U.S. regulators are seizing their moment during this ongoing crypto bear market to crack down on bad actors in the space as many investors are already souring on the asset class.
The U.S. Securities and Exchange Commission charged 11 people today in connection with Forsage, a crypto project that raised over $300 million from "millions of retail investors worldwide," the agency announced today. The individuals charged include the project's four founders -- Vladimir Okhotnikov, Jane Doe aka Lola Ferrari, Mikhail Sergeev, and Sergey Maslakov -- who were last sighted in Russia, Georgia and Indonesia. Several members of the "Crypto Crusaders," a group that promoted the scheme in at least five different U.S. states were also charged, according to the announcement.
Forsage was launched in January 2020 as a website that allowed retail investors to transact on the Ethereum, Tron and Binance blockchains, the SEC complaint says. In June 2020, Forsage was the most popular decentralized application on Ethereum and consumed so much bandwidth on the chain that it caused gas fees to spike. At the peak of its popularity in July 2020, over $20 million worth of ETH was sent to the platform in a single day, Dune Analytics data shows.
According to the SEC, the project has operated as a pyramid scheme for more than two years and used assets from new investors to pay off old ones, typical of a Ponzi scheme structure. Operating a pyramid scheme, a fundamentally unsustainable business model wherein participants recruit others to buy in with the promise of quick returns, is illegal in the U.S.
"Fraudsters cannot circumvent the federal securities laws by focusing their schemes on smart contracts and blockchains," wrote Carolyn Welshhans, acting chief of the SEC’s Crypto Assets and Cyber Unit, a division of the SEC that rebranded to include crypto in its title and embarked on a hiring spree in May this year.
This isn't the first time Forsage has been in regulators' crosshairs. The Securities and Exchange Commission of the Philippines sent the company a cease-and-desist order in 2020 for operating as a fraud and in 2021, the Montana Commissioner of Securities and Insurance did the same. Despite these warnings, the defendants kept promoting the scheme and denied that they were operating a pyramid scheme on various social media platforms, the SEC says.
Besides the founders, Cheri Beth Bowen, Ronald R. Deering, Samuel D. Ellis, Mark F. Hamlin, Carlos L. Martinez, Alisha R. Shepperd and Sarah L. Theissen were all also charged with violating federal securities laws in connection with Forsage, according to the SEC complaint. Ellis and Theissen, the agency says, have agreed to settle the charges.
The charges come at a time of heightened regulatory scrutiny over the digital asset space, particularly from the SEC itself. Coinbase has been locked in a battle with the agency over its sale of cryptocurrencies listed on its platform that it insists are commodities, not securities.
Meanwhile, U.S. Senators Kirsten Gillibrand and Cynthia Lummis are seeking to build consensus in Congress for their bill that would classify most cryptocurrencies as commodities, bringing the industry largely under the jurisdiction of the U.S. Commodity Futures Trading Commission rather than leaving it open to the stricter SEC.