Cryptocurrency or digital assets are a rapidly growing segment of the financial system, but they have also become a target for significant fraud. As crypto markets expand in complexity and value, schemes involving token offerings, exchanges, investment platforms, and decentralized finance have led to billions in investor losses. A cryptocurrency fraud whistleblower plays a critical role in exposing these illegal practices by reporting misconduct to regulators such as the SEC, CFTC, or DOJ. If you have inside knowledge of digital asset misconduct, you may qualify as a crypto fraud whistleblower and be eligible for legal protections and potential financial rewards.
What is cryptocurrency fraud?
Cryptocurrency fraud refers to deceptive or illegal schemes involving digital assets, crypto exchanges, token offerings, decentralized finance platforms, and other blockchain-based investments. As the digital asset market has grown in size and complexity, reported fraud losses have increased significantly. According to the Federal Trade Commission, consumers reported losing more than $1 billion to fraud involving cryptocurrency from January 2021 through March 2022.
In January 2024, the U.S. Department of Justice announced criminal charges alleging a $1.89 billion cryptocurrency fraud scheme, and the U.S. Securities and Exchange Commission filed a related civil enforcement action alleging the scheme raised more than $1.7 billion from investors. These cases illustrate the scale of enforcement actions involving digital assets.
Fraud schemes involving digital assets may include unregistered securities offerings, market manipulation, false or misleading disclosures, Ponzi or pyramid structures, and misappropriation of investor funds. Scammers have also used evolving technologies such as Non-Fungible Tokens and decentralized finance applications in certain schemes.
Many cryptocurrency transactions occur outside traditional banking systems, and some activity occurs through decentralized networks. As a result, fraud can be difficult to detect and, in many cases, transactions are difficult or impossible to reverse once completed. For this reason, individuals with insider knowledge may play a critical role in reporting misconduct to regulators. A cryptocurrency fraud whistleblower who provides original information to federal authorities may be eligible for legal protections and, in some circumstances, a financial award.
Types of Cryptocurrency Fraud
Each of the following schemes represents the type of misconduct that a cryptocurrency fraud whistleblower may report to federal regulators under established whistleblower reward programs.
Investment Scams
Investment scams start with false promises of easy money paired with people’s limited knowledge and experience with cryptocurrency. Scammers claim quick and easy returns for investors, but the “investment” goes to the scammers’ crypto wallet. The underlying investment changes as the technology evolves. Now, in addition to fraudulent investments in tokens, scammers are luring victims with fake NFTs and more complex DeFi schemes.
Liquidity Mining Scam
Liquidity mining is a popular and often legitimate method for cryptocurrency owners to earn passive income by loaning their tokens to decentralized exchanges. But scammers have made this strategy more dangerous. They exploit owners of cryptocurrency and entice them to participate in liquidity mining by guaranteeing a return on investment. Scammers convince victims to link their cryptocurrency wallet to a fraudulent liquidity mining application and then wipe out the funds without notification or permission from the victim. Since January 2019, according to the FBI’s Internet Crime Complaint Center (IC3) and open source, this scam has been responsible for over $70 million in combined victim losses.
Broker-dealer Fraud
The SEC examines the entities investing in cryptocurrencies that may need to register as broker-dealers or exchanges in some circumstances.
Fake ICOs
When a cryptocurrency is first offered for sale, called the Initial Coin Offering (ICO), it presents the perfect time to scam the uneducated in cryptocurrency. Fraudsters can copy whitepapers and bios of fabricated people associated with the ICO from legitimate cryptocurrencies.
Wallet Theft
Cryptocurrency assets provide another avenue for theft. Criminals can hack crypto wallets and steal digital assets, set up fake wallets, and even set up phony crypto exchanges to steal crypto assets.
Ponzi and Pyramid Schemes
Crypto investments can be a vehicle for pyramid and Ponzi schemes where new people are recruited to give returns to the early investors. In August 2022, the SEC charged 11 individuals in a $300 million cryptocurrency pyramid scheme. The individuals created and promoted Forsage, a fraudulent crypto pyramid and Ponzi scheme that raised more than $300 million from millions of retail investors worldwide. These scams can be run using tokens or NFTs.
