There's a formula out there that enthusiasts for cryptocurrencies should consider, the author of this article argues: rising prices + public interest = FOMO = fraud. 

The price of bitcoin – fetching around $48,500 at the time of this article going to press – is still up significantly from the start of January ($34,705), if off its highs of 2024 so far. The wealth sector remains fascinated with cryptocurrencies and digital assets, although the editors sense that some of the stardust has faded with the passing of time and maturation of this market. To set market developments in context, and consider what the future holds, we carry this article by James Evison (pictured below), partner, Stevens & Bolton. In particular, he considers the risk of investment fraud. 

James Evison

The editors are pleased to share these views; the usual editorial disclaimers apply to views of outside contributors. If readers wish to jump into the conversation, please do so! Email tom.burroughes@wealthbriefing.com

The first half of 2024 saw the crypto winter give way to a bull market. Investor appetite appeared undimmed by the long run of negative news stories, market volatility, widespread reports of fraud, and high-profile insolvencies. The price of bitcoin has hit all-time highs and some commentators predict it has further to go. 

This may be good news for many, but there are also risks for the unwary investor in a rising market: that a price may crash is the obvious one, but there is also the risk, perhaps overlooked sometimes, of investment fraud. 

An all-too-common cautionary tale fraud lawyers hear is of private investors, intrigued by the concept of cryptocurrency, being duped into sending funds to fraudsters. It often starts with some online research. Then maybe an approach by individuals with an attractive investment proposal. They are super helpful and attentive. They demonstrate the returns their platform can achieve. “Just invest a small amount with us and see what happens,” they say. That initial investment soars and more is put in. After a while the investor wants to withdraw some money. Excuses are made. Further payments are needed to release the funds. Still nothing is released. Then comes the dawning realisation of what has happened. 

One way of demonstrating this risk is to look at what has happened before. Back in May 2020, an event known as the bitcoin halving took place. This happens every four years and, effectively, means that the supply of bitcoin is halved. If an asset becomes scarcer but demand remains the same, we generally expect value to increase. After the halving in 2020, a boom duly followed. The price surged from somewhere around $7,000 before the halving to a peak of more than $60,000 in 2021.

Stories about digital assets – positive and negative – were all over the news. At the same time, the value of cryptocurrency received by illicit wallet addresses rose from around $9.4 billion in 2020 to $23.2 billion in 2021 and then $39.6 billion in 2022 (according to the Chainalysis 2024 crypto crime report). This period also saw a run of crypto cases coming before the English courts as defrauded investors sought disclosure orders, freezing injunctions, and the return of their stolen funds. 

Jump ahead to 2024, and the cycle of bitcoin halving has just been repeated at a point when bitcoin prices had already risen sharply. Again, the media is awash with stories about opportunity and loss – the impact of rising prices, the regulatory approval of exchange-traded funds in the US, Dr Craig Wright’s adventures in the English courts, and the ongoing fallout from the FTX collapse. 

It is not hard to guess what fraud lawyers are expecting to happen next. It can be summed up with the following simple equation: rising prices + public interest = FOMO = fraud. 

So what can be done to mitigate the risks and prevent investors falling victim to these scams? Better regulation is part of the answer. A number of jurisdictions around the world are competing to put regulatory systems in place, balancing the protection of consumers with the goal of building an innovative but stable new financial sector. 

In the UK, a limited set of rules covering firms marketing crypto assets to consumers has been introduced and the intention is to bring crypto asset-related activities within the existing UK regulatory framework under the Financial Services and Markets Act 2000. This is broadly welcome news for investors, albeit we will need to see whether it survives the upcoming general election intact. Either way, it won’t replace the need for caution and proper due diligence before parting with funds. Prevention is better than cure.

However, if things do go wrong – and they will for some – then all hope is not lost. The English courts are famously friendly to victims of fraud and helpful case law has been laid down applying traditional legal principles to cases of fraud involving digital assets. If the assets can be traced (which they often can be thanks to the blockchain), and you act quickly enough, there is a range of measures that can be taken to protect those assets and to try to secure their return.