Isaac signed up to a cryptocurrency exchange platform (the exchange platform). Isaac noted he was purchasing cryptocurrency to invest in an overseas investment scheme (the scheme).
First warning
The exchange platform emailed Isaac to confirm he understood the risks associated with cryptocurrency investments, including potential loss of funds. The exchange platform told Isaac they weren’t associated with the scheme, so couldn’t comment on its legitimacy. Isaac told the exchange platform he understood the risks.
Second and third warnings
Isaac ordered $5,000 of bitcoin, but had to contact the exchange platform for assistance because the order wouldn’t process. During this discussion, the exchange platform told Isaac they thought the scheme was a scam, because a few aspects of its website suggested the scheme was fraudulent. Isaac told the exchange platform he had invested a lot of time in researching the scheme and wanted to proceed with the order.
After the discussion, the exchange platform sent Isaac a follow up email confirming their view the scheme was a scam because:
- it offered guaranteed returns
- when reverse-image searched, the photo of the stated CEO appeared to be a different person
- Isaac had already received returns, which is a common feature scams use to encourage investors to invest more money
- the scheme’s incorporation certificate was from a country in the Caribbean, though it claimed to be a US company
Isaac responded to the exchange platform’s email by asking them to process his order.
More bitcoin purchased
Over the next few weeks, Isaac purchased a further $10,000 of bitcoin from the exchange platform.
Scam
It transpired the scheme was indeed a scam, and Isaac lost all of his investments. Isaac asked the exchange platform to refund him $15,000 for the bitcoin he had purchased and invested in the scam. When the exchange platform refused, Isaac complained to FSCL.
Dispute
Isaac said the exchange platform should not have authorised his transactions with the scheme and failed to properly warn him the scheme was a scam. Isaac also said the exchange platform had a responsibility to verify the merchants their customers pay bitcoin to.
The exchange platform said they have no responsibility over what their customers do with their bitcoin after they have purchased it and they made reasonable attempts to warn Isaac about the scheme.
Review
We considered the exchange platform’s obligations under the Financial Markets Conduct Act 2013 (FMCA) not to engage in misleading or deceptive conduct.
To comply with this obligation, the exchange platform needed to ensure their messaging about the risks and rewards of buying crypto assets must be balanced, and they couldn’t omit or bury key information about the risks.
We thought the exchange platform complied with this obligation because they pointed out the risk of investing bitcoin to Isaac as soon as he registered. We also considered the exchange platform made reasonable attempts to warn Isaac of the scam. We were satisfied that the exchange platform had not engaged in deceptive conduct by encouraging Isaac to purchase bitcoin from them which he would subsequently go on to lose.
We agreed with the exchange platform that they did not authorise Isaac’s transactions with the scheme. Bitcoin are kept in online ‘wallets’ which are anonymous. The exchange platform’s terms and conditions of use clearly prohibited third party transactions, so even if Isaac had given the exchange platform the scheme’s wallet address to pay the bitcoin directly to, any role the exchange platform played in ‘authorising’ the transaction would have been as a result of Isaac’s breach of the terms and conditions.
Finally, we found the exchange platform’s anti-laundering or ‘know your customer’ obligations did not extend beyond verifying their own customers’ identities and source of wealth, rather than the entities their customers go on to trade with.
Resolution
We issued our preliminary view recommending Isaac discontinue his complaint with the exchange platform, which Isaac agreed to. We told Isaac to contact the police about the scheme if he hadn’t already.
Insights
Cryptocurrency investment scams are unfortunately common, and it is worth taking seriously any warnings about a scheme’s legitimacy.
We were pleased to see the exchange platform updated their policy for dealing with potential scams after the incident with Isaac. The exchange platform now:
- does not onboard new customers who mention managed investment schemes without the schemes being regulated in a safe environment or officially vetted
- freezes customers’ accounts if they become aware of them potentially being involved in a scam
- shares more information with fraud teams at banks and other cryptocurrency exchange platforms about new investment scams.
