The federal government is continuing to clamp down on the fast-moving market for cryptocurrencies, charging two bitcoin traders with fraud on Thursday.
The U.S. Commodity Futures Trading Commission filed civil charges against two alleged cryptocurrency fraudsters, one in New York and the other in Colorado. These are not criminal charges; they are lawsuits filed in federal court in New York seeking restitution for victims as well as financial penalties and trading bans.
The alleged schemes started in April 2017. That was shortly before bitcoin began its stratospheric rise in value from slightly more than $1,000 to a peak of $19,343 on December. 16, according to Coindesk.com. The rise of bitcoin created a frenzy among investors who wanted to get in on virtual currency.
"Increased public interest in bitcoin and other virtual currencies has provided new opportunities for bad actors," James McDonald, enforcement director for the CFTC, said in a statement.
The federal agency accuses a New York bitcoin trader, Patrick K. McDonnell of Staten Island, of taking money to conduct trades and impart market tips. He is accused of absconding with the funds instead.
The CFTC charged McDonnell and his company, known variously as CabbageTech and Coin Drop Markets, with fraud and misappropriation in their trading of bitcoin and litecoin, which also experienced a meteoric runup last year.
CNNMoney was unable to contact McDonnell. The CFTC said McDonnell and his company convinced customers to give them money and also virtual currency in exchange for conducting trades and providing crypto-market tips. But the CFTC complaint says that McDonnell and his company just took the bitcoin without providing anything in return, wiping clean their Internet and social media presence "in an attempt to conceal the scheme."
CFTC enforcement director McDonald said that McDonnell and his company "preyed on customers interested in bitcoin and litecoin, promising them the opportunity to get the inside scoop on the next new thing and to benefit from the trading acumen of a supposed expert." They allegedly promised a 300% return on investment within one week.
The CFTC also accuses a Colorado man, Dillon Michael Dean of Longmont near Boulder, and his British-registered company The Entrepreneurs Headquarters Limited, of fraudulently soliciting bitcoin from customers which it put into a pool described as investment funds, but which was allegedly a "Ponzi scheme."
The CFTC says that starting in April 2017, Dean allegedly solicited more than $1 million in bitcoin from more than 600 people, promising to use their virtual funds as "an investment vehicle for trading commodity interests." But the CFTC says he "misappropriated" the funds, using them to pay other customers "in the manner of a Ponzi scheme."
CNNMoney was unable to contact Dean. A spokeswoman for the CFTC said it doesn't have attorneys listed for either defendant.
The feds ramped up their interest in cryptocurrencies late last year. The Securities and Exchange Commission warned investors to be on the lookout for "potential scams" involving Initial Coin Offerings, a form of raising funds that sometimes involved cryptocurrencies while avoiding the regulatory scrutiny of other forms of corporate fundraising.
The SEC also created its new Cyber Unit to seek out "pump and dump" schemes involving ICOs and cryptocurrencies. In December the SEC froze the assets against PlexCorps, a company running an ICO for its own cryptocurrency, and filed charges against the Canadians who were allegedly running it. Their lawyer said they would fight the charges.
In November the Federal Bureau of Investigation charged a Brooklyn businessman with fraud for allegedly bilking investors through a real estate ICO scam called REcoin. He pleaded not guilty.
- Two bitcoin traders charged with fraud
- Jamie Dimon regrets calling bitcoin a 'fraud'
- Trader Joe's shootout suspect faces 51 charges
- Feds start to crack down on fraud as Bitcoin soars
- Police report incident at L.A. Trader Joe's
- Gunman barricaded inside L.A. Trader Joe's
- Trader Joe's standoff ends with one dead
- Brexit is a nightmare for currency traders
- Bitcoin sinks 20%
- Bitcoin falls below $10,000