Cryptocurrency Scams Bring Ramped Up Enforcement

Summary

WSJ Your Money Briefing – Episode Summary

Episode Title: Cryptocurrency Scams Bring Ramped Up Enforcement
Date: October 8, 2018
Host: J.R. Whalen
Guest: Gabriel Rubin (Wall Street Journal reporter, Financial Regulation Team)

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Episode Overview

This episode addresses the increasing crackdown on cryptocurrency scams by U.S. regulatory agencies, focusing on the Commodity Futures Trading Commission’s (CFTC) heightened enforcement action, growing market participation, and the broader implications for investors and financial markets. Gabriel Rubin joins from Washington to provide expert insights into enforcement trends, the sophistication of scams, and what these changes mean for crypto’s future.

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Key Discussion Points and Insights

The Rise in Crypto Enforcement Activity

• Regulatory Footsteps Get Louder: The host introduces the episode with the observation that federal regulators are ramping up actions against crypto bad actors, especially over the past year.
  • “Hey cryptocurrency bad guys. Hear that sound? Those are footsteps from the feds hot on your heels and they've been getting louder and louder over the past year.” (00:35, J.R. Whalen)
• Retail Market Explosion:
  • Rubin notes that as cryptocurrency became more popular, especially after the late 2017 price surge, retail investors poured in, increasing both legitimate trading and scams.
  • “To quote the Notorious B.I.G., it's sort of a more money, more problem situation... there was a lot more retail fraud going on and more sort of uneducated investors getting into the market who are more susceptible to getting caught up in scams.” (03:38, Gabriel Rubin)
  • Whalen adds levity, noting Rubin as the first to quote Notorious B.I.G. on their show (04:19).

Spoofing and Market Manipulation

• Definition and Tactics:
  • Rubin explains that spoofing is a market manipulation tactic where scammers place large orders to influence market prices, then cancel them to lure traders and profit from predictable price movements.
  • “Spoofing is a technique that scammers use... spoofers will make a large set of orders, but then cancel them before they're final order to lure other traders into those markets... it's sort of a textbook example of market manipulation and a key focus and theme of the CFTC's enforcement regime.” (04:36, Gabriel Rubin)

Increased Legitimacy and Professionalization

• Attracting Big Players:
  • Regulatory action, trade associations, and clear standards are helping legitimize the market, attracting Wall Street banks and Silicon Valley investors.
  • “We're seeing a lot more interest by, you know, top Wall Street banks and, you know, venture capitalists in Silicon Valley, etc. And a lot of that is because regulators have taken notice... the market is becoming much more professionalized.” (05:21, Gabriel Rubin)
  • Regulators do not villainize cryptocurrencies intrinsically but focus on bad actors and fraud. (05:21–05:50)

Persistent and Overlooked Frauds

• Not Just Crypto:
  • Rubin points out that traditional frauds, especially with precious metals, remain rampant and occupy a substantial part of the regulatory caseload.
  • “There's still an immense amount of precious metal fraud... by, you know, claiming to be selling gold or silver. Things that we hear about all the time... that takes up a lot of the CFTC's time...” (06:35, Gabriel Rubin)
  • Out of 83 cases brought or settled by the CFTC in the past year, about 30 were basic retail fraud (06:55–07:10).

Enforcement Trends and Penalties

• Size and Scope of Fines:

  • In the last fiscal year, CFTC levied around $900 million in fines, but these numbers are nuanced—many cases stem from incidents dating back years, including those related to the financial crisis.
  • “So this year... saw roughly $900 million in fines doled out. Now, those numbers... a lot of those cases started far earlier. Some of them date back to the financial crisis... The uptick in enforcement numbers is certainly significant, but you really got to delve into the numbers to see why it's significant.” (07:33, Gabriel Rubin)
  • Major fines can skew annual totals, making year-over-year comparisons tricky (08:26, Gabriel Rubin).

• Outlook for Enforcement:

  • Rubin cautions that monetary values of fines may fluctuate, depending more on the kinds of cases resolved rather than any pullback in enforcement intensity.
  • “The overall monetary value of the fines may actually decline... but I don't think that we should necessarily look at that and say, ‘oh, the CFTC is pulling back on enforcement.’ It might just be the nature of the cases they're taking on.” (08:30, Gabriel Rubin)

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Notable Quotes & Memorable Moments

• “To quote the Notorious B.I.G., it's sort of a more money, more problem situation.” (03:38, Gabriel Rubin)
• “He knew quite a bit about markets, apparently.” (04:26, Gabriel Rubin joking with Whalen)
• “Spoofing is... a textbook example of market manipulation and a key focus and theme of the CFTC's enforcement regime, especially as high frequency trading has become the norm over the last several years.” (04:36, Gabriel Rubin)
• “There's nothing wrong with cryptocurrencies. It's the, you know, like any other market, it, there's a share of fraud and there's a share of bad actors, but that doesn't mean that the space overall is a bad thing.” (05:38, Gabriel Rubin)