Pump and Dump Schemes
This is most common with small-cap cryptocurrencies, pump and dump is a form of securities fraud that involves artificially inflating the price of a cryptocurrency through false and misleading positive statements (pump), to sell the cheaply purchased stock at a higher price (dump). Once the operators of the scheme “dump” (sell) their overvalued shares, the price falls and investors lose their money. In September 2022, the SEC filed charges against Arbitrade Ltd., a Bermudan company, and Cryptobontix Inc., a Canadian company, and their principals, for perpetrating an alleged pump-and-dump scheme involving a crypto asset called “Dignity” or “DIG.”
DeFi Rug Pull Scam
DeFi cryptocurrency scammers can create a new token project and then, after enough investors have pushed the price higher, walk away with all the money in what is called a “rug pull.” These rug pulls can work in different ways. A common method is by programming the token to steal from investors. For example, a fraudster will program a crypto token’s underlying smart contract to make it impossible to sell the token, allowing the scammer to mint unlimited new ones, or charging huge trading fees. Scammers can also steal the liquidity from the new token. They create a liquidity pool, wait for investors to buy in, and then withdraw all of the valuable tokens from the pool.
Exchange Fraud
Scammers will lure investors with the promise of a great cryptocurrency exchange, maybe even promising some additional digital assets. Instead, there is no exchange and the investor doesn’t realize it is fake until after they have lost their deposit.
Regulatory Oversight of Cryptocurrency
The U.S. Department of Justice, the U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission, the Financial Crimes Enforcement Network, and the Internal Revenue Service each have enforcement or regulatory authority over various activities involving digital assets, depending on the conduct at issue and the laws implicated.
SEC Enforcement and the SEC Whistleblower Program
The SEC regulates securities, including digital assets that may qualify as “investment contracts” under federal securities laws. Under the Securities Act of 1933, a company may not offer or sell securities unless the offering is registered with the SEC or qualifies for an exemption from registration. Many cryptocurrency-related enforcement actions have involved alleged unregistered securities offerings, misleading disclosures, market manipulation, or misuse of investor funds.
Federal securities laws require broker-dealers, certain investment advisers, alternative trading systems, and national securities exchanges to register with the SEC and, where applicable, become members of self-regulatory organizations such as FINRA. Depending on how a digital asset product is structured, platforms offering crypto lending or staking programs may also be subject to federal securities laws.
The SEC Whistleblower Program permits individuals to report potential violations confidentially. If the information leads to a successful enforcement action resulting in monetary sanctions exceeding statutory thresholds, an eligible whistleblower may receive a monetary award.
CFTC Authority and Commodities Whistleblower Protections
The CFTC has regulatory and enforcement authority over certain digital assets treated as commodities under the Commodity Exchange Act, particularly in connection with derivatives markets and certain spot market fraud or manipulation. The CFTC has publicly stated that enforcement involving digital assets remains an enforcement priority due to the risks posed to investors. In June 2022, the CFTC filed an enforcement action against Mirror Trading International Proprietary Limited, alleging what it described as the largest fraud scheme involving Bitcoin charged in any CFTC case, and the court ultimately ordered over $1.7 billion in restitution and penalties.
FinCEN and Anti-Money Laundering Enforcement
FinCEN administers the Bank Secrecy Act framework and regulates anti-money laundering and counter-terrorist financing obligations for covered entities, including many money services businesses that handle convertible virtual currency. In 2013, FinCEN issued guidance stating that certain administrators and exchangers of virtual currency qualify as money services businesses under the Bank Secrecy Act. The Anti-Money Laundering Act of 2020 expanded statutory definitions to include “value that substitutes for currency,” strengthening the regulatory basis for applying BSA requirements to certain virtual currency transmission activities. Covered entities must register with FinCEN and implement anti-money laundering compliance programs.
IRS Enforcement of Cryptocurrency Tax Violations
The IRS treats virtual currency as property for federal tax purposes. As a result, cryptocurrency transactions may generate taxable gains or losses, and digital assets may be involved in tax-related enforcement actions.
Individuals who provide original information to these agencies regarding violations of federal securities, commodities, tax, or anti-money laundering laws may qualify for protections under applicable whistleblower statutes. In certain cases, a crypto fraud whistleblower may also be eligible for a financial award if the information results in a successful enforcement action.
