SEC Files Enforcement Action Against Alleged Fraudulent Cryptocurrency Pyramid Scheme
On May 22, the Securities and Exchange Commission (“SEC”) filed a complaint in the U.S. District Court for the Central District of California against Daniel Pacheco, owner of two California-based companies known as IPro Solutions LLC and IPro Network LLC (collectively, “IPro”). The SEC’s complaint alleges that IPro raised more than $26.5 million in investments via the offer and sale of “IPro packages,” which included instructional materials for e-commerce activities and a recruitment-based compensation plan that paid its members in a cryptocurrency called “PRO Currency.” According to the SEC, IPro’s activities constituted an unlawful unregistered sale of securities because the sale of IPro packages involved an investment in the form of the PRO Currency digital assets, which were not registered and were not eligible for a registration exemption. The SEC also alleges that the sale of IPro packages involved an investment in a pyramid scheme. Framed as a multilevel marketing campaign with the goal of developing a blockchain-based e-commerce network, IPro offered recruitment bonuses to its users in the form of points that could be converted into PRO Currency and also offered points and cash commissions to incentivize users to make additional investments in the network. The SEC alleges that Pacheco and IPro misappropriated more than $5 million in funds, resulting in IPro having insufficient funds to pay commissions and bonuses to its users.
The SEC’s press release regarding this enforcement action is available here.
SEC Obtains Emergency Temporary Restraining Order Against Alleged Fraudulent Ponzi Scheme Involving Diamond-Backed Cryptocurrency
On May 21, the SEC announced that it was granted a temporary restraining order and temporary asset freeze against Jose Angel Aman (“Aman”), principal owner of Argyle Coin, LLC (“Argyle Coin”), in the SEC’s enforcement action filed on May 13, 2019 in the U.S. District Court for the Southern District of Florida. In its complaint, the SEC alleges that Aman, Argyle Coin, and two other companies owned by Aman operated a Ponzi scheme that targeted more than 300 investors in the United States and Canada. The SEC’s complaint asserts that Aman and his co-defendants misused or misappropriated more than $10 million of the $30 million raised by Argyle Coin and related entities through a coin offering and the sale of investment contracts.
The SEC alleges that Argyle Coin was established as a modernized continuation of the activities of two other entities controlled by Aman, Natural Diamonds Investment Co. (“Natural Diamonds”) and Eagle Financial Diamond Group Inc. (“Eagle”). Natural Diamonds and Eagle allegedly sold investment contracts in Natural Diamonds and told investors that their investments would be used toward the acquisition of “fancy colored diamonds,” which in turn would be processed and sold. The SEC alleges that Natural Diamonds and Eagle misrepresented their operations and existed to facilitate a Ponzi scheme. Aman allegedly established Argyle Coin and began seeking investments via a coin offering when the bank accounts of Natural Diamonds and Eagle lacked sufficient funds to further the scheme. Argyle Coin’s cryptocurrency token called “RGL” was marketed as being backed by “fancy colored diamonds,” and Argyle Coin raised more than $2.6 million from 59 investors, including unaccredited investors, through its sale of RGL tokens.
Baltimore City Government Computer Systems Seized in Ransomware Attack
On May 7, Baltimore officials discovered that the city’s computer systems had been compromised in a ransomware attack, which affected the city’s email and voicemail systems, parking fines database, and billing and real property registration systems, among other municipal services. The Baltimore Sun reported that the hackers delivered a ransom demand for payment of three Bitcoins per system, or thirteen Bitcoins for release of all systems. The ransom note also stated that the hackers used ransomware called “Robbinhood,” which The New York Times reports as containing a leaked National Security Agency-developed malware tool known as EternalBlue. The same tool was used in other major cyberattacks, including Wannacry in May 2017 and the NotPetya attacks in Ukraine in June 2017.
