Unit was founded, at least in part, to police these offerings, suggesting that we can expect to see many more fraudulent schemes involving blockchain-based currencies in the future.
The risks of fraud, along with the current reputation of such currencies as often being used for money laundering and other criminal activities, has built scepticism among more risk-averse investors including the belief that cryptocurrencies are highly speculative bubbles likely to burst at any point.
All of this is understandable. But it's ironic given that cryptocurrencies are designed to make financial transactions both highly secure and more transparent.
From a risk and control perspective, the blockchain or “distributed ledger” concept on which cryptocurrencies are based is brilliant. Every transaction involving a currency “coin” is recorded in what is essentially a secure and encrypted public ledger, allowing those involved to verify the transaction and its history. The design model is very close to what some auditors and control specialists have been discussing for years, a system in which every financial transaction taking place in any business process is independently tested, verified and permanently “stamped” as legitimate.
When it comes to preventing, detecting and investigating fraud in conventional systems, a major challenge lies in piecing together multiple data sets from different sources to determine whether there are red flags. While specialized data analysis has automated many of these processes and enabled financial transactions to be continuously monitored, even simpler still would be if all aspects of monetary activities were recorded centrally, making available a comprehensive and transparent analysis for all those with a need to know.
Of course, what may be the dream of fraud investigators, auditors, tax authorities and police forces, could well be the “big-brother” nightmare of others. But that story is for another day…