Protections for Crypto Fraud Whistleblower
Because cryptocurrency can be regulated by various federal agencies, several laws can protect possible cryptocurrency whistleblowers, including providing confidentiality and potential rewards for reporting fraud if money is recovered. It is best to talk to an experienced whistleblower attorney to learn more.
How Do You Become a Cryptocurrency Fraud Whistleblower?
When choosing a whistleblower lawyer, consider Phillips & Cohen, which has represented whistleblowers in qui tam and other government whistleblower reward programs for over 30 years. Our attorneys have experience representing individuals who report complex financial misconduct, including securities and commodities violations involving cryptocurrency and other digital assets. We are the most successful whistleblower law firm, with more than $13 billion in recoveries from our cases.
If you know of wrongdoing or fraud by your employer or another entity, including cryptocurrency fraud, digital asset market manipulation, unregistered token offerings, exchange misconduct, or misuse of investor funds, you can take steps to stop it. Talk to experienced whistleblower lawyers and contact us for a free, confidential review of your matter. A cryptocurrency fraud whistleblower may be eligible for legal protections and, in certain cases, a financial award for reporting violations to federal regulators.
Crypto Fraud & Whistleblower FAQs
How does a whistleblower report crypto fraud?
A cryptocurrency fraud whistleblower can report misconduct by submitting original information through a federal agency’s whistleblower program, such as the SEC or CFTC, depending on the type of violation involved. To qualify for potential protections or an award, the information must generally be voluntary, original, and lead to a successful enforcement action. In certain circumstances, a crypto fraud whistleblower may remain anonymous if represented by counsel. Consulting an experienced whistleblower attorney before submitting a report is strongly recommended.
How does a whistleblower report crypto fraud as a whistleblower?
If you believe you may qualify as a cryptocurrency fraud whistleblower, gather any non-privileged information that supports your concerns. This may include relevant communications such as emails or internal messages, transaction records, offering documents, marketing materials, compliance reports, account statements, blockchain transaction data, or other records showing how funds were raised, transferred, or used. Detailed information regarding dates, amounts, entities involved, and the structure of the digital asset product can assist regulators in evaluating potential securities, commodities, tax, or anti-money laundering violations.
Before collecting or sharing information, it is advisable to speak with an experienced whistleblower attorney to ensure you do not violate company policies, confidentiality agreements, or applicable laws.
What if I only have suspicions, not concrete evidence of crypto fraud?
A crypto fraud whistleblower does not need to prove a violation before contacting counsel or regulators. If you have a reasonable belief that misconduct involving digital assets may be occurring, you can report your concerns with as much specific detail as possible. Federal agencies such as the SEC and CFTC evaluate whether submitted information is credible, timely, and sufficiently detailed to warrant further investigation.
Providing original information, even if you do not possess complete documentation, may still be valuable. An attorney can help assess whether your knowledge could qualify under a federal whistleblower program.
Can I report crypto fraud that occurred internationally?
Yes, you can report international crypto fraud. Many regulatory bodies have mechanisms for dealing with cross-border fraud, and crypto assets often fall under the scrutiny of multiple jurisdictions.
How long does the process of investigating and addressing crypto fraud typically take?
The process can vary greatly, ranging from several months to a few years, depending on the complexity of the fraud, the jurisdictions involved, and the efficiency of the investigative bodies. Patience is key, as thorough investigations take time to gather sufficient evidence for legal action.
Remember, reporting crypto fraud is a significant step in combating illegal activities in the digital finance world. Your actions not only help in potentially recovering lost assets but also protect others from falling victim to similar schemes.
Can I submit a crypto fraud tip anonymously, and how is my identity protected?
Yes. A cryptocurrency fraud whistleblower may submit a tip anonymously under the SEC or CFTC whistleblower programs if represented by an attorney. Federal law requires these agencies to protect information that could reasonably reveal a whistleblower’s identity, subject to limited exceptions, such as disclosures required in certain court proceedings or to other government authorities.
What percentage of monetary sanctions can crypto whistleblowers receive, and what is the minimum threshold for eligibility?
Under the SEC and CFTC whistleblower programs, eligible whistleblowers may receive between 10 percent and 30 percent of monetary sanctions collected in a successful enforcement action. To qualify for an award under these programs, the action must generally result in monetary sanctions exceeding $1 million.