CFTC Whistleblower Program Rewards Whistleblowers for Providing Original Information About Crypto Fraud
Crypto fraud schemes have caused investors to lose more than one billion dollars and undermine public confidence in the digital asset and cryptocurrency ecosystem. Indeed, the implosion of FTX led to a crypto winter in which the value of digital assets plummeted and several crypto lending firms went bankrupt. Whistleblowers can help the CFTC identify and combat crypto fraud schemes by promptly providing specific and credible information.
Crypto fraud whistleblowers are eligible to receive between 10% and 30% of the monetary sanctions collected in successful enforcement actions. The CFTC has issued more than $390 million in awards to whistleblowers. The largest CFTC whistleblower awards to date are $200 million, $45 million, $30 million, and $10 million. Whistleblower disclosures have enabled the CFTC to bring successful enforcement actions against wrongdoers with orders for more than $3.2 billion in monetary relief.
Whistleblowers that voluntarily provide the CFTC with original information about violations of the CEA that leads the CFTC to bring a successful enforcement action resulting in the imposition of monetary sanctions exceeding $1 million can qualify for a CFTC whistleblower award from CFTC collected monetary sanctions and from related actions brought by other governmental entities.
Crypto Fraud Schemes that the CFTC Combats
- Wash trading of digital currencies or swaps or futures contracts. For example, CLS Global recently plead guilty to a fraudulent “wash trading” scheme whereby it attempted to manipulate the crypto market by inflating the value of various cryptocurrencies through wash trading – repeatedly buying and selling tokens to make them appear more valuable to investors. In particular, CLS Global used an algorithm that executed self-trades from multiple wallets to appear as organic buying and selling.
- Pump and sump schemes, such as the CFTC’s action against Adam Todd and four companies he controlled for attempting to manipulate Digitex’s native utility token, DGTX, by allegedly pumping the token’s price through the use of a computerized bot on third-party exchanges he designed to be “always buying more than it was selling” and by filling large over-the-counter orders to purchase DGTX on third-party exchanges.
- Pig butchering or relationship confidence schemes in which fraudsters build online relationships with unsuspecting individuals before convincing them to trade crypto assets or foreign currency on fake trading platforms. According to the FBI’s 2023 Cryptocurrency Report, losses from cryptocurrency-related investment fraud schemes reported to the FBI Internet Crime Complaint totaled $3.96 billion in 2023.
- Crypto Ponzi schemes, such as Ikkurty Capital, LLC soliciting more than $40 million from investors by promising to invest the funds in a crypto hedge fund or a carbon offset bond and instead using the funds to pay off previous investors in another crypto hedge fund and investing a small portion in volatile digital tokens. The final order of judgment in that matter imposed over $209 million in monetary sanctions.
- Violating rules that protect customers funds and require custodians to segregate and separately account for customer funds. For example, FTX and Alameda Research were required to pay $8.7 billion in restitution and $4 billion in disgorgement for commingling of customer funds, using customer funds to extend a line of credit to an affiliate, investing customer funds in non-permitted investments through an affiliate, and appropriating customer funds for luxury real estate purchases, political contributions, and high-risk, illiquid digital asset industry investments.
- Operating an unregistered commodity pool. For example, the CFTC obtained an order against Mirror Trading International Proprietary Limited (MTI) requiring it to pay $1.7 billion in restitution and a $1.7 billion civil penalty for failure to comply with commodity pool operator regulations. MTI solicited Bitcoin from investors for participation in an unregistered commodity pool that purportedly traded off-exchange, retail forex through a proprietary “bot” or software program, but in fact MTI misappropriated the Bitcoin that they accepted from the pool participants.
CFTC Whistleblower Reward Program
Under the CFTC Whistleblower Reward Program, the CFTC will issue rewards to whistleblowers who provide original information that leads to CFTC enforcement actions with total civil penalties in excess of $1 million (see how the CFTC calculates monetary sanctions). A whistleblower may receive an award of between 10% and 30% of the total monetary sanctions collected. Monetary sanctions includes restitution, disgorgement, and civil monetary penalties,
Reporting original information about cryptocurrency fraud “leads to” a successful enforcement action if either:
- The original information caused the staff to open an investigation, reopen an investigation, or inquire into different conduct as part of a current investigation, and the Commission brought a successful action based in whole or in part on conduct that was the subject of the original information; or
- The conduct was already under examination or investigation, and the original information significantly contributed to the success of the action.
In determining a reward percentage, the CFTC considers the particular facts and circumstances of each case. For example, positive factors may include the significance of the information, the level of assistance provided by the whistleblower and the whistleblower’s attorney, and the law enforcement interests at stake.
Awards are paid from the CFTC Customer Protection Fund, which is financed through monetary collected by the CFTC in any covered judicial or administrative action that is not otherwise distributed, or ordered to be distributed, to victims of a violation of the CEA underlying such action.
Crypto Fraud Whistleblowers Can Report Anonymously to the CFTC
If represented by counsel, a crypto fraud whistleblower may submit a tip anonymously to the CFTC. In certain circumstances, a whistleblower may remain anonymous, even to the CFTC, until an award determination. However, even at the time of a reward, a whistleblower’s identity is not made available to the public.
The confidentiality protections of the CEA require the CFTC not to disclose information that “could reasonably be expected to reveal the identity of the whistleblower.” According to a recent report of the CFTC Whistleblower Office, the Office takes steps to protect whistleblower confidentiality. For example, in a recent fiscal year the Office considered 267 requests to produce documents from the investigation and litigation files of the Enforcement Division and found 16 requests to implicate whistleblower-identifying information. The Office worked with the Enforcement Division to remove whistleblower-identifying information or otherwise take steps to preserve whistleblower confidentiality.