Upon discovery of the attack, Baltimore officials immediately contacted the FBI and took systems offline to prevent the further spread of the malware. Baltimore mayor Bernard Young has so far refused to pay the ransom, and the city’s IT team has commenced workaround efforts to bring the affected systems back online.
Vermont Enacts Legislation Creating Statutory Exemption for Payment Processors From Money Transmission Licensing Laws
On May 14, Vermont Governor Phil Scott signed into law Senate Bill 154, which modernizes Vermont’s financial services regulatory scheme and, among other things, creates a statutory exemption from the money transmission licensing laws for qualifying payment processors. This new exemption overrides the Vermont Department of Financial Regulation’s position that there are no exemptions under the money transmission licensing law for payment processors. Effective July 1, 2019, the law will exempt from the Vermont money transmission licensing law any person who:
“facilitates payment for goods or services, not including money transmission itself, or bill payment through a clearance and settlement process using institutions regulated under the Bank Secrecy Act pursuant to a written contract with the payee and either payment to the person facilitating the payment processing satisfies the payor’s obligation to the payee or that obligation is otherwise extinguished.”
With this legislation, Vermont joins a growing number of states, including Michigan, Connecticut, Illinois, North Carolina, Pennsylvania, Virginia, and Washington (among others), providing similar statutory exemptions for payment processors. However, some features of Vermont’s Senate Bill 154 make it much more similar to the federal payment processing exemption than to the exemptions of other states. For example, the Vermont law does not expressly require an agency appointment but does require that the intermediary use a clearance and settlement process that complies with the Bank Secrecy Act (an atypical criterion relative to most other state exemptions).
Europol Seizes Servers of Cryptocurrency Mixing Service
On May 22, Europol announced that the Dutch Fiscal Information and Investigation Service (“FIOD”), working with Europol, McAfee, and local authorities in Luxembourg, seized six servers of the cryptocurrency mixing service provider Bestmixer.io. Cryptocurrency mixing services are marketed as an anonymity tool that makes it difficult to track original funding sources in cryptocurrency transactions. A user sends cryptocurrency to the mixer and receives back “clean” cryptocurrency minus a transaction fee. The services are designed to break the incoming transfer into very small amounts of cryptocurrency and the returned cryptocurrency is sent to multiple wallets in very small transaction amounts. Theoretically, these mixing transactions make it more difficult to trace activity on the blockchain, and records of the transactions are maintained only for a very short time period and then destroyed.
Bestmixer.io is reportedly one of the three largest cryptocurrency mixing service providers and has turned over at least $200 million in cryptocurrency within the past year. Europol stated that its investigators concluded that Bestmixer.io was frequently used to conceal and launder funds of criminal origin. The FIOD’s investigation is ongoing and the FIOD has announced plans to collaborate with Europol and agencies within other countries in furtherance of international enforcement and oversight efforts.
Israeli Judge Rules Bitcoin Is an Asset Instead of Currency for Tax Purposes
On May 21, Israeli news sources reported that the Central District Court in Lod recently upheld the Israel Tax Authority’s position that Bitcoin is an asset and not a currency for tax purposes. In litigation between the Israel Tax Authority and Noam Copel, founder of the blockchain startup DAV, which provides a decentralized peer-to-peer transportation network, Copel argued that Bitcoin should be classified as a foreign currency, which would make his profits from selling Bitcoin nontaxable. The Israel Tax Authority argued that Bitcoin cannot satisfy the Bank of Israel Law’s definition of “currency,” which requires that currency have at least some form of physical manifestation. The court under Judge Shmuel Bornstein held that Copel failed to demonstrate that Bitcoin qualified as a currency under this definition; therefore, Copel is liable for approximately $830,000 in taxes assessed against his gains on the sale of Bitcoin in 2013. If appealed, the litigation could possibly be brought before the Israeli Supreme Court. Under Israel’s tax regime, capital gains on the sale of assets are taxed at between 25% and 47%; in foreign currency transactions, however, the capital gain is calculated based on the foreign currency exchange rate (reducing the amount of gain subject to tax).