Gary Gensler warns against fraudulent crypto-currencies: here’s how to recognize a questionable project

S’addressing the U.S. military in a Twitter space earlier this month, Gary Gensler and SEC Commissioner Caroline Crenshaw discussed what they see as the dangers of investing in crypto and how to tell if a project is a scam.

“If something seems too good to be true, sometimes they really are,” Gensler said. “There are certain red flags you can look for beyond the fact that it’s too good to be true.”

In general, Gensler laid out three telltale signs of a possible scam: (1) the crypto-currency project can’t provide clear documentation of how it works or how it plans to achieve its goals; (2) the project can’t demonstrate regulatory compliance; and (3) the project can’t easily explain what it is at all.

Gary Gensler also said that high return offers are a red flag and warned against projects that are too complicated or that push the investor to make a decision, citing “FOMO,” or fear of missing out.

What are the risks for investing in crypto?

Listen to my discussion with Commissioner Caroline Crenshaw and @USArmy ⬇️ pic.twitter.com/df90CkxwjN

January 27, 2023

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

“Most [des crypto-monnaies] are not securities law compliant, but they should be,” he said. “It’s the Wild West, I would say you really have to wonder if’there is a ‘there’ there.

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

“It is important to understand that crypto is new, it is speculative“, said Commissioner Crenshaw. “The protections for investors are really, really diminished because most of them didn’t choose to fall under the SEC’s jurisdiction.“

Highlighting the history of scams in crypto, 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’s on the blockchain is transparent, but the rest of what’s out there is not transparent.”

Although Crenshaw didn’t call FTX by name, the specter of Sam Bankman-Fried’s collapsed 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 didn’t hold one-for-one reserves of customer assets and eventually filed for bankruptcy.

Bankman-Fried has since been arrested and charged with eight financial crimes, including wire fraud and money laundering conspiracy, in connection with the stock market collapse. Currently, billions of customer assets are still missing, and millions of customers still do not know if they will ever see those funds again.

“The bottom line is that there is increased risk when you invest in these new, speculative, volatile investments that really lack basic protections and regulations“, Commissioner Crenshaw said during the Twitter spaces. “So, if you are considering investing in crypto, think about how much of your portfolio you put into it, and certainly no more than you can afford to lose.“