CBA Record January 2018

ther, taxpayers who earn cryptocurrency through mining (i.e., helping the network validate transactions) must report their compensation as income. Potential Estate Planning and Asset Inquiry Considerations Cryptocurrency is a form of property held by the owner. Accordingly, it may be fairly included in the owner’s schedule of assets, not unlike a bank account or real estate holdings. Accessing the cryptocurrency can be difficult for the owner’s creditors or heirs. To recover the cryptocurrency, one would need access to the owner’s account information, including the “personal key” needed to unlock transactions. These com- plexities raise important issues for those involved in estate planning or family law matters. Cautionary Tales from the Cryptocurrency Market: Schemes, Scams and Fraudsters Many legitimate cryptocurrency invest- ments exist. That said, some fraudsters have capitalized on the cryptocurrency craze. Cryptocurrency’s complexity and obscurity lends itself to fraud. Cryptocurrency has seen its share of Ponzi schemes—where the fraudster obtains money from early investors and pays “returns” that are in actuality noth- ing more than money received from subsequent investors. On July 23, 2013, for example, the SEC charged Trendon T. Shavers with defrauding investors in a Ponzi scheme involving Bitcoin. Shav- ers promised investors up to 7% interest weekly to those who loaned him Bitcoin, while he pursued “arbitrage opportunities.” In fact, he simply used the funds for his own personal use and paid early investors seeking a redemption. In 2015, Shavers pled guilty in federal court and was sen- tenced to 18 months in prison. Cryptocurrency is also subject to pump- and-dump schemes. Pump-and-dump generally involves a three-step process. First, the fraudster buys large sums of a cryptocurrency that is trading for pennies or low-dollar amounts. Second, it sends out mass communications touting the cryptocurrency’s soon-to-be-meteoric rise to entice others to purchase, and these

purchases increase the cryptocurrency’s price. Third, the fraudster sells his holdings at the higher price, locking in the profits. Eventually, the bottom falls out and the fraudster’s targets lose money. Finally, there are simple frauds shrouded in the complex nature of cryptocurrency. The fraudster touts a purported cryp- tocurrency or related product, gets the investors’ money, and delivers nothing in return. In December 2017, for example, an app masquerading as the legitimate app, “MyEtherWallet,” reached Number 3 on Apple’s App Store. Many fear that the app was simply a means of stealing credit card information and funds as well as cryptocurrency private keys. As another example, on December 4, 2017, the SEC filed charges against Dominic Lacroix and his company PlexCorps for fraud in an ICO. PlexCorps promised 1,354% returns in PlexCoin in a short 29 days. It raised $15 million through internet and other solicitations. The SEC concluded that the investors’ money did not go into any actual product; instead, the money simply lined the pockets of PlexCorps’ founders and was used for personal expenditures. The SEC obtained a court order freezing the company’s assets and charged its principals with misappropriation, fraud, and failure to register a securities offering. Given these examples, it is critical for investors to tread cautiously and closely monitor cryptocurrency investments. Some things to look out for before invest- ing include the following: promoters have no registration with the SEC, FINRA, CFTC, NFA, or state financial advisory regulators; unsolicited emails or phone calls, and communications that are not associated with a brick-and-mortar address; pitches that promise high rates of return ; sales pitches that promise a long-term, fixed return (unlikely in a volatile market); pitches that suggest little risk ; pitches urging the investor to act now ; new apps and websites that have not been vetted by regulators or the marketplace; and requirements that investment be locked up for a long period of time, without a good explanation. After investing in a cryptocurrency product, investors should be on the lookout

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for the following: the entity sends account statements showing consistent month- to-month returns or too-good-to-be-true returns; the entity does not return phone calls or emails or delays in responding; and the entity does not immediately honor requests to cash out of the investment. Conclusion Cryptocurrency has excited the investing public. Some contend that cryptocurrency is merely a temporary craze, while others suggest that cryptocurrency is here to stay as an alternative to government-backed currency. With the rapidly evolving mar- ketplace, investors should be aware of the risks and volatility associated with crypto- currency investments and the presence of scams in the marketplace. Likewise, invest- ment professionals and promotors offering cryptocurrency products should be aware of their obligation to seek guidance under the rapidly-evolving regulatory patchwork and register themselves or their products when appropriate. Anthony F. Fata and Brian P. O’Connell are attorneys at Cafferty Clobes Meriwether and Sprengel, LLP, where they focus on financial litigation and regulatory matters. Save on Lexis, client credit card processing, virtual office receptionists, student loan rates, car rentals, UPS, magazine subscriptions, legal software and more. Visit www.chicagobar. org, Membership, Member Discounts for more information and links to our discount providers. These programs have been negotiated to offer you savings and special offers as a value-added benefit of your CBAmembership. Make themost of your membership investment and check out these savings!

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