SEC Chairman Gary Gensler Says There Are Three Ways To Tell If A Crypto Project Is A Scam

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How hard is it to spot a crypto scam? According to SEC Chairman Gary Gensler, it’s not as hard as it sounds.

Speaking to the US military during a Twitter Spaces earlier this month, Gensler and SEC Commissioner Caroline Crenshaw discussed what they see as the dangers of investing in crypto and how to know if a project is a scam.

If something seems too good to be true, sometimes it really is, Gensler said. There are some red flags you can look for beyond it being too good to be true.

In general, Gensler presented three telltale signs that something may be a scam: (1) the crypto project cannot provide clear documentation of how it works or how it plans to achieve its goals; (2) the project cannot demonstrate compliance with the regulations; and (3) the project cannot easily explain what it is at all.

Gensler also said high-yield deals are a red flag and cautioned against projects that are too complicated or push the investor to make a decision, praying on FOMO or fear of missing out.

The SEC Chairman also reiterated his belief that many cryptocurrencies can be unregistered securities.

More [cryptocurrencies] don’t follow securities laws, but they should be, he said. It’s the Wild West, I’d say you really have to wonder if there’s one there.

Presenting a grim outlook on the future of the crypto industry, Gensler told the audience that the majority of cryptocurrencies, over 15,000 tokens currently in the market, will eventually fail.

It is important to understand that crypto is new; it’s speculative, Commissioner Crenshaw said. Investor protections are really very small because most of them have not chosen to come under the mandate of the SEC.

Highlighting the history of crypto scams, Crenshaw said there needs to be more transparency in the industry.

They are notorious for their scams and they claim to be transparent, Crenshaw said. What is on the blockchain is transparent, but the rest of what is there is not transparent.

Although Crenshaw did not call FTX by name, the specter of the collapsed Sam Bankman-Frieds crypto exchange continues to haunt the crypto market. FTX, once a dominant player in the crypto industry, imploded in November following a bank run on the exchange. The liquidity crisis forced the company to admit that it did not hold individual reserves of client assets and eventually filed for bankruptcy.

Bankman-Fried has since been arrested and charged with eight financial crimes, including wire fraud and conspiracy to launder money, in connection with the stock market crash. Right now, there are still billions of customer assets that go unaccounted for, and millions of customers still don’t know if they’ll ever see those funds again.

Ultimately, there is increased risk when you invest in these speculative and volatile new investments that really lack basic protections and regulations, Commissioner Crenshaw said during Twitter Spaces. So if you are considering investing in crypto, consider how much of your portfolio you are devoting to it, and certainly no more than you can afford to lose.

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