A familiar scenario emerges: a golden opportunity, a once-in-a-lifetime chance. You are in on the ground floor of what will be a financial bonanza for you. So says your relative/colleague from school/somebody you met online.
You are a little nervous at first. You do not have much information about the venture, but you do not want to miss this opportunity. The classic fear of missing out (FOMO). So you give some cash/sign a check/click a button on your iPhone and, voila, you are part of this grand adventure.
You soon find out that your hard-earned money is gone, the person who reached out to you has vanished, and it is highly unlikely you will ever see your money again. How could you not have seen this coming?
As long as there has been the opportunity for people to engage in commerce, swindlers and cheats have been a part of the ecosystem. The cryptocurrency market is not immune to scams.
The ‘Squid’ Crypto Scam
The latest such misadventure involves a crypto, “Squid,” purportedly based on the popular “Squid Game” show on Netflix. To be clear, there is no evidence that the Netflix show is associated in any way with the crypto coin itself. This crypto had a particularly short life span—opening late last month and closing on November 1 after the unknown creators of the coin allegedly absconded after cashing out about $3.4 million.
This cryptocurrency—described by its organizers as a “play-to-earn” crypto—alleged that it would allow purchasers to play the games described by the popular show online. Like the show, the “Squid” coin caught on and had a Twitter account that at one point had over 50,000 subscribers. Similarly, a Telegram channel associated with the coin at one point had over 70,000 followers.
From Oct. 26 to Nov. 1, the meteoric rise of this coin was astounding, jumping from about a penny to over $2,800 per coin. Then the party stopped. On Nov. 1, the coin’s creators engaged in a “rug pull,” or selling the coin for cash and devaluing the coin by depriving it of liquidity. Anybody who invested in the coin (other than the coin’s creators) basically lost all of their money.
Red flags of problems regarding the coin were available. First, Squid’s website and white paper (which have since been removed) had a large number of grammatical and spelling errors. Second, the token’s founders did not have profiles on social sites like LinkedIn. Third, Squid’s social media accounts did not allow followers to comment. Finally, early Squid buyers learned that they could not sell their coins and started telling others.
It is impossible to prevent all scams. As the tale of the Squid coin shows, these scams can happen quickly. The first and best line of defense will always be the individual considering participating in these “opportunities” looking for red flags instead of giving in to FOMO.
Red Flags to Consider
Regulators have developed extensive educational resources—such as on investor.org—to inform the public about various red flags that those considering placing some of their money in crypto should consider.
First and foremost, does the opportunity sound too good to be true? If it does, then it probably is.
Second, is there pressure to place your money in the coin right now? A regular tactic is to urge immediate action to avoid the missed opportunity. This tactic is designed to get you to not do your homework, not take a look at the coin or the potential downsides of the coin.
Like any type of a purchase, a little homework can go a long way. Some professionals suggest that potential purchasers take a cooling off period before making a significant decision about the purchase. Such a cooling off period can take some of the emotion and frenzy out of the decision and give the purchaser a better ability to determine whether they are comfortable with engaging in the purchase.
Third, scrutinize claims being made. Claims such as “zero-risk,” “risk-free” and “absolutely safe” are generally associated with a scam. Check the social media presence. Check what others are saying about the coin. Check diligently to see what criticisms there are of the coin (as those can be the most valuable for your consideration).
Regulators of cryptocurrency have devoted significant resources to mitigating fraud and scams in the cryptocurrency markets. The CFTC, the SEC, and other regulators have brought a number of enforcement actions seeking to obtain illicitly gained funds and restore them to those purchasers who were harmed. There is no guarantee, of course, that the regulators will successfully obtain ill-gotten gains in a particular case, so the purchaser remains the best defense.
Scams are here to stay. They are an unfortunate aspect of a market being used by untrustworthy individuals. However, individuals and regulators can diligently look for and heed the red flags of such improper activity.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Daniel J. Davis was the CFTC’s general counsel for nearly four years before joining Katten’s Financial Markets and Funds group in Washington, D.C. He led and managed the CFTC’s 65-person legal division, handling all aspects of the agency’s legal operations, including litigation, rulemakings, enforcement actions, financial agency negotiations, and internal agency operations, among other areas.