The function of the United States Securities and Exchange Commission (SEC) is to enforce laws pertaining to market manipulation. A Chairman of the Comission, Gary Gensler recently shared his thoughts on how to spot a crypto scam during a Twitter Spaces event. He stated that there are three key signs to look out for when trying to identify potential scams project:
(1) Lack of clear documentation on how the project works or how it plans to deliver on its goals
(2) The project is not in regulatory compliance
(3) The project is unable to explain itself easily
Other Red Flags of Scams
Gensler also warned against projects that offer high returns, are overly complicated, or that rush investors to make a decision. These tactics are often used to prey on the fear of missing out (FOMO). The SEC chief also took the opportunity to repeat his stance that multiple cryptocurrencies are actually unregistered securities.
“Many digital assets are not complying with securities laws as they should be,” he stated. “It’s the Wild West out there. I’d say you have to really wonder if a ‘there’ actually exists, or if it’s just an ideal”
The Role of Transparency
SEC Commissioner Caroline Crenshaw also shared her thoughts on the crypto industry. She pointed out the history of scams in crypto and called for more transparency in the space. Crenshaw also advised investors to consider the level of risk associated with investing in crypto and blockchain technology.
The collapse of FTX, a once dominant crypto exchange, was also mentioned during the event. The company’s massive downfall has become a cautionary tale of potential risks associated with the industry.
The platform imploded in November following a bank run. Shortly afterwards, FTX filed for bankruptcy after admitting that it did not hold one-to-one reserves of customer assets.
The CEO, Sam Bankman-Fried, has been arrested and charged with several financial crimes in connection with the collapse, and there are still billions in customer assets that are unaccounted for.