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Important Timestamps

• 00:35–03:38: Introduction, overview of cryptocurrency enforcement trends
• 03:38–04:19: Retail investor boom and fraud, Notorious B.I.G. reference
• 04:30–05:12: Explanation of spoofing and market manipulation
• 05:21–06:20: Professionalization of crypto markets, regulatory attitudes
• 06:35–07:24: Persistent scams outside crypto, CFTC’s broader caseload
• 07:33–08:26: Discussion of fines, case timelines, and significance of enforcement numbers
• 08:30–09:18: Expectations for future enforcement and trends

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Tone and Language

The tone remains informative yet lively, with Rubin and Whalen blending clear financial analysis with humorous moments and contemporary references. The discussion is accessible for listeners unfamiliar with technical market regulation but detailed enough for experienced investors.

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Conclusion

This episode spotlights how increased scrutiny and enforcement from federal regulators are professionalizing the cryptocurrency market, deterring scams, and paving the way for bigger players. Regulatory bodies like the CFTC and SEC are not targeting crypto itself but are focused on rooting out fraud, ensuring retail investor protection, and establishing firmer market foundations as interest in digital assets explodes. Rubin emphasizes that while enforcement numbers may fluctuate, the regulatory focus is steady and responsive to both new and traditional financial threats.

Transcript

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[J.R. Whalen]

With your Money briefing. I'm J.R. whalen at the Wall Street Journal in New York. Hey cryptocurrency bad guys. Hear that sound? Those are footsteps from the feds hot on your heels and they've been getting louder and louder over the past year. We'll hear from the Journal's Financial regulation team in a moment. But first, these money and market stories you should know the Wall Street Journal Daily Shot column suggests that as 30 year fixed mortgage rates approach 5%, refinancing activity is likely to significantly decline along with mortgage prepayments. Higher mortgage rates are also likely to further slow the pace of sales of existing homes. Freddie Mac says the 30 year fixed rate mortgage averaged 4.71% for the week of October 4th. That's down one basis point from 4.72% the previous week, and that snaps a five week stretch of gains. And even with that drop, so far this year the 30 year fixed has averaged 4.47%. That compares to 3.99% at this time last year. A survey by the National Federation of Independent Business indicates a record 37% of small businesses in September reported giving out raises in all forms of compensation to employees in hopes of hiring and retaining needed workers. 38% of all owners reported job openings they could not fill in the current period. The that's unchanged from August's record high. Reports of job openings were most frequent in construction, manufacturing, transportation, wholesale trades and retail, where customers are showing up in large numbers. The lack of qualified applicants is nearing levels attained in the late 1990s, when Y2K produced a surge in demand for computer and programming specialists. And the Wall Street Journal's Real Estate Bureau reports that actor and director Bradley Cooper bought a Greenwich Village townhouse in New York this past spring with for $13.5 million. Cooper currently stars in a remake of A Star Is Born with singer Lady Gaga. He bought the townhouse in a very quiet manner, registering the property under what was known as the Cool Trust, which kept the May purchase under wraps. The townhouse is about 4,000 square feet, has six bedrooms and spans five floors. It also has roughly 1,000 square feet of outdoor space has reclaimed barn wood floors, French doors opening to a balcony overlooking the garden, a remote controlled fireplace, a hidden wet bar, and a temperature controlled wine cellar outfitted for 1,000 bottles. One fly in the ointment. Amid all the hoopla surrounding cryptocurrencies is the lack of regulation and enforcement in the face of scams and schemes. Well, it appears the spotlight from regulators is being turned up a notch and Wall Street Journal reporter Gabriel Rubin joins us from Washington with details. So, Gabriel, the Commodity Futures Trading Commission has taken a lot more action and stepped up issuing fines when it comes to cryptocurrency since the start of the Trump administration than it did in previous years. Is that because of an increase in nefarious activities?

[Gabriel Rubin]

I think what you could say is that to quote the Notorious B.I.G. it's sort of a more money, more problem situation. Uh, and cryptocurrencies really weren't all that popular among the retail market until pretty much last year, 2017. The run up in prices in December saw a lot of new interest in cryptocurrencies. And as a result, there was a lot more retail fraud going on and more sort of uneducated investors getting into the market who are more susceptible to getting cut up, caught up in scams. So the fact that we're seeing more enforcement of those scams really is just a result of the increased interest in cryptocurrencies.

