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How hard is it to find crypto scams? According to SEC Chairman Gary Gensler, this is not as hard as it sounds.
Speaking to the US Army during Twitter Spaces earlier this month, Gensler and SEC Commissioner Caroline Crenshaw discussed what they see as the dangers of investing in crypto and how to tell if a project is a scam.
“If something seems too good to be true, sometimes it actually is,” says Gensler. “There are certain red flags you can look for beyond too good to be true.”
In general, Gensler gives three signs that something might be a scam: (1) the crypto project is unable to provide clear documentation of how it works or how it plans to achieve its goals; (2) the project cannot demonstrate that it complies with regulations; and (3) the project can’t easily explain what it is at all.
Gensler also says that offering high returns is a red flag and a warning against projects that are too complex or those that make investors rush decisions, pray to “FOMO,” or fear missing out.
The SEC chairman also once again reaffirmed his belief that many cryptocurrencies may be unregistered securities.
“Very [cryptocurrencies] does not comply with securities laws, but it should be,” he said. “This is the Wild West, I think you have to really wonder if it’s ‘over there’ there.”
Presenting a bleak outlook on the future of the crypto industry, Gensler told the audience that the majority of cryptocurrencies, the more than 15,000 tokens currently on the market, will eventually fail.
“It is important to understand that crypto is novel; it is speculative,” said Commissioner Crenshaw. “There really is a reduction in investor protection because most of them don’t choose to come under the authority of the SEC.”
Pointing to a history of fraud in crypto, Crenshaw said there needs to be more transparency in the industry.
“They are notorious for their scams, and they claim to be transparent,” said Crenshaw. “What’s on the blockchain is transparent, but the rest is not.”
Although Crenshaw did not mention FTX by name, the specter of the Sam Bankman-Fried crypto exchange collapsing continues to haunt the crypto market. FTX, once a dominant player in the crypto industry, exploded in November following a bank run on exchanges. The liquidity crunch forced the company to admit it had no one-to-one customer asset reserves and eventually filed for bankruptcy.
Bankman-Fried has since been arrested and charged with eight financial crimes, including wire fraud and conspiracy to commit money laundering, in connection with the stock exchange collapse. Currently, there are still billions of customer assets that have yet to be found, and millions of customers still don’t know if they will ever see those funds again.
“The bottom line is there is increased risk when you invest in new, speculative and volatile investments that really lack basic protections and regulations,” Commissioner Crenshaw said during Twitter Spaces. “So if you are considering investing in crypto, consider how much of your portfolio you are devoting to it, and certainly not more than you can afford to lose.”
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