California State Regulator Targets 11 Crypto Firms for Running 'Ponzi Schemes'

California State Regulator Targets 11 Crypto Firms for Running ‘Ponzi Schemes’

UTC by Tolu Ajiboye · 3 min read
California State Regulator Targets 11 Crypto Firms for Running ‘Ponzi Schemes’
Photo: Unsplash

The California DFPI says its targets are crypto firms that misappropriated customers’ funds and also misrepresented their services.

California regulator, the Department of Financial Protection and Innovation (DFPI) has added 11 crypto companies to its list of targets, for alleged violations. According to the DFPI, these little-known crypto trading desks stole consumer funds or acted like pyramid and Ponzi schemes. Furthermore, the California state regulator questioned the credibility of the services these targets offer, and filed cease-and-desist orders against the crypto companies. In a press release, the DFPI stated:

“Each of the 11 entities allegedly offered and sold unqualified securities and ten of them also made material misrepresentations and omissions to investors. Nine of these entities solicited funds from investors to purportedly trade crypto assets on behalf of the investors.”

Lastly, the Sacramento-based regulatory body also added:

“One of the entities solicited crypto assets to develop metaverse software and one entity claimed to be a decentralized finance, or DeFi, platform.”

More on Schemes Deployed by Erring California DFPI Targets

According to the DFPI, previous schemes aimed at prospective investors have offered high-yield investment products in other sectors. These include energy products like oil and gas. Further elaborating on the schemes used by the offending companies it targets, the California state regulator explained:

“The entities promised to pay investors commissions if they recruited new investors, and additional commissions if the investors that they recruited, in turn, recruited new investors.”

In addition, the DFPI also stated that the referral programs achieved their purpose by incentivizing investors to entice others. The primary investors were able to attract others by creating and posting content to various social media platforms, including YouTube.

The DFPI’s crackdown on crypto firms Elevate Pass LLC, Pegasus, Remabit, Sity Trade, and others, follows another relatable occurrence. On Monday, California joined a group of states in suing crypto lender Nexo for violating securities laws.

The DFPI’s latest enforcement actions against these crypto companies are in accordance with a state-mandated 2022 executive order. On May 4th, 2022, California Governor Gavin Newsom signed a decree to shape regulation in the crypto space. Furthermore, this executive order prescribes guidelines for using blockchain technology for state and public institutions. It also lays the groundwork for the DFPI regarding protecting consumers and investors within the digital assets space.

Crypto Regulation

As the crypto industry continues to make inroads into traditional finance in the US, lawmakers are also proposing supervisory guidelines. For instance, a group of bipartisan lawmakers in Congress introduced a bill to provide more oversight clarity regarding regulatory agencies. With the bill still under review, the two main regulatory bodies involved are the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). Recently, SEC Chair Gary Gensler revealed that he is open to the CFTC assuming control over Bitcoin (BTC). However, Gensler added that such CFTC oversight must not undermine or overlook the power of his agency.

In the past, Gensler has branded BTC as a commodity and not a security, but remains less clear on Ether (ETH).

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