At Hearing, Warren Calls out Giant Wall Street Firms’ Profiteering from Crypto Scams
Warren Will Introduce Legislation to Regulate Crypto and Protect Consumers
“Crypto is an industry that is built to favor scammers, and some of the biggest players in our financial system are in on the con. Venture capital, giant hedge funds, and private equity rake in profits from a system that’s designed to reward insiders and to defraud mom-and-pop investors.”
Washington, D.C. – Today, at a hearing of the Senate Banking, Housing, and Urban Affairs Committee, U.S. Senator Elizabeth Warren (D-Mass.) called out the role that large institutional investors, including venture capital, hedge funds, and private equity, play in funding, hyping, and sucking money from crypto projects that scam mom-and-pop investors.
Senator Warren noted that large professional investors are playing a growing role in the crypto market. Venture capital firms invested $33 billion in crypto-related companies last year, and hedge funds and other big investors traded $1.1 trillion on Coinbase last year, more than double the amount of retail investors.
Senator Warren called out scams by Voyager and Celsius, two companies backed by big investors that recently filed for bankruptcy. The companies promised up to 20% interest to customers while claiming they were FDIC insured or “safer than banks.” Senator Warren noted that these claims were lies from the start. Melanie Lubin, the President of the North American Securities Administrators Association, confirmed that mom-and-pop investors who handed money over to these companies will likely be last in line to get their money back in these bankruptcies.
Senator Warren called on regulators and Congress to protect mom-and-pop investors from crypto scams propped up by seemingly legitimate financial institutions and said that she will soon introduce a bill to regulate the crypto market and protect consumers.
Transcript: Protecting Investors and Savers:
Understanding Scams and Risks in Crypto and Securities Markets
U.S. Senate Committee on Banking, Housing, and Urban Affairs
Thursday, July 28, 2022
Senator Elizabeth Warren: Thank you, Mr. Chairman.
So crypto has made it faster and cheaper than ever before to rip off consumers.
According to the Federal Trade Commission, since the start of 2021, about one in every four dollars that consumers were defrauded out of – totaling about a billion dollars – was lost in a crypto scam. And those are just the scams that are reported – not the ones people are too ashamed to tell anyone about or never report because they know the money is gone and it just doesn’t feel like any point in it.
Today is about scams, but crypto isn’t an industry with a few scam artists operating around the fringes. Crypto is an industry that is built to favor scammers, and some of the biggest players in our financial system are in on the con. Venture capital, giant hedge funds, and private equity rake in profits from a system that’s designed to reward insiders and to defraud mom-and-pop investors.
Now, Ms. Walsh, you are an expert on protecting mom-and-pop investors, so I’d just like to ask you who those mom-and-pop investors are up against. Are big institutional investors becoming more prominent players in the crypto market?
Gerri Walsh, Senior Vice President of Investor Education, Financial Industry Regulatory Authority: Thank you, senator, for that question. Well my, you know the FINRA Foundation focuses on retail investors and has information about retail investors. We’ve certainly seen from media reports that there are large investments by institutional investors and hedge funds and other entities.
Senator Warren: You know, in fact, I have some of the data. VC firms invested $33 billion in crypto-related companies last year. That’s more than all the previous years combined. And hedge funds and other big investors are now the main source of trading activity. Last year, professional investors traded $1.1 trillion on Coinbase, more than double the amount retail investors traded.
In other words, some of the biggest players in our financial system – the so-called “smart money” – are all in on crypto.
Now, two companies that these big investors poured money into recently were Voyager and Celsius, which, as it turned out, both of them filed for bankruptcy earlier this month. Celsius, for example, announced raising $750 million from professional investors just months before it collapsed.
Ms. Walsh, Voyager and Celsius made money by taking people’s deposits and lending them out – a lot like traditional banks. But they made astonishing claims, like offering up to 20% interest while claiming they were FDIC insured and quote “safer than banks.” Does that have the earmarks of a scam to you?
Ms. Walsh: Senator, I appreciate that question. And if that were happening within the space of broker-dealer regulation, FINRA would be able to look at the advertising, because that’s what we do. We would be able to look at the disclosures because that’s what we do.
It’s important to have clarity in the digital asset space.
Senator Warren: Well I appreciate clarity, but let’s be clear here. No risk, 20% returns. Look, that was a lie from the start. It doesn’t take a lot of deep analysis to understand what’s going on here.
But notice, it did not stop big professional investors from throwing money at crypto firms that were clearly drawing in mom-and-pop investors on a scam.
So, Ms. Lubin, do you think the mom-and-pop investors who handed their over money to Voyager and Celsius are likely to be at the head of the line in getting their money back during the bankruptcies of those companies?
Melanie Senter Lubin, President, North American Securities Administrators Association: Thank you, senator, for that question. And I wouldn’t presume to tell you how bankruptcy law works. On the other hand, if those investors are considered unsecured creditors, they’re going to be put in the pool with everybody else, and they’re typically at the end of the line.
I have some other theories, and there are other things being litigated, so I’m going to invoke investigative privilege and not discuss some of the other approaches that investor’s counsel might want to take in some of those cases.
Senator Warren: Fair enough, but this is going to be tough, right?
Ms. Lubin: I think it’s an uphill battle.
Senator Warren: That’s right.
Ms. Lubin: I’m sorry to interrupt. I think there’s an uphill battle, and there’s always an uphill battle in bankruptcy or when we put cases into receivership because there’s rarely enough money to cover the investors.
Senator Warren: Right. Across the crypto market, the big investors are funding, hyping, and then vampire-sucking money out of crypto projects that scam mom-and-pop investors.
Regulators need to protect customers from cyber criminals, grifters, from other illicit characters that are scamming consumers from the shadows. But these shadowy actors shouldn’t distract us from the big, seemingly legitimate players that are financing crypto and helping crypto attract the mom-and-pop customers who are going to lose their money.
And that’s why I’ll soon introduce a bill to regulate the crypto market and stamp out the worst scams – by scam artists both big and small.
Thank you, thank you Mr. Chairman.
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