Another day, another digital currency scandal

Another day, another dollar … or so they saying goes. Locally, we might tweak it to read: Another day, another mysterious bitcoin-related scam making the headlines for allegedly evaporating billions in South African investors’ cash. If you think today’s opening sentences lack empathy or come across as slightly cynical, you are correct on both counts. For one thing, I remain suspicious of the amount of cash reportedly caught up in these crypto heists / scams and equally wary of the lack of evidence surrounding the claims and counter claims being made by attorneys representing investors (sic), the Financial Sector Conduct Authority (FSCA), the supposed scam masterminds and even the media.

The regulator has it right, we hope…

The latest scandal broke a couple of days ago, with local media alleging that two brothers, age 19 and 21, were on the run after magically ‘disappearing’ around 70000 bitcoin from crypto wallets in which their clients’ funds were safeguarded. The brothers were responsible for a local unregulated crypto currency platform, marketed as Africrypt. As is common with this type of arrangement, investors were lured in with promises of 2-11% per month in returns generated from mysterious financial shenanigans involving their digital currencies. In May 2021, the brother’s informed clients that the platform’s crypto wallets had been hacked; a fate that conveniently coincided with news of a $40 million hack / theft from one of the world’s largest crypto currency exchanges, Binance. 

In an update since published on Moneyweb.co.za it appears this is not the first time the brothers have used the “we’ve been hacked” excuse to explain disappearing investors’ funds. They have also reportedly done quite a good job of disappearing themselves, with rumours they are in the UK, or UAE, or somewhere else. The online media trumpeted the latest ‘heist’ as totalling “as much as R54 billion” by using the recent record price of the crypto currency at around $60 000 per coin. At current prices the ‘theft’ would be a more manageable sum of around half that, assuming the reported number of coins is correct, which we doubt. These doubts have been confirmed by a 29 June 2021 article, published on News24, in which one of the brothers claims only R71 million is missing, which sounds more realistic… 

Whatever the eventual outcome, we can reference these vague and evolving claims and counterclaims to explain why experienced financial journalist, Bruce Whitfield, was outrageously flippant during a recent interview with an attorney representing some of the affected investors. I listened intently to 702’s ‘The Money Show’ for more information on events, but ended up none the wiser. The attorney said that funds might be recoverable or traceable; but did not believe the amount of money involved was as much as that being mentioned by the media. He also introduced random speculation about the brothers possibly being roped into some or other international crime syndicate. Could our esteemed regulator throw light on the matter? 

Crypto, crypto blah blah…

An FSCA press release, issued 24 June 2021, offered little beyond a confirmation that they were aware of the allegations. “We are aware of the concerns regarding investments made by the public in Africrypt (Pty) Ltd and are continuing to investigate complaints for indications of whether or not a financial product or service was offered to the public, which would have required the firm to be registered with the Authority,” they wrote, quickly adding that crypto assets were not currently regulated in terms of any financial sector law in South Africa. “The authority is concerned over the large number of scams being perpetrated by persons purporting to provide crypto assets to the public,” they wrote. “Crypto assets are a highly speculative and risky area which is not appropriate for the majority of investors in South Africa”. 

The authority did not have much information about the Africrypt saga, except to mention that the exceptionally high and unrealistic returns on offer were akin to those offered by unlawful investment schemes commonly known as Ponzi’s. Investors were left to digest the usual tried-and-tested and common sense warnings about the high-risk nature of investing in crypto assets, including concerns over: 

• The suitability of crypto assets as an asset class for investment;
• The lack of an underlying business model for many crypto currencies;
• The risk of large fluctuations in the market prices of most crypto assets;
• The offshore location of many firms offering crypto assets coupled with poor security measures to protect the crypto assets that were being acquired and held on behalf of the customer; and
• The number of unscrupulous players in the crypt asset sector. 

What happens next is anyone’s guess; but there are rumblings that the FSCA would like to have crypto assets declared financial products, thus giving it jurisdiction over the emerging asset category. They also called on investors to seek our independent financial advice before putting money into high risk opportunities. That said, I would be surprised to learn of any self-respecting financial advice professional pushing his or her clients towards an unregulated financial platform promising returns in excess of 10% per month. 

Like sheep to the slaughter…

For unadvised clients, the writing should be on the wall by now, because promises of excessive returns are almost always followed by a wholesale fleecing of the gullible sheep i.e. chasing ‘get rich quick’ returns will inevitably result in you losing your money. You pour your hard-earned savings into these initiatives entirely at your own peril. Before dealing with a financial entity, the FSCA recommends that you check that the entity or individual is registered with the FSCA as well as determining what financial services it is registered to provide. You can dial the FSCA’s toll free number 0800-110-443 or visit https://www.fsca.co.za/Fais/Search_FSP.htm to learn more. 

Writer’s thoughts:
The quality of reporting on crypto debacles such as Africrypt and Mirror Trading International leaves much to be desired, with different news agencies falling over one another to get the scoop despite having limited access to the facts of the matter. I guess we err in a similar manner by trying to keep readers updated on various financial scams; but hopefully our focus on analysis rather than breaking news gets us some reprieve. What are your thoughts on reporting around financial scandals? And what do you expect from the mainstream media in this regard? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

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