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Sept. 29, 2022, 9:51 a.m. EDT

California launches crackdown on crypto scams as scrutiny intensifies

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By Anushree Dave

California’s Department of Financial Protection and Innovation, or DFPI, announced on Tuesday that it had issued desist and refrain orders against 11 entities for violations of California securities laws.

Each entity “allegedly offered and sold unqualified securities and 10 of them also made material misrepresentations and omissions to investors,” according to a press statement from the DFPI. Of the 11 entities, one was developing a metaverse software by soliciting crypto assets, and another claimed to be a decentralized finance platform, the DFPI said. The remaining entities, which include names like Elevate Pass LLC, Pegasus, and Remabit, allegedly misled investors. Vexam Ltd and Elevate Pass LLC didn’t respond to requests for comment. The other entities couldn’t be reached for comment.

All the entities were alleged to have used a Ponzi-like scheme in which they used investor funds to pay “profits” to other investors. The entities also had referral programs that worked like a pyramid scheme, authorities said, where investors were promised commissions if they recruited new investors, and additional commissions if the investors that were recruited also recruited new investors. The programs worked to motivate investors to create and post content on social-media websites to entice others to invest, said a press statement from the DFPI.

All of the entities were examples of “high yield investment programs” in which they promised high and consistent returns with low risk. They also used vague language to describe how the HYIP makes money and who the money is going to, with little detail of who runs the HYIP, the department said.

“The DFPI will continue to protect California consumers and investors from crypto scams and frauds,” said DFPI Commissioner Clothilde Hewlett in a statement. “These actions not only protect consumers, but also ensure California remains the premier global location for responsible crypto asset companies to start and grow.”

Larger efforts

In recent years, the crypto market has faced increasing scrutiny from regulators and policy makers. In August, the U.S. Securities and Exchange Commission charged 11 individuals in a $300 million crypto pyramid scheme. Earlier this year, the SEC announced an expansion of the team responsible for protecting investors in crypto markets and from crypto-related threats.

In mid-September, the Biden administration said U.S. government agencies need to double down on the digital asset sector enforcement to identify gaps in cryptocurrency regulation. Earlier in the year, President Joe Biden signed an executive order to ensure responsible development of digital assets.

While cryptocurrencies hit a market cap of $3 trillion last fall, the sector has slumped in recent months as investors pulled out of risky investments due to rising interest rates.

Brian Deese, the director of the National Economic Council, said on Sept. 16 that cryptocurrencies could harm national security without adequate oversight.

“Regulation of cryptocurrencies is needed if digital assets are going to play a role that we believe they can in fostering innovation and supporting our economic and technological competitiveness,” he said.

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