Binary Options Scams Spread Into Crypto, Time for US Lawmakers to Act

Mainstream finance and cryptocurrency are becoming more closely intertwined with each passing day. Just over a year ago, the idea of centralized financial behemoths trialing blockchain or crypto solutions would have been unthinkable. 

Currently, cryptocurrency is traded like never before. In just the last few weeks, major players have launched both Bitcoin options and futures platforms, making cryptocurrency accessible to a whole new range of investors.

For crypto enthusiasts, each instance of wider integration with mainstream finance is a cause for celebration. For cryptocurrency’s many detractors, these new ways of trading are simply opening the door to a rogue sector whose instability could have serious ramifications. 

But with the growing proliferation of binary cryptocurrency options, regulatory bodies in the United States such as the Securities and Exchange Commission and the Commodity and Futures Trading Commission are being kept busy by a new generation of scammers seeking to relieve investors of their funds. In the last two months alone, the CFTC has clamped down on fraudulent binary options schemes operating in the U.S. worth over $15 million. 

Already a high-risk investment strategy, binary options platforms are often based online and are hard to regulate. Unfortunately, navigating binary cryptocurrency options has proven easier said than done for many inexperienced investors. 

What are binary options?

Binary by name, binary by nature. This method of options trading earns its name due to there being only two opposing outcomes for investors: a fixed sum or nothing. The notion of binary options is easy to understand. 

Investors bet on the value of an underlying asset at a certain period of time in the future. The outcome of the binary option is a simple yes/no proposition. If they’re correct, they can cash out on their previously agreed-upon winnings. If not, investors usually leave empty-handed. 

There are a number of binary options contracts in which the customer may be eligible for a small refund, but these are few and far between. For this reason, binary options are also known as “all-or nothing options.”

While binary options are an inherently risky trading method, some are listed on registered exchanges that are policed by U.S. regulators, namely the CFTC or SEC. According to the FBI, most binary options are available via a plethora of online platforms, many of which are not compliant with stringent U.S. regulatory requirements. 

An unfortunate truth of all methods of cryptocurrency trading is that there is always a high risk of falling foul of a scam. The same is true for binary options trading. By virtue of both operating online and the sheer volume of these platforms, it is hard for law enforcement and regulators to crack down on cowboy outfits. 

Braden Perry, a former attorney at the CFTC and partner at the Kennyhertz Perry law firm, told Cointelegraph, “On their face, binary options are not fraudulent,” but the proliferation of internet-based platforms has proved a useful environment for scammers: 

“Many binary options products are listed on exchanges and have regulatory oversight. But like Forex and Cryptocurrency trading, many internet-based platforms have surged into the market, and with that surge, the opportunity for fraudulent promotional schemes, overstatement of returns, and the failure to pay out for the wins have increased.”

How can investors be swindled?

The prospect of being wrong on the value of an underlying asset alone is not the only way for investors to lose their money with binary options. Not all platforms are created equal. Perry explained to Cointelegraph that binary options trading can be manipulated, leading investors to lose their money even after placing a successful bid: 

“Some actors are using manipulative software to rig the system, so ‘winning’ bids end up losing. This is new territory where some investors have made significant money. And where there are legitimate products, non-legitimate products follow. The main reason is the lack of clarity on the regulatory structure and the ability to make markets without oversight.”

A classic tactic to part investors from their funds is to refuse to credit accounts or reimburse customers. The ways in which this can be done vary from repeatedly cancelling withdrawal requests to accusing the customer themself of fraudulent behavior on its platform. 

Much like with many other fraudulent vehicles, identity theft is also rife. Investors should always be wary of handing over any copies of credit cards, passports, bills or any other personal data. Giving any or all of these to fraudulent binary options platforms can allow malicious actors to steal your identity. 

Fraudulent platforms can be hard to spot. One of the most universal signs of a scam, regardless of the manner of investment it requires, is the promise of huge, low-risk returns. As per the FBI’s warning, fraudulent binary options websites advertise undeliverable promises on social media, trading websites and message boards to lure in unsuspecting customers. 

Related: Grand Theft Crypto: The State of Cryptocurrency-Stealing Malware and Other Nasty Techniques

They have also been known to harangue investors with cold-calls from boiler room operations, in which pushy salespeople try to trick naive customers into “once-in-a-lifetime” opportunities. Pankaj Balani, CEO of Delta Exchange, told Cointelegraph that the brief maturity of binary options means that they are at a higher risk of being manipulated. Balani also explained to Cointelegraph that investors should be aware of hastily constructed scam platforms online: 

“Many binary options platforms have popped up recently. Just a quick glance at some of these can tell you that they have been put together in a hurry. Most of such platforms don’t specify their price sources. Trading on such venues is risky as their product can be manipulated easily.”

CFTC dishes out multimillion dollar ban for ATM Coin 

Although binary options trading is relatively new to the crypto sector, scammers are quickly finding themselves in the dock, facing heavy fines. On Nov. 1, the CFTC announced that a New York court had ordered defendants to pay $4.25 million in penalties for an investment fraud scam involving the cryptocurrency ATM coin. The Eastern District Court of New York entered an order against multiple entities for committing fraud and misappropriating client funds. 

The defendants comprise a mix of both individuals and corporate entities spread across the globe, including Blake Harrison Kantor and Nathan Mullins, along with four corporate entities: Turks and Caicos-located Blue Bit Analytics, United Kingdom-based Blue Bit Banc and two New York-based firms, Mercury Cove and G. Thomas Client Services. 

Although the penalty was served only recently, the CFTC’s Virtual Currency Task Force first filed the case on April 16, 2018, charging defendants with fraud. According to the CFTC, defendants misappropriated customer funds obtained through binary options by converting Blue Bit Banc investments into ATM coin, telling investors they were worth a substantial amount of money.

Balani told Cointelegraph that, while options trading in the cryptocurrency sector is a positive development that could lead to wider adoption, he maintains that binary options are a step back for investors and the industry alike: 

“Growth in crypto vanilla options is a good sign and it will help is increasing institutional participation and reducing long term volatility of crypto markets. Binary options is an exception here, a lot of binary options platforms attract customers by selling them a dream of making astronomical returns in short duration. Binary options are high risk products and One should understand the mechanics of binary options completely before trading these products.”

$11 million Ponzi binary options scheme 

The $4.25 million penalty against binary options scammers in November was the CFTC’s second successful strike in the past two months. On Oct. 16, the regulator issued a civil enforcement action against Circle Society. 

In a press release, the CFTC announced that it would be charging the Nevada-based company and its owner, David Gilbert Saffron, with fraudulent solicitation, misappropriation and registration violations in relation to an $11 million binary options scheme. 

Tracing it back to December 2017, the CFTC claims that Saffron and Circle Society fraudulently solicited at least $11 million worth of Bitcoin and fiat currency to trade off-exchange binary options on foreign currencies and cryptocurrency pairs. 

Saffron allegedly lured in unsuspecting investors by promising astronomic returns of up to 300%. Instead of using investor funds to trade in binary options as agreed, Saffron transferred the funds to his own wallet to pay out previous participants, a textbook example of a Ponzi scheme. Echoing the thoughts of many, CFTC Chairman Heath P. Tarbert said at the time:

“Fraudulent schemes, like that alleged in this case, not only cheat innocent people out of their hard-earned money, but they threaten to undermine the responsible development of these new and innovative markets.”