[J.R. Whalen]

By the way, Gabriel, you have now staked your claim in your money briefing history. By the first time we've had a quote from Notorious B.I.G.

[Gabriel Rubin]

on the podcast, he knew quite a bit about markets, apparently.

[J.R. Whalen]

Thank you for that. You also talk about spoofing in your story in the Wall Street Journal. Can you explain what that is?

[Gabriel Rubin]

Sure. So spoofing is a technique that scammers use. It's the use of algorithms to drive up prices in markets. And essentially spoofers will make a large set of orders, but then cancel them before they're final order to lure other traders into those markets. And the spoofers can make pretty handsome profits if they bet on which way prices are going to go, because they'll know ahead of time how they expect the market movement to play out. And it's sort of a textbook example of market manipulation and a key focus and theme of the CFTC's enforcement regime, especially as high frequency trading has become the norm over the last several years.

[J.R. Whalen]

You know, up to this point, a lack of enforcement and regulation is just one thing that has kept a lot of big players from jumping into the cryptocurrency market.

[Gabriel Rubin]

Yeah, and I think that's, that's definitely changed over the past year or so. We're seeing a lot more interest by, you know, top Wall street banks and, you know, venture capitalists in Silicon Valley, etc. And a lot of that is because regulators have taken notice and, and the market is becoming much more professionalized. You know, there are things like trade associations forming where sort of the more legitimate actors in the space understand that they need a set of standards and if in order for this space to operate above board and be legitimate and you know, regulators are, at least the CFTC and the SEC are very clear that, you know, cryptocurrencies, there's nothing wrong with cryptocurrencies. It's the, you know, like any other market, it, there's a share of fraud and there's a share of bad actors, but that doesn't mean that the space overall is a bad thing. And certainly going forward, I think we'll, we'll see it mature into a market similar to equities or other commodity markets.

[J.R. Whalen]

Yeah, you know, cryptocurrency, it gets a lot of the headlines. And patrolling the cryptocurrency bad guys is just one component, as you point out in the CFTC and the SEC's body of work. But this spectrum of trading scams, it keeps them pretty busy.

[Gabriel Rubin]

Yeah, I mean there's one of the things that doesn't really get the headlines, as you mentioned, is just sort of basic retail fraud. There's still an immense amount of precious metal fraud out there where small time criminal essentially will defraud people out of their money by, you know, claiming to be selling gold or silver. Things that we hear about all the time actually, just, just not sort of in headline news. And that, that takes up a lot of the CFTC's time and it's something that they take very seriously. And if you look at the overall caseload that they took on this year, of the 83 cases that they either settled or filed in court, roughly 30 were sort of basic retail fraud cases. So it's definitely something that they're still very concerned with and that, you know, that's the core of, of maintaining integrity in markets.

[J.R. Whalen]

Can you give us an idea of the amount of fines that have been doled out by the CFTC in the past year since we have seen the ramp up in enforcement?

[Gabriel Rubin]

So this year, which is the first full fiscal year of the Trump administration with, with Trump appointed regulators at the CFTC saw roughly 900 million in fines doled out now those numbers, it goes beyond the numbers in this case because a lot of those cases started far earlier. Some of them date back to the financial cris. Some of the biggest ones date back to the financial crisis, including major settlements with banks like bank of America, Deutsche bank and JP Morgan, among others, related to the manipulation of interest rate benchmarks from the period from 2007 to 2012. So a lot of these cases take a very long time to work their way through the system and only when those cases are finalized do we see them in the fiscal year numbers. So the uptick in enforcement numbers is certainly significant, but you really got to delve into the numbers, see why it's significant.

[J.R. Whalen]

Do the increases in enforcement and penalties seem like the norm to you going forward?

[Gabriel Rubin]

I think it's tough to say. I think that especially as I mentioned with the crisis, the financial crisis era cases, I'm not, it's hard to tell how many of those are still in the pipeline. And those tend to be, you know, many, many millions of dollars. You know, there was a range from 30 to $90 million in terms of those fines and there were several of those. So. And you know, if the total is 900 million and you have five cases that are between 30 to 90 million, that's a good chunk of the overall total. So the, the overall monetary value of the fines may actually decline. But I don't think in the following years, but I don't think that we should necessarily look at that and say, oh, the CFTC is pulling back on enforcement. It might just be the nature of the cases they're taking on.

[J.R. Whalen]

All right, that is Wall Street Journal reporter Gabriel Rubin, part of our financial regulation team here at the Journal, joining us from our Washington bureau. Gabriel, thanks for being with us.

[Gabriel Rubin]

Thanks for having me.

[J.R. Whalen]

And that's your Money briefing. I'm J.R. whalen at the Wall Street Journal in New York.

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