Fraud cases and crash: “Crypto means risk”

The sell-off in cryptocurrencies this week has also gripped Bitcoin and Etherrum. In an interview, crypto fraud expert Erica Stanford puts the current crash in perspective, explains how investors can secure their investments and identify scammers.

This week, the crypto market has crashed sharply. The reason for this was, among other things, payment problems at the crypto lender Celsius. Some even suspect fraud here. They have spawned a book on the biggest crypto scams. Help us: Was this a scam?

Erica Stanford: Celsius makes crypto loans. That’s always risky. What happened is relatively simple: Celsius loaned out other investors’ crypto assets. When investors wanted their coins back, Celsius lacked liquidity. And then panic broke out. It’s kind of like a bank run, it’s over at some point. Of course, Celsius made mistakes too. You probably borrowed too much money too quickly and set the holding periods too short to achieve the promised return.

Which should be up to 17 percent after all…

…yes, and since they had invested parts in other cryptocurrencies, that pulled down the other currencies as well. People panicked and sold. But that also shows how volatile the market is.

So no scam? So what was the cause of the burglary?

Crypto means risk. And crypto loans mean significantly more risk. One should not forget that. However, I think that the current slump is not solely due to Celsius. I also know some employees from the Celsius team and they are really good people. Although Celsius has accelerated the slump, it is basically being fueled by the overall market. Everyone expects a recession and rising interest rates. Then investors prefer to hold more cash and get out of risky assets like crypto. But no, I’m not assuming it’s a scam.

You write in your book that in the meantime almost 98 percent of all cryptocurrencies had no real value or were clear frauds. Where are we now?

These statistics come from the American Securities and Exchange Commission (SEC) and mainly relate to the period around 2018, when there were thousands of new crypto issuances (ICOs). The problem with these cases is that you can’t clearly separate them into black or white. Some were outright frauds. The investors even provocatively thanked the investors and then fled. Others just had bad luck, technical problems or the market was going badly. Many of them even meant well, but then stumbled over themselves – as sometimes happens with startups. And in between there were countless projects about which one can say: The founders actually wanted to achieve something good, but are not innocent of failure – so they are in the gray area. For example, financing rounds that were too large or ICOs were arranged too quickly. Normally, no investor would have put money into it, but because it was crypto, many were blind. Some founders then noticed that it involved quite a lot of work – and preferred to flee with the money. Others have failed at the task. So it wasn’t a planned fraud, but they weren’t innocent either.

So should ICOs be more strictly regulated, similar to classic IPOs?

Basically, the concept is not wrong. It’s fantastic that you can invest a small amount in a project of your choice at such an early stage. This is not so easily possible in other markets. But: The founders were able to collect large sums of money without having to take much responsibility for it. I would therefore rather say that many projects have collected too much money – at least for what they intended. And yes, there should be tighter regulation.

Conversely, what do crypto exchanges have to look out for before they accept a coin?

This is actually a problem with over 19,000 different cryptocurrencies, 99 percent of which are likely to collapse. But some will definitely survive and have value. Finding these few coins is difficult. The platforms need to take a very close look at the supposed advantages of the currencies. Do they really use less energy than other currencies? Can this really be used to transfer assets to remote regions of the world free of charge? Some promise more than they can keep, most actually have no real benefit. When I think of coins whose only idea is to buy banana chips – I can spend the money in the supermarket right away. Of course, that doesn’t make any sense and shouldn’t be traded on crypto exchanges.

Many act anyway.

Yes, because they make money on every trade. And the more cryptocurrencies they offer, the more money they make. From a stock exchange perspective, one could argue that they are ultimately just shops. What users then buy is up to them. But I would argue that they should check the projects better in advance. Mainly because there are good tools for it. But I am not in favor of the stock exchanges being held responsible for a collapse. The ultimate fault almost always lies with the project.

Since the stablecoin Terra USD crashed in May and sent the markets plummeting, stablecoins have been under more scrutiny – especially Tether. There have been allegations of fraud against the project for a long time. What do you make of it?

