On 16 October 2018, a New York Federal Court ordered Gelfman Blueprint Inc., and the CEO Nicholas Gelfman, to pay USD 2.5 million restitution and fines. This is a successful end to the Commodity Future Trading Commission’s (CFTC) first Bitcoin-related anti-fraud enforcement action, an endeavor which began on 21 September 2017.
From 2014 through January 2016 Gelfman Blueprint Inc. solicited USD 600,000 of investments from at least 80 clients. This money supposedly went towards a fund for an in-house high-frequency trading algorithm named Jigsaw, which supposedly made consistent profits. However, the performance reports were fake, and payouts of profits to clients came from new investments from other clients, which makes this a classic Ponzi scheme. The period of 2014 through 2016 coincided with a Bitcoin bear market, and Gelfman Blueprint Inc. was overall unprofitable. The Ponzi scheme collapsed when a fake hack was staged to make it appear like all customer funds were stolen.
The CFTC charged Gelfman Blueprint Inc. and the CEO with fraud, misappropriation of client’s money, and issuing false accounting statements. The final judgement is USD 1.047 million of restitution to clients, and USD 2.031 million of civil monetary penalties. The CFTC warns that Gelfman Blueprint Inc and the CEO might have no money though, and therefore despite the judgement there may be no payout. Further, Gelfman is banned from participating in any future financial activity that falls under CFTC jurisdiction. Notably, there does not appear to be any criminal penalties or prison time for Gelfman, despite effectively stealing USD 600,000.
The CFTC Director of Enforcement, James McDonald, says “This case marks yet another victory for the Commission in the virtual currency enforcement arena. As this string of cases shows, the CFTC is determined to identify bad actors in these virtual currency markets and hold them accountable. I’m grateful to the members of Enforcement’s Virtual Currency Task Force for their tireless work on these matters”.
In the past, the Securities and Exchange Commission (SEC) was the primary enforcer in the crypto markets, but this landmark case shows that the CFTC is ready, willing, and able to perform similar enforcement actions. The CFTC considers Bitcoin and crypto to fall under their jurisdiction as commodities, while the SEC says most cryptos are securities and fall under their jurisdiction. Bitcoin is sufficiently decentralized not to be considered a security itself, but the Bitcoin market still sees regular enforcement action by the SEC since many Bitcoin investment products can be classified as securities.
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