Personally, I wouldn’t put any money into Tether. It’s really difficult to verify that they are really secured as they say they are. There is no real proof of this and I personally don’t believe in it either.

Are stablecoins stable?

no I don’t trust Tether in particular. But I wouldn’t be surprised if we see other collapses here in the near future. Some stablecoins state that they are fully hedged to US dollars. Is that you? Maybe. Perhaps there is a stablecoin that I haven’t heard of that has actually hedged the exact dollar amount advertised. Then it would be hypothetically possible. But is there such a stablecoin? Anyway, I haven’t heard of it. And so I’m currently having a really hard time believing in the protection of stablecoins.

Some say that would be no different with bank deposits. If the bank goes bust, the money is gone…

There is a fundamental difference. If you have purchased a bitcoin, then it is secure in the blockchain. You have it, even if the crypto exchange has gone bankrupt. I wouldn’t be so sure about stablecoins. It’s risky at best, as you can see with the Terra/Luna crash.

Was Terra/Luna a scam, was it the founders fault, or were they just unlucky?

I don’t think you can classify that so clearly. After the first crash, you even issued a second token, which then crashed again. And now the authorities in South Korea and the USA are investigating. On the other hand, the South Korean authorities accuse the founder of having extracted millions. In any case, it doesn’t look all that good and I don’t want to form a final judgment on it. But I think we’ll be hearing a lot more about it in the coming months.

The scams have changed several times over the years. What are the latest trends?

The systems are getting smarter all the time. Two developments stand out: On the one hand, there are celebrities who supposedly appear as brand ambassadors. In reality, however, they often do not even know that they are being advertised. For example, some are hacked. Still others know that they are advertising, but do not understand the product at all. The latest trend is dating scammers, mainly from Africa but also from the US. These existed before, but the system has changed: In the past, the victims were supposed to transfer the money directly to the scammers. Today they are persuaded to first invest the money on a well-known crypto exchange like Binance. This initially creates trust and the victims think they are investing the money for themselves. But then the scammer persuades the victim to divert the coins to another unknown crypto platform. Supposedly there would then be a higher return or better conditions. In reality, however, the coins end up with the scammer.

In their book, they describe multi-level marketing as a kind of catalyst for numerous cases of fraud – i.e. the type of structured sales that also exists with insurance companies, for example. Is this still a problem?

Yes, I would say: multi-level marketing is still the biggest problem. Especially in the crypto sector, but also in other economic sectors. Only those who get there really early earn money with structured sales – and a lot at that: We’re talking about hundreds of millions of euros. However, 98 percent earn nothing and sometimes even lose money. The problem with crypto is that the lower sales levels are paid in cryptocurrencies – which then often crash. At first it looks pretty good, then they get their money back. But that is exactly the character of a pyramid scheme. People then keep investing, selling it to their family members and friends and getting nothing in the end. We see this all over the world, but especially in Africa where clergymen are turning this scam on their parishioners and getting rich themselves.

How can investors ensure that their investment is safe?

This is really difficult for ordinary investors. The most important thing is to do a reality check. Many crypto scammers promise great returns in colorful letters. Then people quickly talk about returns of ten percent and more, i.e. values ​​that you should always be careful with anyway. Another thing is Google reviews. Of course, a company can also buy them, but in my experience there are always a multitude of voices pointing to a possible scam. You shouldn’t look the other way, you should take them seriously. And thirdly, you should see if the team behind the project is known. If for some reason it wants to remain anonymous, there is a high possibility of a scam.

How do you rate the long-term opportunity for cryptocurrencies?

In any case, I don’t expect a total collapse. Bitcoin still has fundamental value. The good projects will definitely prevail, just like in other markets. I believe that in the future there will be more focus on the utility of the currency than on volatility and size. At least I hope so and I am confident that the good values ​​will recover.

Jannik Tillar spoke to Erica Stanford

The interview is up first Capital.de appeared